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Saturday, June 14, 2014

What about me, it isn’t fair, world beef prices are high and I want my share

By Angus Brown  |  Source: MLA's NLRS, CME

Key points

  • Australian beef prices are highly discounted to record US prices in both absolute terms and on an historical basis.
  • Very strong cattle supply is the main driver behind the large discount, especially for young cattle.
  • We expect the spread to close when the season turns around and supply contracts.

2014-06-13 What About Me FOG 1

2014-06-13 What About Me FIG 2

2014-06-13 What About Me FIG 3

A common comment we are hearing from growers is that US cattle and beef prices are at record highs, yet local prices remain in near the doldrums - even if improved from last year. There are a lot of variables in international beef markets, but the basic answer to the large spread is supply: the lack of it in the US, and abundance here.

US Feeder Cattle futures reached a new record high this week, sitting today at 205.8¢/lb lwt.  To put this in perspective, this is 42% higher than the same time last and almost double the price at this time in 2010.  In Australian dollar terms, the rise has been similar, with Feeder cattle now sitting at A479¢/kg lwt (figure 1).

The last two months have seen US feeder cattle rise nearly 60¢ (14%) in our terms, despite a strengthening Australian dollar.  The EYCI has rallied somewhat from early year lows, but figure 1 shows that it is still well behind young cattle prices in the US.

At the other end of the production scale, US Live Cattle futures, which are equivalent to heavy grainfed cattle, have also been on the rise over the past 12 months, with current prices 20% higher than a year ago (figure 2).  Australian grainfed cattle prices, as measured by the Southern Queensland 100-day grainfed over the hooks indicator, have also reach record highs, sitting 14% above this time last year. They do, however, remain at a very large discount to their US counterparts.

The main reason for the large spread between US and Australian prices is supply. Figure 3 shows the spread between US and Australian grainfed cattle and EYCI/feeders, along with the year-on-year change in Australian cattle slaughter on a monthly basis.

While we operate in a global market with prices largely set by international beef demand and supply, unfortunately (or fortunately if we are in a tight supply situation), the local supply and demand situation can distort this.  Basic economics tells us that despite how much processors might be getting for beef on international markets, they only need to pay the price the grower is prepared to sell at, which is obviously lower when feed is scarce and expensive.  

What does this mean?

The medium and longer term outlook for cattle prices remains positive. The longer we continue to slaughter our breeding herd, the better the outlook for prices when things turn around.  While Queensland and northern NSW markets remain relatively depressed, some cattle types (all types in WA, heavy steers in Victoria, SA and NSW, and live export cattle) are performing well (refer to our monthly percentile articles for more detail around this).

We keep saying that there is plenty of upside for cattle prices, but not until the supply glut turns around. When that happens, you can expect all cattle indicators to be trading above their 90th percentile, and probably at record prices, even if prices don’t rise to the bottom of the ‘normal’ historical discount to the US. 

As an example, with an EYCI discount of 150¢ (the bottom of the usual range) at current US feeder cattle prices, the indicator would be 329¢/kg lwt or 609¢/kg cwt.  Obviously this depends on US market remaining strong, but there is room for it to fall and still be plenty of upside for our prices.

Mecardo information is provided to assist in your marketing decisions. It contains a range of data and views on the current market. It is not intended to constitute advice for a specific purpose. Before taking any action in relation to information contained within this report, you should seek advice from a qualified professional. The information is obtained from a variety of sources and neither Mecardo nor Ag Concepts Advisory will be held liable for any loss or damage whatsoever that may arise from the use of information or for any error or mis-statement contained in this report. 


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