By Augusto Semmelroth | Source: MLA, CME, Steiner, CEPEA
Based on our Eastern Young cattle Indicator (EYCI) price model, the indicator has a current fair value of 585¢/kg cwt. As of this Thursday, the benchmark was quoted at 344¢/kg cwt, or 41% lower than the indicative price the model suggests. Is it worth contemplating that young cattle markets could eventually reach those unforseen levels?
The fact that the EYCI has been undervalued for some time is no fresh news. Yet, gauging what should be a realistic price for the benchmark is tricky, especially after two consecutive years of record slaughter levels and a chronic lack of demand for store cattle. With that in mind, it’s worth to look beyond the farm gate, and our borders, to have a better grasp of what we have potentially missed on.
Global cattle and beef prices have experienced an almost uninterrupted uptrend since the beginning of 2010. The two largest beef cattle producers on the global stage, US and Brazil, have seen farm gate prices breaking all-time record levels repeatedly during this period.
Figure 1 shows an index for cattle and beef markets (ie 90CL) in Australia, the US and Brazil, with a starting point in January 2010. Over this period, live cattle prices in the US and Brazil have risen a whopping 90% and 80%, respectively, in nominal terms and in their own local currencies. US feeder cattle prices have managed to rally even further, moving 144% higher since.
As with cattle, the main benchmark for lean beef markets globally and our key export product to the US, the 90CL, has also experienced a very similar surge. Between January 2010 and this month, the 90CL indicator has surged 107%.
Despite having also enjoyed a strong recovery in 2010 and 2011, the EYCI has moved in a completely different fashion to main global cattle and beef markets since. As of this month, the indicator is only 19% above the levels seen in January 2010. Should it have followed a similar trend to US and Brazilian cattle markets (80-90% upside), the EYCI would be quoted somewhere between 550¢ and 580¢/kg cwt.
These values are also in line with our EYCI model, which takes into account beef export prices, feed grain prices, and a variable for export market access. From that standpoint, we can infer that the EYCI could be up to 70% higher than it currently is.
This analysis does not attempt to directly compare the prices of cattle across the globe. The main idea here is to show that cattle markets in key producing countries have seen a very similar uptrend in recent years and that the level of the price recovery has been rather similar for those markets, except in Australia.
Talking about an EYCI of around 600¢/kg cwt might sound a bit unrealistic, particularly under the current supply/demand scenario. That said, this target price suggests the potential upside to be achieved if we return to a situation of above average seasonal conditions, tightening supplies, revived restocker demand and also assume export demand and international beef prices remain where they are.
At this stage, it seems quite unlikely the EYCI will reach that level in the short-term even if the aforementioned scenario unfolds. It would take more than one good wet season in the north to see this potential recovery be realised. However, an EYCI somewhere around 450-500¢/kg cwt by April/May 2015 is still quite plausible.
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