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Wednesday, March 26, 2014

Any support from record US cattle prices?

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

Key points

  • Australian cattle prices are at a large discount to US cattle prices, with young cattle more so than finished stock.
  • Oversupply and expensive feed in Australia is largely driving the discounts.
  • There is significant upside for local cattle prices when the supply and feed price issues abate.


2014-03-24 Any Support From Record US Prices FIG 1

2014-03-24 Any Support From Record US Prices FIG 2

2014-03-24 Any Support From Record US Prices FIG 3

One of the most perplexing conundrums for cattle growers in the current market is the apparent disconnect between record cattle prices in the US cattle prices in Australia languishing in the doldrums. History shows there is some relationship between US and Aussie cattle prices. However, extraordinary costs of production and record cattle sales here are blowing out the spread.

There are two cattle futures contracts traded on the Chicago Mercantile Exchange, Live Cattle and Feeder Cattle.  The Live Cattle Futures contract is based on heavy grainfed cattle, while the Feeder Cattle contract is based on young cattle entering the feedlot at 300-385kg.

In Australia, we have reasonably equivalent indicators. The first is the Qld 100 Day Grainfed Over the Hooks Steer Indicator (Qld 100 day) published by the NLRS, which relates to the Live Cattle contract. The second is the Medium Fed Feeder Steer Indicator, which is a direct to feedlot price reasonably equivalent to the Feeder Cattle Futures contract.

Given we compete with US beef in the high value exports markets of Japan and Korea, we could reasonably expect our grainfed cattle prices to track US Live Cattle Futures closely.  Figure 1 shows that this is not necessarily the case.  US Live Cattle Futures have rallied to record levels in the last year on tight beef supply in the US and good demand. While the Grainfed 100 day cattle price in Australia has gained some ground, and is close to an all-time high, it is also at a record 178¢/kg cwt discount to the US Live Cattle price.

One reason for the usual discount for our grainfed cattle relative to US cattle is the domestic focus of US markets, with exports generally a value add for product the US consumer doesn’t like.  In contrast, export markets drive our heavy grainfed cattle markets, with our high value cuts competing with beef from the US that can be sold cheaper.

Over the last year, grainfed beef export prices to Japan has improved (data is hard to find) but the strong supply of cattle to processors means they haven’t had to offer grainfed cattle prices far beyond the cost of production for lot feeders. As such, our grainfed cattle price discount to the US has blown out.

For feeder cattle, the spread between US and Australian prices is usually wider, and is currently extraordinary at 250¢/kg lwt.  Young cattle prices are driven by the price of the end product (prime cattle) and the cost of feed.  Generally, the cost of feed in Australia is more expensive than in the US due to cheap US corn values. Therefore, our young cattle prices would be cheaper than the US even if finished cattle prices were the same. 

In 2010 and 2011, when corn was expensive and feed in eastern Australia was abundant, the local discount to US prices closed up, with the feeder spread close to the grainfed spread (figure 3).  Over the last year, the abundant supply of cattle and expensive feed in Australia has seen our feeder cattle price discount to the US feeder cattle futures move to 250¢/kg lwt, while the Grainfed discount to live cattle is 100¢/kg lwt.

What does this mean?

It is an extraordinary coincidence that drought in Australia has coincided with record cattle prices in the US causing our cattle price discount to blow out to such large levels.  The good news is that, when the oversupply and feed issues abate, which will obviously happen with widespread rainfall, our cattle prices are likely to reach record levels as well. 

While prices aren’t going to reach the US price levels, we could reasonably expect them to move back to the bottom of the historical discount range to the US, which could theoretically put grainfed cattle prices at 470¢/kg cwt, and feeder cattle prices (and the EYCI) at 500¢/kg cwt, or 280¢/kg lwt.  This sounds extraordinarily strong, but it is equivalent to the price rise seen in the US and world beef markets, so a price rise of that proportion here is not out of the question.

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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