By Matt Dalgleish | Source: MLA, NLRS, ABS, USDA, Steiner, ACU, ACA
Last week Meat and Livestock Australia (MLA) released their projections for the 2016 season which contained some minor adjustments to their previous release. The herd is expected to bottom out in 2017 with a forecast of 25.9 million head, while slaughter is forecast to reach a low of 7 million head (a reduction of 250,000 from previous projections) before increasing from 2018 onwards.
Figure 1 highlights the expected yearly change in cattle slaughter and although we anticipate the herd rebuild phase to kick in this year cattle supply is still forecast to decline. The 2016 season is set to see a 15% fall followed by a decline of 8% in 2017 before production starts to increase from 2018. As the herd rebuild gets underway we expect to see a decline in cow slaughter as focus shifts toward a retention of heifers. In addition, robust prices will encourage producers to focus as much as possible on increasing marking rates.
The changing dynamic of the herd being slaughtered (i.e. less proportion of females to steers slaughtered) as herd rebuild gets underway is anticipated to flow through to increased carcase weights. Indeed, MLA projections have made an upward revision to average carcase weight forecasts with recent figures 2-3% higher than previous estimates. Average carcase weight in 2016 is now expected to be 286 kg (previously 278 kg) and is anticipated to increase to 295 kg by the end of the decade, 11 kg higher than previous projections. Tight supply is likely to encourage processors to seek out a regular supply of heavier stock to limit the effect that lower numbers will have on production, while strong prices should motivate producers to enhance weight gains thereby supporting high numbers on feed.
Figure 2 highlights the relationship between the cow slaughter numbers and the impact this can have upon the Eastern Young Cattle Indicator (EYCI). As the graph demonstrates the peak in female slaughter usually coincides with the EYCI bottoming out. Similarly, the troughs in female kill rates tend to occur as the EYCI reaches a peak. As we anticipate female slaughter rates to continue to decline in the 2016 year we expect that the EYCI will continue higher in 2016, although more moderately than what was experienced in 2015.
Turning to our EYCI price forecast model (Figure 3) we can see that the model predicts an annual average price range of 615-715¢ for the 2016 year and 595-710¢ for 2017. We believe that this year will see record margins for breeding operations selling weaner and feeder steers, unless seasonal conditions deteriorate beyond expectations.
When considering our EYCI forecast bear in mind that our model assumes average seasonal conditions and an A$ ranging between 66-69¢ US. Therefore, a more favourable rainfall situation and a lower than expected A$ could encourage prices to test the upper end of the range reasonably easily.
On the other hand, significant falls in the US cattle market prices, unfavourable climate conditions and/or a much higher than expected A$ could see the EYCI languish at the bottom of the range or even go below it.
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