By Matt Dalgleish | Source: MLA, ACA
There’s little doubt restocker interest helped fuel the rise in cattle prices over the 2016 season, particularly for young/store cattle, encouraged by favourable weather to much of the nation and an optimistic view of future price movements based on the anticipated tight supply. However, long term correlations between local and global cattle prices point to a looming correction for the Australian cattle market. Indeed, 2017 could be the year of the crossroads for cattle prices.
Figure 1 highlights the comparative percentage spread pattern above and below the Eastern Young Cattle Indicator (EYCI) that restockers, lot feeders and processors have been willing to pay for EYCI style cattle. Clearly, the surge in the restocker spread from mid-2016 to a premium spread of more than 6% over the EYCI shows the keen demand for store cattle at the sale yard by restockers. This restocker frenzy was largely responsible for the move in the EYCI from 650¢ to the record highs achieved during Winter 2016 at 725.75¢/kg cwt.
Since the peak in the EYCI young cattle prices have steadily softened, which is not unusual for Spring, closing the season around 635¢. However, the normal lift in the EYCI that often occurs during Summer has not eventuated this season. This has been largely due to a late start to the northern wet season, a dryer weather forecast for much of the east coast from the Bureau of Meteorology for the first quarter of 2017. Also growing concerns over a looming cattle price correction has weighed on the market - particularly for finished lines.
In June Mecardo released an analysis piece outlining the strong longer term correlation between average annual prices of local heavy steer prices and US live cattle futures prices, showing that heavy steers were overvalued according to the long term relationship. Similar analysis, highlighting the correlation between the average annual EYCI and the 90CL beef export price, shows a comparable situation in that the EYCI is currently trading in overvalued territory compared to the long term relationship – figure 2.
Indeed, as shown in figure 3 the percentage spread of the EYCI to the 90CL has reached premiums never before seen, although recent softness in local cattle prices has seen the premium spread narrow back towards 10%. Given the tighter supply experienced this season the EYCI was anticipated to move into a premium to the 90CL, but the added restocker enthusiasm this year saw it extend beyond the forecasted level of an annual premium spread of 25¢.
Figure 4 shows the reasonably strong correlation between annual cattle slaughter and the EYCI/90CL spread which indicates that the tighter supply (and consequential lower slaughter numbers) was expected to see the EYCI record a 25¢ premium to the 90CL on an annual average basis. However, the restocker demand saw the actual premium spread extend to a 50¢ premium for this year, as the 90CL averaged 580¢ during 2016 while the EYCI averaged 630¢. As shown in figure 4 the projected tighter supply and lower annual slaughter figures expected for 2017 is anticipated to see the premium spread average 45¢ for the coming year.
The key question for 2017 will be how the dynamic of tight local supply, the potential remnant enthusiasm for restockers to continue the herd rebuild and low feed grain prices encouraging lot feeder demand for cattle, will play out. This all needs to be weighed up against the spectre of subdued/weakening global cattle prices. This is particularly relevant given the strong correlation between local and global cattle prices, which suggests we are currently in overvalued territory according to this long-term relationship.
Undoubtedly the weather (rainfall distribution and quality of pasture across the nation) is likely to play a key role in determining how long the enthusiasm of restockers will last into the 2017 season. Clearly, feed grain prices are unlikely to spike higher into next year, given the yields being reported at harvest so far. This is likely to keep lot feeder demand for cattle reasonably firm, as long as the price of finished cattle holds its ground. Processors are likely to keep operations lean and continue to remain subdued in their purchases until local prices correct back down to levels that make it economic for them to re-engage and increase capacity.
Certainly 2017 will make for an interesting year for local cattle markets and the team at Mecardo will be scouring the data on a regular basis to provide you with timely insight into when the price correction is imminent. This is the last release for me for the 2016 season, I hope you have a safe and enjoyable festive season – take care and speak again in 2017.
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