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Tuesday, December 02, 2014

As usual, cattle price gain reliant on rain

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

Key points

  • December to January is historically a volatile period for cattle prices.
  • Opening prices of 2015 are likely to be dependent on rainfall this week and follow up rains in late December/early January.
  • Record prices are possible in the first quarter of 2015 for all cattle categories, with young cattle and cows having the most upside.


2014-12-01 Cattle Price Forecast FIG 1

Last week we reviewed our cattle price forecasts. This week it’s time for us to take another look at where the market might be headed in 2015. January is historically a volatile time for cattle markets as rainfall, or the lack of it, over the Christmas/New Year period is assessed. The New Year promises much for cattle producers, providing the rain received this week is followed up.

Over the last 10 years, the Eastern Young Cattle Indicator (EYCI) has averaged a 2% rise between the first week of December and the last week of January. However, this benign figure disguises significant volatility.  Last year the EYCI fell 12% in December and January, while in 2006/07 and 2007/08 it gained 14% and 12% respectively.  Last year, the lack of rainfall in December and January led to the market returning to the doldrums, while in 2006 and 2007 the market rallied from depressing lows because of some reasonable summer rain in the north.

As we have been saying for some time, the Australian cattle market is fundamentally grossly underpriced. The rain forecast over the coming week could be the beginning of a marked price correction, with the important caveat that any rains will need to be followed up in January.

Figure 1 shows our projections for the range of the EYCI over the coming four months, with the worst case scenario – with little summer rainfall in NSW and Queensland - seeing prices track along at similar levels to current.  The best case scenario is in the case of somewhere around average summer rainfall, following up this week’s falls.  This may even underestimate price movements. 

Price movements for heavier cattle are likely to be similar in the best case event, as supply of cattle for slaughter will tighten significantly with rainfall.  In the worst case event, heavy slaughter cattle will move back to a solid premium to young cattle, as there will be few finished cattle available in the New Year.

Cow values will no doubt spike significantly with good rainfall, as every possible female will be retained for rebuilding the herd. Moreover, there remains little downside risk for cows so long as the export price remains at similar to current levels.    

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What does this mean?

We can hear you saying, ‘we’ve heard this before’. This is right, but we are now finally approaching the time of year when significant price movements on the upside are possible and, with the rain forecast this week, probable. 

With some follow up later in December or in early January, upside potential is, as usual, largest on young and breeding cattle. However, heavy slaughter cattle are also likely to improve as the record supply we’ve seen over much of 2014 will abate, and processors will be trimming margins to keep plants running.

If the wet season fails again, prices are likely to continue to track along at current levels, or slightly lower, as it’s hard to see supply increasing on what we’ve seen over recent months.

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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