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Friday, January 31, 2014

What happens to cattle prices if it doesn’t rain?

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

Key points

  • The EYCI and QCMI are close to 10-year lows and showing high volatility.
  • Price lows of 2007 look to be a good base for prices, but a failed winter/spring could see further downside.
  • The chance of lower cattle prices seems small as there should be fewer cattle to sell, and fundamentals remain strong.

2014-01-31 What Happens If It Doesnt Rain FIG 1

2014-01-31 What Happens If It Doesnt Rain FIG 2

It seems like nearly a year that we have been talking about what will happen to cattle prices if it rains in key cattle growing areas in northern NSW and Queensland. Given Meat and Livestock Australia’s projections have just been released with the expectation of average to below average rainfall, it’s a good time to look at what might happen to cattle prices if the below average scenario eventuates.

Generally, when seasonal conditions are ordinary, and cattle prices are at historically low levels, markets are very volatile until a break in the drought is confirmed.  We are already seeing this, with the QCMI starting the year at 175 points before falling to 147.5 points, then rising this week to 169 points.  The Eastern Young Cattle Indicator (EYCI), being a broader indicator, has also shown volatility, although it has been less marked.

Figure 1 shows the EYCI over the last 14 years, with the current values of 285¢/kg cwt sitting 12¢ above the low of late 2007, and 60¢ above the late 2002 low.  We would argue that the 2007 is a better representation of the weakest prices possible as a result of the proliferation of lot feeding, strong export demand and dwindling supplies.  Even in the very ordinary wet season of 2006-07, the EYCI only reached a low of 273¢/kg cwt in December 06.

The QCMI last week actually hit a new 11-year low before rebounding this week (figure 2). The 150 point mark seems to be a solid support under which growers will take their chances on buying feed or just holding and hoping. 

In winter and spring 2002, the EYCI and QCMI reached lows of 224¢/kg cwt and 129 points, respectively, on the back of failed winter and spring across the entire east coast.  This is a risk to an extent currently, but a seemingly remote one.

In terms of the number of cattle available for slaughter, MLA is forecasting the Australian herd to be at 27.5 million head by June 2014. This is 1.4% lower than 2002 and 3.5% lower than 2007, so there should be fewer cattle to sell in the coming year if things remain tough.

What does this mean?

If key Queensland and NSW cattle country remains dry, cattle prices are likely to bounce along off the lows seen recently, and show plenty of volatility as buyers try and get in before the break.  Further downside seems limited under current conditions, but could eventuate if conditions remain dry for the remainder of the wet season and there is widespread failure of an autumn break or a dry spring. 

The range of possible prices over the coming six months is getting wider, with rainfall the only factor which will have a major impact. We don’t expect the EYCI to fall below 270¢, or the QCMI below 140 points, with upside to 370¢ and 200 points should seasonal conditions improve.

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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