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Thursday, February 04, 2016

Supply projected, price projections.

By Angus Brown  |  Source: MLA, NLRS, Steiner.

Key points

  • MLA are forecasting much tighter cattle supply over the coming year, which should see cattle prices supported relative to export beef indicators.
  • The EYCI is currently sitting close, or higher than the price forecast given MLA’s forecast cattle slaughter rates.
  • EYCI downside does exist, but seems limited, with large upside dependant on a rally in US export prices.

2016-02-04 Cattle Price Projections Fig1

2016-02-04 Cattle Price Projections Fig2

2016-02-04 Cattle Price Projections Fig3

 

Meat and Livestock Australia (MLA) last week put out their industry projections for the coming year and beyond. As usual MLA didn’t go so far as to project prices, but they do project supply. Here we use MLA’s supply projections, and plug them into some of our price models to give an idea of where the EYCI might be headed over the coming year.

As outlined in Matt’s article, and in our webinar, MLA are forecasting Australian cattle slaughter to fall significantly this year.  The 12% fall in slaughter is not quite unheard of, but it is very large.  While local supply does impact prices, the main driver remains export markets, as we have recently been exporting over 70% of our beef.

As such we like to measure value in local markets relative to export beef prices, as this gives a better indication of local supply and demand.  We have historically found that the 90CL Frozen Cow exported to the US is one of the best indicators of our local prices, as the US is both a large market for Australian beef, and a strong competitor in higher value markets.

The relationship between cattle slaughter and the Eastern Young Cattle Indicator (EYCI) premium or discount is surprisingly strong.  Figure 1 shows a straight line relationship, with higher Australian cattle slaughter resulting in a larger EYCI discount to the 90CL.  Obviously this means the lower projected slaughter means the discount will be smaller, or the EYCI might even move to a premium.

Figure 2 plugs MLA’s slaughter forecasts into the equation shown in figure 1, and it also shows where 2015 finished up.  Interestingly in 2015 we saw the EYCI sitting above the trendline, and this was dragged higher by a rapidly falling 90CL at the end of 2015, and a steady EYCI, which has seen the EYCI start 2016 at a premium (figure 3).

The 90CL/EYCI discount model suggests the EYCI should sit at a 22¢ discount in 2016, and at a 45¢ premium in 2017.  These forecasts should be relatively close to the mark, which leaves the question as to where the 90CL price will sit over the coming year or two.

What does this mean?

With the EYCI currently sitting at almost the same level as the 90CL indicator, it is safe to say that further upside in the market is limited to around 50¢ without an increase in the beef export markets.  The good news is that there is some potential upside for the 90CL market, as it is weak 25% lower than this time last year in US terms.

Looking further out the level of the AUD is the other major driver which could move the 90CL price in our terms, and as long as it stays under 75¢ the 90CL and weak supply should continue to support the EYCI over the medium term.

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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