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Thursday, April 30, 2015

The cattle restocker dilemma yet to hit our shores

By Augusto Semmelroth  |  Source: MLA, CME, CEPEA

Key points

  • US and Brazilian cattle producers have difficult dilemma when selling finished cattle and restocking at unfavourable prices.
  • Store cattle prices overheated across the globe; producers paying 40-45% premium over finished lines.
  • Australian cattle markets fundamentally undervalued but that will change when/if season turns for the better in the north later in the year.
  • Upside potential of 600-700¢/kg cwt for young store cattle sounds absurd, but plausible.

2015-04-30 The Restocker Dilemma FIG1

2015-04-30 The Restocker Dilemma FIG2

2015-04-30 The Restocker Dilemma FIG3

Global finished cattle markets are reaching record high levels in all key producing countries, namely the US, Brazil and Australia. Although that should put a smile on producers’ faces, US and Brazilian restockers and lotfeeders are struggling with an overheated store cattle market. In the meanwhile, store cattle markets remain fundamentally undervalued in Australia. What are the lessons can we take from our overseas friends?

Although the Australian, Brazilian and American cattle markets vary in shape and form, they share one universal feature. And that is, store cattle are priced at a premium to finished cattle on a ¢/kg basis. When seasonal conditions and grain prices are favourable, the premiums become even greater as restockers and lotfeeders are incentivised to buy more stock.

This price spread between store and finished cattle is of critical importance for producers, as paying too much for weaners/feeders may become uneconomical. But that’s exactly the dilemma US and Brazilian producers are facing. Despite the record finished cattle prices of late, the unprecedented demand for store cattle, coupled with tight supply, has pushed prices well beyond what many are willing to pay.

To put that into perspective, figures 1 and 2 show the spread (premium) between weaner/feeder steers over finished cattle in the US and Brazil, respectively. As a general rule, and accounting for seasonal trends, store cattle are valued at a 15-25% premium to finished stock, on average, in the US. In Brazil, the average premium fluctuates between 10-20% throughout the year.

This price dynamic is largely understood, and hardly moves beyond “well known” boundaries. However, the last couple of years have defied historical trends and placed many producers in an uncomfortable position. Paying a 40-45% premium (¢/kg lwt basis) for store cattle sounds absurd, but that’s exactly what restockers and lotfeeders across the globe have been doing in the last 6-12 months.

In the meanwhile, down under, we are still battling with record cattle slaughter levels and subdued restocker demand. However, when performing a similar analysis for our market the structural differences between US/Brazil and Australia became starkly evident. Store cattle remain fundamentally under-priced in relative terms. 

To put this into context, figure 3 shows the spread between the average price of Eastern Young Cattle Indicator (EYCI) type cattle purchased by restockers in NSW to the NSW heavy steer indicator. As of last week, producers could still sell their slaughter steers and restock at a 2% discount on a ¢/kg basis. The big question is - until when?   

What does this mean?

While the drivers of cattle markets may vary across the globe, some fundamental patterns are universal. And one of them is that store cattle will be valued at a much higher levels to finished cattle when seasonal conditions (and grain prices) allow.

In the US and Brazil, the race for young/store cattle has already started to see premiums move into very unfavourable territory for restockers, backgrounders and lotfeeders. And the bad news is that this trend has been sustained and is unlikely to change in the short-term.

Australian producers are still digesting the “record” store cattle prices seen this year, but will need to be prepared to pay much higher prices when/if the season turns for the better in the north later in the year.

But what are the potential risks restockers/lotfeeders could face under “favourable seasonal conditions”? Assuming the inevitable tightening of finished cattle supplies, ongoing robust demand for beef and live exports, the A$ at or below 80US¢, it’s hard to believe finished steers will be valued below 500¢/kg cwt. With that in mind, a conservative store cattle premium of 20% would put prices at 600¢/kg cwt, while a US/Brazil scenario of 40% would see prices above the 700¢/kg cwt mark!

Although these values may sound “absurd” in isolation, they can easily be justified looking at historical trends and the situation in US and Brazil. The restocker dilemma will, sooner rather than later, come to our shores, so planning ahead will be crucial.     

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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