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Wednesday, September 03, 2014

Cows at 400¢ a possibility

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

Key points

  • Extraordinary rise in export beef prices to the US over the last two months caused by tight supply and strong demand for ground beef in the US.
  • Stronger US prices have forced increases in all beef export prices to other markets.
  • Cow prices have risen, but there is plenty of room for further rises is supply tightens.

2014-09-02 Cows At 400¢ A Possibility FIG 1

2014-09-02 Cows At 400¢ A Possibility FIG 2

We keep talking about rising export beef prices and the impact they are having, and are expected to have, on cattle prices. Today we are taking a closer look at the extraordinary price rise we have seen in the Frozen Cow 90CL export market, and how this is impacting other markets for our beef, and our cattle prices.

In the last two months, the Frozen Cow 90CL (Cow trim, 10% fat, exported to the US, priced at Australian ports) price has seen an extraordinary rise.  The market was already trading at record levels above 450¢/kg swt for the first half of 2014, with the latest rally adding 184¢, or 41%, to take the price to 634¢/kg swt (figure 1).

The rapid rise in the 90CL price is caused by tight supply of domestic trim in the US, a result of a major herd rebuild.  Despite being so strong, imported 90CL beef is still at a discount to US domestic values.  Demand for ground beef in the US has also grown over the past 12 months because, while it is getting more expensive, it is the cheapest beef in the market.

Export beef prices to Japan have finally been impacted by rising US prices, with the Grassfed Fullset for export to Japan gaining 100¢ to near a record high of 696¢/kg swt (figure 1).  Remarkably, the export price for a box of heavy steer or heifer primal beef cuts to Japan is making just 62¢, or 10%, more than Cow beef that will be ground for mince.  The average premium for Grassfed Fullsets over the last five years is 172¢/kg swt.  Japanese buyers simply have to pay more for beef at the moment, despite the demand situation, as it would have gone through the grinder and be sent to the US if prices hadn’t risen.

The cow price has finally started to move in response to some rain and rising export prices. The national cow indicator reached 322¢/kg cwt last week, driven by the rising Queensland Cow indicator that hit 313¢/kg swt, a 9-year high.  

What does this mean?

Generally speaking, a 500kg lwt Cow will yield around 160kg of beef, which you would expect to be worth at least 626¢/kg (prime cuts will be worth more), or $1,001/head.  Add to this around $200 for by-products and the Cow is worth $1,200 to a processor, having been purchased for $750. 

The great unknown, slaughter costs, has to come out of the $450 difference. However, it still seems processors can pay up to 400¢/kg cwt ($960/head at 500kg lwt) for Cows and still turn a profit. 

This is a pretty crude analysis, but it does illustrate where potential upside in Cow and other cattle markets is likely to come from as supply tightens.   

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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