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Thursday, June 29, 2017

Does cattle trading still make sense?

By Angus Brown  |  Source: NLRS

Key points

  • Young cattle prices are at strong premiums to heavier cattle as restocker demand remains strong.
  • There are still reasonable gross margins to be made on sell/buy cattle transactions.
  • Looking forward the risk of making a loss on cattle seems small, but margins are smaller than recent years. 

2017-06-29 Cattle Fig 1

Last week Matt looked at the cattle price spreads, highlighting how discounted slaughter cattle are at the moment relative to their younger counterparts. Additionally, we took a stab at forecasting prices in the event of continued dry weather. The strong prices being paid for young cattle begs the question as to what sort of margins might be available on these cattle, given some headwinds the market may face over the coming six months.

The Eastern Young Cattle Indicator (EYCI) has eased in recent weeks, falling back to a two month low of 633¢/kg cwt (figure 1).  At 54% dressing the EYCI currently sits at 341¢/kg lwt, but cattle are still selling for much more than this on online platforms. 

Last Friday a number of lines of British bred weaner steers, weighing from 260-300 kgs sold for 375-400¢/kg lwt, which was at a 34-59¢ premium to the EYCI, which is historically strong.  In the past weaner steers have commanded a 15-30¢ premium to the EYCI.

The basic sell/buy equation still looks reasonably attractive.  Those selling 450kg feeder steers at 350¢/kg lwt are realising $1,575 per head, and replacing with weaner steers at $1,100 per head are still seeing a $475 gross margin. Traditionally growers have been prepared to buy back in with a $250-350 gross margin, so current values don’t look so expensive.

For heavy steers the discount in ¢/kg terms (figure 2) starts to bite on the sell/buy equation, but the extra kilograms outweighs the weaker prices.  The value of heavy steers in dollars per head is currently around $1,780 for a 600kg lwt animal.  Buying a weaner steer in for under $1,100 looks like a good trade in gross margin terms.

For those who don’t operate a sell/buy system, figure 2 shows some of the possible scenarios we see playing out.  Under the average case we see a bit of weakness in the market by the time cattle bought now will be due to be sold.  However, gross margins still look ok.

The worst case pricing, which we have based off continued dry weather, will turn a smaller than usual gross margin for feeders, and an ok margin for heavy steers.

What does this mean?

The consistently rising markets of the last three years has made cattle trading look easy, but things are ripe for change.  The good news is that those growing out steers are still making very good money on every kilogram they put on, and as such can still afford to pay well over the finished price in ¢/kg to secure young cattle.

Under the worst case scenario there is not likely to be much margin left in trades, but that doesn’t seem to be enough to pull young cattle prices back at this stage.  The real test will come if we do indeed get a dry late winter and spring, which would see store cattle move back into line with the rest of the market.

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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