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Tuesday, September 27, 2016

Eastern young cattle to eastern lamb basis update

By Matt Dalgleish  |  Source: MLA, NLRS, ACA

Key points

  • The EYCI/ESTLI percentage basis has widened since the start of the season, currently trading at 13.5% premium.
  • It is not uncommon to see the EYCI/ESTLI basis at a premium during a wetter than average season, although the long term average basis since 2000 has been a 14% discount.
  • The EYCI/ESTLI percentage basis is anticipated to remain in a range between a 10% discount to a 20% premium for the 2016/17 season.

2016-09-27beef Lamb Fig 1

2016-09-27beef Lamb Fig 2

2016-09-27beef Lamb Fig 3

In early March Mecardo released an analysis piece on the Eastern Young Cattle Indicator (EYCI) percentage spread/basis to the Eastern States Trade Lamb Indicator (ESTLI). This follow up article provides an update on how the relationship between the two key indicators has fared over the last six months.

Recap on the original article released in March 2016 here.

Figure 1 highlights the price pattern for the EYCI and ESTLI since 2000 which shows the EYCI moving to a premium basis during September 2015 after two years of trading at a discount. Indeed, as the historic price trend suggests the EYCI has usually traded at a discount to the ESTLI, with the long term average percentage basis between the EYCI and ESTLI since 2000 sitting at a 14% discount.

A glance at the seasonal pattern in the percentage EYCI/ESTLI basis demonstrates a gradual narrowing of the discount basis during the 2014/15 season from 60% discount to 20% discount – figure 2. During the 2015/16 season the discount basis continued to narrow moving to a premium basis that ranged between 5-15% for much of the 2015/16 season. As outlined in the March 2016 analysis the premium basis was anticipated to narrow to a discount around April/May, which reached a low of 3.2% discount late in May 2016 before recovering to a premium into the 2016/17 season. The current EYCI/ESTLI percentage basis is at a premium of 13.5%.

A cursory look at the longer term movement for EYCI/ESTLI percentage basis indicates that during times of wet seasonal conditions, characterised by La Nina weather patterns such as the 1998-2001 or 2010/11 seasons, can result in a strong move towards a premium percentage basis or a significant narrowing of the discount basis. In contrast, situations of extreme drought as characterised by an El Nino weather pattern usually sees a widening of the discount basis, such as that which occurred during the 2013/14 season – figure 3.

Indeed, as demonstrated in figure 3, the two most extreme moves in the EYCI/ESTLI percentage basis since 2000 occurred during the 1998-2001 La Nina when basis went above a 40% premium and the 2013-2015 El Nino drought when basis went over an 80% discount. The black dotted line on figure 3 represents the long term average basis discount of 14%, while the green shaded area indicates where basis has ranged for 70% of the time. The two red dotted lines represent the range in basis for 90% of the time.

What does this mean?

It is anticipated that the prospect for average to above average rainfall for the remainder of the 2016 season and a tight supply of cattle into 2017 will broadly support the EYCI/ESTLI percentage basis for the current season.

The seasonal pattern for percentage basis is expected to roughly mirror the 2005/08 trend (blue circle on figure 3), ranging between a 10% discount to a 20% premium from now until the end of 2017.

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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