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Thursday, June 26, 2014

El Nino and cattle markets, what’s the worst that could happen?

By Augusto Semmelroth  |  Source: MLA's NLRS

Key points

  • El Nino’s negative impact on cattle markets generally starts in October and peaks in December.
  • Downside of up to 20% from July levels by December have been observed but, on average, restricted to around 10-15%.
  • El Nino events generally subside by the turn of the year to see cattle markets rebounding up to 30% by March of the following year.
  • Should an El Nino occur this year, downside should be restricted to 10% in spring. Upside potential in early 2015 could be substantial under average seasonal conditions.  

2014-06-25 El Nino Impact On Cattle FIG 1

2014-06-25 El Nino Impact On Cattle FIG 2

2014-06-25 El Nino Impact On Cattle FIG 3

Underpinned by ongoing El Nino prospects, the BOM released today their 3-month rainfall outlook (Jul-Sep) pegging a 60-70% chance of below median rainfall for most of Queensland and NSW. Victoria, SA and Tasmania, on the other hand, have around even odds for above median rainfall. This article assesses the impact of previous El Nino events on eastern states cattle markets and what to expect this year.

El Nino years are generally associated with below average rainfall in winter and spring on the east coast, but not always. Over the last four El Nino events, cattle markets have tended to lose ground in spring on the back of increased turn-off and restricted restocker demand.

To better assess the real impact of an El Nino event on eastern states cattle markets, figure 1 shows the price movements of the Eastern Young Cattle Indicator (EYCI) from June until December in the El Nino years of 1998, 2002, 2006 and 2009. In addition, the figure shows the average price movements for El Nino and non-El Nino years.

As a general rule, the adverse impact of El Nino doesn’t really kick in until October. Before then, cattle markets generally experience very limited downside. The clear exception was 2002, when seasonal conditions deteriorated sharply in autumn/winter to see prices moving lower in July and August. This is very unlikely to be the case this year given the solid rains seen since April.  

October is obviously a turning point for markets, as the ‘El Nino-induced’ dry conditions accentuate the seasonal spring supply flush. Over the last four El Nino events, prices moved 4% lower, on average, from June levels by October. By November and December, prices eased 9% and 11%, respectively, from June levels (figure 1).

What comes next is somewhat a light at the end of the tunnel. While peaking in Nov/Dec, the negative effects of El Nino abate by the turn of the year. As a result, eastern states cattle markets have always bounced back strongly at the start of the following year, when seasonal conditions return to normal.

Figure 2 shows the EYCI performance after the El Nino influence subsides. Aside from 1997/98, when markets were largely unaffected by below average rainfall conditions, the ‘post-El Nino’ price recovery has been substantial. On average, prices surged 9%, 12% and 26% by January, February and March, respectively, from December levels.  

What does this mean?

This article does not intend to foresee an El Nino event; rather, it aims to illustrate a worst case scenario for cattle markets should one unfold. We leave the weather forecasts in the hands of the experts (i.e. BOM) and even they get it wrong, so let’s not speculate too much.

That said, the analysis shown here gives us some context as to what expect if the worst case scenario does occur. For the faint hearted, the outlook is not so bad. We believe that the EYCI could have a potential downside of around 10% in spring under the El Nino (figure 3), but not much more than that.

For the ones looking for opportunities, postponing finished cattle sales from spring to early 2015 will certainly pay off. As for ‘autumn weaner’ producers, managing feed supply for coming months (buying cheaper fodder/grain now) to guarantee higher weaning weights looks like a sound strategy too.     

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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