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Thursday, September 29, 2016

Even with grass fever restockers set to turn a profit

By Angus Brown  |  Source: NLRS

Key points

  • It would seem grass fever is driving young cattle markets, but restockers are not getting carried away.
  • Restocker premiums to the EYCI remains below the peaks hit in 2010 and 2011.
  • Feeder and finished cattle markets can fall 10% and maintain reasonable margins.

2016-09-29 BEEF FIG 1

2016-09-29 BEEF FIG 2

 

Cattle market pundits have been talking about grass fever for months, but we are now well and truly in spring and the fever has hit fever pitch, so to speak. This article looks at whether we are in an extraordinary situation, or whether we’ve seen this before, and how it might pan out.

The price paid by restockers in EYCI saleyards hit a new peak last week, just surpassing the mark set two weeks ago, and hitting 748¢/kg cwt (figure 1).  In liveweight terms, which is how store cattle are bought, restockers paid 403¢/kg for their share of EYCI cattle last week. 

The current set of circumstances driving the cattle market, being a 20 year low herd, and an extraordinarily wet winter and spring, could be expected to see restockers setting a record in prices relative to other buyers.  Interestingly, this is not the case.

Last week also saw processors pay record prices in EYCI saleyards (figure 1), with extremely tight supply pushing their price to 696.75¢.  Processors are not far behind feeders, who are dragging the chain, and keeping the EYCI below record levels.  Feeders paid 711¢, 8¢ below the peak hit a month ago.

Figure 2 shows that while restockers paid record prices, their premium to the EYCI itself sits at 4.7%, below the peak of 6.2% seen back in January.  Additionally, we can see that in 2011 restockers sustained premiums of 6% through the last quarter of the year. 

The 10 year average restocker premium is 2.8%, which at the current EYCI would put restockers paying just 13¢ less than the current price.  As such, the price being paid is not really out of the ordinary.

It would seem restockers are not just blindly buying young cattle in order to eat excess grass.  They are definitely keeping an eye on what the feeder and finished cattle markets are doing, and this is keeping a lid on the premium they are willing to pay. 

What does this mean?

When we look at store cattle making well over 400¢, it’s easy to say they are too expensive.  But the calculation being done by many buyers, either in their head or on paper, is shown in figure 3.  If feeder prices hold through to January or February weaner steers bought now will still over better than average returns. 

A 10% fall in the market, which we expect, will see margins squeezed, but will be back somewhere near historical averages.  The worst case scenario outlined in figure 3 is unlikely, but even then, gross margins will be positive.   

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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