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Wednesday, October 15, 2014

EYCI defying the odds – will it continue?

By Angus Brown  |  Source: MLA's NLRS

Key points

  • The EYCI has remained steady in October, against the usual seasonal trend.
  • The EYCI has never averaged a higher price October or November than the September average.
  • Given record supply, and strong demand, it’s hard to see too much downside in the EYCI despite historical trends.

2014-10-14 EYCI Defying The Odds FIG 1

2014-10-14 EYCI Defying The Odds FIG 2

The Eastern Young Cattle Indicator (EYCI) usually falls 5-10% from the end of September to the start of October, with the fall even harder when you get a dry spring like currently being experienced in some areas. So are we going to see the spring price decline, or will prices hold on?

So far in October, the EYCI has defied the usual October downtrend, hitting a new two-year high, and currently sitting marginally above the September average (figure 1).  In contrast, in 2007 the EYCI fell 12% from September to October after a dry August and September, illustrating just how strong prices are currently under similar seasonal conditions. 

The EYCI has never managed to average a higher price in October than in September in its 13 year history. It has fallen more than 2% eight times out of 13 years, or 61% of the time, and has been steady or fallen slightly five times, or 39% of the time.

If we look at the stats for September to November, the EYCI averages a 6% fall, having fallen nine times out of 13 (69%) and been steady or slightly lower four times.  Again, the EYCI has never been higher in November than it was in September.

History tells us there is no chance the EYCI will increase over the six weeks, with the best we can hope for being steady prices.  We have, however, never had circumstances like we have in cattle markets at the moment.  We have record cattle slaughter, record beef export prices, and record prices for some finished cattle, all of which are supporting the EYCI at a level which is fundamentally undervalued.

If supply can’t get a lot stronger, and prices are remaining steady, this points towards market upside if supply tightens. This can either happen when the cattle run out, or it rains and cattle are held.  

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What does this mean?

Figure 2 shows our current outlook for the EYCI range over the coming 4-5 months.  Based solely on historical trends, a betting person would put all their money on the EYCI being steady or lower in November than it is now. However, our view is that the worst case scenario in the current market is close to the average scenario.  Average rainfall for the coming three months would see the market track along the best case line, while an extraordinary rainfall event would see it higher than this. 

The EYCI should continue to defy the historical odds in the short term, and break all records on the upside if and when the northern wet season kicks off in a meaningful way.

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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