By Augusto Semmelroth | Source: MLA, ABS
After a solid price recovery in April, the Eastern Young Cattle Indicator (EYCI) lost ground again in May on the back of below average rainfall and a surge in supply in recent weeks. That said, the indicator has found solid support at around 330¢/kg cwt. This article looks at what’s in store for the EYCI for the next few months based on seasonal supply and price trends, and other fundamentals.
Figure 1 shows the EYCI weekly yardings, smoothed by 4 weeks. As a general rule, EYCI weekly throughput tracks around 15,000 to 15,500 head on average between March and May before easing to around 13,000 to 13,500 head during June and September. That’s a 13-13.5% fall in supply that takes place rather quickly in June/July.
Although cattle prices are dictated by a balance between supply and demand, this clear seasonal trend in supply has supported higher cattle prices between June and September. To be more precise, the EYCI has gained around 25¢, or 7%, on average, between late May and mid-August in the last five years. Last year, the indicator recovered 47¢, or 17%, to 330¢/kg cwt by early July on the back of a delayed but positive autumn break.
This year, the EYCI rebounded strongly in autumn, rallying 60¢ to 360¢/kg cwt in April before easing back to around 330¢/kg cwt in May as a result of deteriorating seasonal conditions. However, prices seem to have found firm support at that level over the last two weeks, suggesting this could easily be the bottom of the market this year.
A closer look at historical price movements also supports this idea. Over the last 14 years, the EYCI has moved lower between May and July only in 2002 and 2011, or less than 15% of the time. It’s also worth mentioning that the east coast experienced one of the worst and most widespread droughts on record in 2002, while in 2011 prices eased only 20¢ from a very high base (400¢/kg cwt) on the back of below average autumn/winter rainfall.
Moving away from seasonal supply and price trends, our EYCI price model continues to suggest a ‘fair’ price for the EYCI of 400-10¢/kg cwt, or 70-80¢ higher than current prices. That, of course, would be a potential target should seasonal conditions move back to above average levels between now and the end of the year.
As usual, the main wildcard going forward continues to be the weather. The BOM released yesterday its 3-month outlook, suggesting a 30-40% change of above median rainfall for NSW, southern Queensland, northern Victoria, SA and parts of WA. In addition, it also estimated a 70-80% chance of above median temperature for most of the country between June and August.
Should this scenario unfold, the EYCI is most likely to move sideways over the next couple of months, albeit with limited downside. If seasonal conditions turn out to be around average, the EYCI could move another 25-35¢ higher to 355-65¢/kg cwt by July-August.
That said, in the absence of a major turnaround in seasonal conditions, restocker and lot feeder demand for young cattle will remain restricted to cap the EYCI at around those aforementioned levels in winter.
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