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Tuesday, August 13, 2013

EYCI waits for BOM positive rainfall outlook to unfold

By Augusto Semmelroth  |  Source: DAFF, MLA’s NLRS, BOM, Steiner

Key points

  • The EYCI is struggling to move above 330¢/kg cwt, a result of ongoing dryness in northern NSW and Queensland.
  • EYCI model suggests prices are around 10% below fair value, based on current grain and beef export prices.
  • Upside will be around 10% until the end of the year to put the EYCI back at 355-360¢/kg cwt.
  • This is dependent on seasonal conditions unfolding according to BOM forecasts.


2013-08-13 EYCI Waits For BOM Positive Rainfall Outlook To Unfold FIG 1

2013-08-13 EYCI Waits For BOM Positive Rainfall Outlook To Unfold FIG 2

2013-08-13 EYCI Waits For BOM Positive Rainfall Outlook To Unfold FIG 3

After a solid recovery in May and June the Eastern Young Cattle Indicator (EYCI) has found strong resistance at 330¢/kg cwt as dryness persists in northern markets. With seasonal conditions expected to improve considerably and export fundamentals robust, will cattle prices deviate from their seasonal spring trend and surprise us on the upside?

As with many other agricultural commodities, cattle prices present strong seasonality. For the EYCI, August is the month when prices tend to peak as both northern and southern markets usually hit their yearly highs.

Using historical price movements and their seasonal trend as reference, the EYCI should find support at current levels until September, before succumbing to increased supplies and softening demand. This is characteristic of the period between mid-October and December. With that in mind, the EYCI should ease another 3-5% (or 10-15¢/kg cwt) to 315-20¢/kg cwt until November/December.

While history suggests lower prices by the end of the year, a few other indicators remain reasonably positive.  These should provide some ground for an ongoing recovery in the coming months.  

The first one is the fact that the EYCI remains at very depressed levels, which leaves the indicator with a greater potential for recovery once overall market conditions improve. To be more precise, the EYCI is still 15% and 10% below the year-ago levels and the 5-year average, respectively (figure 1).

The second one relates to the mismatch between domestic and export prices. Current beef export quotes to key markets (Japan, Korea and US) are in fact between 4-8% higher than 2012 levels and 6-15% above the 5-year average.

This leaves us with poor seasonal conditions and feed costs to blame for the depressed state of cattle prices. A combination of lack of rainfall and high grain prices since August last year forced more animals to slaughter at the same time it restricted restocker and feeder demand.

The good news is that feed prices have been slowly retreating from recent highs and are expected to be around 6-10% lower by harvest. Current feed grain prices are already at or below year-ago levels. Furthermore, when isolating the effect of rainfall on prices, we believe that the EYCI should have a fair value of 360¢/kg cwt, or 30¢ (10%) above current levels (figure 2). In other words, the return of improved weather conditions should drive the EYCI back to its fair value.  

What does this mean?

As with other price forecasts, we make a number of assumptions based on the information that is currently available. While we try to use the most accurate facts, predicting what the future will unfold is a hard task given the dynamic nature of livestock markets.

Right now, we believe that the main price drivers for the next 3-6 months will be the availability/cost of feed (ie pasture or grain) and the state of domestic restocker/feeder demand rather than export demand. Because of that, a critical component of our forecast is the expectation of improved seasonal conditions by the end of the year.

Should BOM’s 3-month rainfall outlook (70-80% chance of above median rainfall) become reality, a recovery similar to 2010 and 2011 (10% by Nov/Dec) should be expected. That would see EYCI moving 25-35¢ higher to 355-60¢/kg cwt. However, if spring fails, downside will be strong (figure 3).

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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