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Thursday, February 18, 2016

Falling grainfed prices to limit upside for grassfed cattle

By Angus Brown  |  Source: NLRS

Key points

  • Weakening Grainfed cattle prices, and stronger grassfed heavy steer values have seen the Queesland grassfed discount move back to its smallest level since 2012.
  • There appears to be limited upside for heavy grassfed cattle without a lift in grainfed prices.
  • Further falls in Grainfed cattle would be a sell signal for heavy grassfed steers, while rising Grainfed values could indicate further upside.

2016-02-18 GRASS VS GRAINFED FIG1

2016-02-18 GRASS VS GRAINFED FIG2

2016-02-18 GRASS VS GRAINFED FIG3

 

Grainfed cattle prices have fallen in recent weeks, as the weakening export demand we have been hearing about starts to impact over the hooks prices. In the meantime, grassfed cattle prices have bounced off lows as supply deficits start to bite. This article looks at the historical relationship between grassfed and grainfed cattle prices, and what this might tell us about where prices might be headed.

Grainfed cattle are at the end of a long live cattle supply chain, which includes breeders, backgrounders and feedlots.  As such, when grainfed cattle prices move around, they can affect the price of feeder cattle, which in turn can impact the price of weaner, or light store cattle.

The price of grainfed cattle can also impact the value of grassfed cattle, as grassfed prices can only move to a certain premium to grainfed prices before something has to give.

Figure 1 shows the Queensland Over the Hooks 100 day grainfed steer price, along with the saleyard Heavy Steer indicator and the Cow Indicator.  The three price series generally move together, with the Grainfed Steer and Heavy Steer largely in lockstep from 2009 to 2012.  When drought hit in 2012 heavy steers moved to a larger than normal discount, as grassfed cattle supplies increased, depressing prices.

During the drought Grainfed steer prices didn’t really fall, as grain prices were strong, and lotfeeders needed the incentive of reasonable prices to draw cattle through the system.

Figure 2 shows the spread between Grainfed and Grassfed Heavy steers in Queensland, and we can see that Grassfed steers still haven’t managed to reach parity with their Grainfed counterparts.  We can see that Grassfed price have recently been at a 70¢ discount to Grainfed cattle, with that gap quickly closing to 20¢ on the back of rising Grassfed cattle and falling Grainfed cattle prices.

Nationally Grassfed Heavy Steers are performing better than those in Queensland, currently sitting at parity with the Queensland Grainfed Steer (figure 3), and back in the pre-2012 range. The larger proportion of British Bred Cattle in the National Heavy Steer Indicator is likely the reason why they are currently trading higher than the Queensland Indicator.

What does this mean?

Falling grainfed cattle prices and rising grassfed prices have the Queensland spread at the top of its range since 2012, and the National Heavy Steer Indicator is 6% off the peak seen in the middle of 2015.  This basically suggests that Heavy Grassfed Steer prices have limited upside without a rally in Grainfed cattle prices. 

This goes against normal seasonality which usually has cattle prices rising at this time of year, but we may have seen the extent of the rally already.

Further falls in Grainfed cattle prices should be seen as a sell signal for Heavy Steers, while rising Grainfed prices should equate to further potential upside for Grassfed cattle.

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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