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Wednesday, August 31, 2016

Feeder forwards suggesting good time will continue.

By Angus Brown  |  Source: NLRS, Auctionsplus

Key points

  • Direct Feeder cattle prices are less volatile than saleyard values, but follow similar seasonality.
  • Forward prices for feeders cheapen in November, in line with normal seasonal price falls.
  • Assuming supply remains tighter than last year, it’s hard to see export feeder prices falling lower than 350¢/kg lwt. 

2016-08-30 Feeder Forwards Fig 1

2016-08-30 Feeder Forwards Fig 2

2016-08-30 Feeder Forwards Fig 3

We recently had a query from a reader along the lines of ‘we are wondering what you are tipping feedlot steer/heifer prices do through to the end of the year and over summer’. Forecasting prices is an inexact science, but we now have the assistance of Auctionsplus forward feeder sales as guide to what feedlots are willing to pay at least until December.

Since we last covered the forward market for feeder cattle, about a month ago, export feeder prices have rallied to a new peak, before easing slightly.  Direct to feedlot Feeder prices are historically less volatile than cattle sold through the saleyards, but they still tend to follow the seasonal trend of peaking in winter, and easing into the spring and summer.

Figure 1 shows how feeder prices can vary relative to the average seasonality.  The 10 year average shows a peak in August, before price lose around 7% to a low in early November. 

In 2005, a year which prices have been tracking closely thus far in 2016, feeder prices lost nearly 20% from the peak to the low.  In 2011, the last we spring, and early northern wet season we saw, feeder prices continued to rise through to the end of the year.  

While all the scenarios in figure 1 are possible, feedlots look to be backing something close to average price movement.  Figure 2 shows the year to date NLRS Mediumfed feeder average price, along with 2015 and the latest forward prices from Auctionsplus ‘Targeted Feeder Sale’.  The prices varied a bit more in this sale, but the averages were slightly higher than the current NLRS quote, but close to the top price being paid in the market, which makes sense.

Lotfeeders, and growers who sold cattle in November, are expecting feeder prices to ease in November, with prices dropping 20¢ to 365¢/kg lwt delivered feedlot, or 355¢ ex farm.  There was a 10¢ lift in prices paid for December delivery.

The strong forward prices being paid do appear to be sustainable in the current market.  Figure 3 shows the Queensland Over the Hooks Grainfed Steer indicator, and the input costs of a grainfed steer, and the margin remains good at $90/head before overheads.  Falling grain prices are no doubt assisting a cheaper cost of gain, which is offsetting the high price paid for feeders.

What does this mean?

So back to the questions we received.  Forward prices are the best indicator of where market participants expect prices to go.  These feeder steers were all Angus cattle and at the top end of the quality range, so heifers and other breeds can be discounted by 10-20¢/kg lwt depending on where they sit on the quality scale.

Into January we would expect prices to remain relatively steady on December values, and maybe higher with good early wet season rain in Queensland.  On the downside 350¢/kg cwt looks to be a solid floor for export feeders, being 8.5% below current levels.  After that 320¢ would be the target, but given the supply and weather outlooks, this seems unlikely.  It wasn’t that long ago that 320¢ would have been seen as a great price, and it shows how the market, and expectations have shifted this year.

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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