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Tuesday, March 31, 2015

“Get off the fence”… where to for Australian cattle prices?

By Tim McRae, Bangalla Consulting  |  Source: ABARES, MLA's NLRS

Key points

  • Significant potential for Australian cattle prices to move to a substantially higher plateau in 2015 and through future years – provided seasonal conditions are favourable.
  • EYCI possibly closing in on 500 ȼ/kg cwt (if above average seasonal conditions prevail).
  • Heavy, slaughter-ready cattle, both cows and steers, will become very scarce in the later months of 2015, with average prices forecast to possible exceed 450ȼ/kg cwt.
  • Producers who are positioned to sell cattle in the second half of 2015 should be well rewarded. 


Rain .forecast .median .national .season 1.latest .mr

So cattle supply will be down, and demand will be strong. Hardest hit will be the Australian domestic beef market. Now it’s time to “get off the fence”. This article places some prediction on the record, for where Australian cattle prices could be over the next 12 months.

Extensive and long drought periods throughout 2012-15 have the market poised for a significant contraction in supply once it rains (read Cattle supply outlook 2015: how long can the large turnoff rates be maintained?). This has led to the Australian herd falling to a two-decade low, with no sign of rebuilding yet to emerge (read Long-term shortage of slaughter cattle – what impact?). At the same time, export demand has accelerated, boosted significantly by a much more favourable A$ (read Looming supply contraction will leave many markets wanting).

Unsustainably high slaughter levels, rapidly falling herd numbers and record export demand would indicate the outlook for cattle prices is on the up – but where, when and how?

Using the latest three month rainfall outlook from the Australian Bureau of Meteorology (BOM) (figure 1), which shows an above average chance of rain for April-June, prices should be much higher come the first week of July.

Indeed, if some good storms through January 2015 were able to push the cattle market 18% higher for young cattle and 33% higher for cows, the impact of a decent autumn break could be of a similar magnitude. The difference is that the rise would come from a higher starting point – an encouraging sign for producers.

Therefore, assuming a favourable April-June period (as forecast by the BOM) and all the benefits that flow from a good autumn break in southern Australia, it is conservatively feasible that the EYCI could improve easily by 10%, which would have it above 460ȼ/kg cwt in early July.

Interestingly, the “early” autumn break of 2014, which started in late February and ended by May, saw an initial 20% increase in young cattle prices, 10% for heavy cattle and 14% for cows. Given that the market fundamentals have only become more acute 12 months later, a similar price response would see the EYCI kick above 480ȼ cwt, while cows would quickly jump back above 400ȼ/kg cwt.

Looking further out is obviously more difficult, given the lack of forecasts for seasonal conditions. But again, given the underlying long-term supply issues, historical pricing and “assumption” for an improvement in autumn conditions, it should be expected that the EYCI will continue to track safely in the mid-400’s barring any major supply shocks (such as worsening drought). However, given the above assumption for autumn 2015, even an average winter would see heavy cows become extremely scarce.

In 2014 between the first week of July and first week of October, the national average cow price kicked by 35% and was up 27% from the final week of March. A similar jump for 2015 would see cows average 430-450ȼ/kg cwt by the first week of October. Based on the long term relationship between the categories, this puts the EYCI over 470ȼ/kg cwt at the same period.

Looking nine to twelve months ahead, price levels will again be determined by the drought conditions through northern Australia and, as always, the extent of the 2015-16 wet season. But, given the degree of rises in 2014, any widespread wet season flooding in 2015-16, especially if in late 2015, would most likely see the EYCI kick over the 500ȼ/kg cwt mark.

The above forecasts only deal with the “positive aspect” of the assumption of rain and an improvement in seasonal conditions. That said, it is somewhat difficult to see cattle turnoff increasing – and, by extension, prices declining – in 2015 regardless of seasonal conditions, given the vastly reduced national pool of cattle.

What does this mean?

While any widespread rain event through April will have an immediate impact on prices, given the looming very tight supply situation, any run of months experiencing above average rain will finally deliver very high prices for an extended period. The lower A$ will help to offset the impact of sustained higher prices to export markets.

Producers looking to buy cattle for further finishing will need to be very precise with timing, given how reactive the market will be upon any widespread falls. 

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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