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Wednesday, May 21, 2014

10-year highs for southern restocker gross margins

By Augusto Semmelroth  |  Source: MLA's NLRS

Key points

  • Gross margin for a “sell finished/buy store” trade around $600/head in Victoria and NSW, and just over $400/head in Queensland.
  • Gross margin for store cattle purchased 12 months ago reaching record high level of $700/head if sold as heavy steers in current market.
  • Restockers in southern markets in favourable position to sell heavy steers and restock them at attractive prices.
  • Positive outlook for finished cattle markets in 2015 should underpin solid gross margins for store stock purchased at current prices.   

2014-05-20 Restocker Gross Margins Reaching 10-year Highs In Southern Markets FIG 1

2014-05-20 Restocker Gross Margins Reaching 10-year Highs In Southern Markets FIG 2

2014-05-20 Restocker Gross Margins Reaching 10-year Highs In Southern Markets FIG 3

A follow up analysis on last week’s “Heavy steers move back to a premium to store cattle” article provides further evidence restockers are in a good position to sell heavy steers and buy store cattle in Victoria and NSW, less so in Queensland. This time, we take a closer look at the long-term gross margins for restockers and what to expect from buying stores in this current market.

Figure 1 and 2 shows the spread between heavy and store steers (orange bars) as well as a calculated Gross Margin (GM) based on selling a heavy steer of 550kg lwt and buying a young steer of 250kg lwt (green line) for Victoria and Queensland. The main point here is to quantify the GM of a “one-for-one” trade and to be able to compare current and long-term values.

Over the last 10 years, the GM in Victoria has fluctuated between $400 and $600/head for most of the time. After moving to the lower end of this range in late 2013, the GM has moved back close to $600/head in recent weeks. This is a result of sustained high finished cattle prices and relatively well priced store cattle.

A similar analysis for Queensland shows a slightly different trend since 2009. As opposed to Victoria, the GM was capped below the $500/head mark for most of this period before moving up to $600/head in the second half of 2013. Last week, the GM eased to $420/head, with finished cattle markets clearly underperforming young store cattle in recent months.

Figure 3 shows a similar GM concept but looked from a slightly different angle, this time only for Victoria. Instead of assessing the GM from a “sell finished/buy store” perspective, this demonstrates the rolling GM from buying an animal to be sold 12 months later. Right now, Victorian producers who purchased store steers in May 2013 can sell them and make close to $700/head in GM. That’s one of the largest margins seen since 2004.

For budgeting purposes, table 1 demonstrates trading scenarios for buying young cattle at current market prices to be sold this time next year. Given the positive outlook for finished cattle markets in 2015, we believe the GM should be at the upper end of the range showed at the bottom of the table, at around $575-675/head. While that’s below the current margins of $700/head, they are still solid targets and well above the 10-year average of $460-75 for eastern states.  

What does this mean?

This analysis aims to show general trends in gross margins for restocking operations as well as to look at spot trading opportunities. While the “sell finished/buy store” values (figures 1 and 2) can be used to evaluate trading opportunities and support decision making, the numbers shown in figure 3 are also a valid technique to track the performance of a trade executed 12 months earlier.  

For now, restockers located in Victoria and southern NSW are best positioned to sell heavy steers, restock them and secure a favourable margin. As shown in figure 1, the current GM level for Victoria is at the very top of the 10-year range. That said, the opportunity to purchase well priced young cattle seems to be available across all states on the east coast.

While this analysis does not include any operational and capital costs, these targets margins can be comfortably considered for budgeting purposes, taking into account your own circumstances of course. 

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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