By Augusto Semmelroth | Source: MLA, ABS
Cattle markets have pushed the envelope this year, reaching unprecedented levels. After bottoming in January 2014, eastern states cattle markets have steadily climbed to see prices double in nominal terms in the last 18 months. While that is a remarkable outcome for cattle producers, many are still wondering how current levels stack up in real terms.
The debate around nominal vs real prices is a recurrent theme when analysing agricultural markets. Every now and then this discussion is triggered to demonstrate the declining terms of trade in farming, or to show that livestock prices are nowhere near the levels seen in the past when adjusted by inflation. Put differently, sale prices received today are not as attractive as they once were.
This is a valid statement. It still holds true when we compare the current price levels, in real terms, to those seen before 1980. The real value of a unit of output has plunged across all major agricultural products, including cattle. This trend is underpinned by substantial productivity gains and a rapid increase in global agricultural/meat production in the last 30-40 years.
Figure 1 shows the Eastern Young Cattle Indicator (EYCI) price in real terms since 1955 (EYCI proxy used before the EYCI was developed in 1996). The most obvious pattern is the price downtrend started in the late 1970s. Between 1979 and 1998, young cattle prices moved from 870¢ to 250¢/kg cwt, a 70% decline in value.
However, when looking at the performance of cattle markets over the last 25 years, no major directional trends have emerged. In other words, young cattle prices have tracked sideways within a confined range of 300¢ and 500¢/kg cwt for most of the time, with only a few attempts to break through those levels.
To put this into better perspective, figure 2 shows the EYCI since 1990 and highlights the aforementioned 300-500¢/kg cwt range. For the first time in 10 years, eastern states young cattle prices have moved above 500¢ and are now quoted at 565¢/kg cwt. That’s not only a record level in nominal terms but the highest real value in 30 years.
For those interested in percentiles, figure 3 shows the same prices as in figure 2 but overlays key percentile ranges for the 1990-2015 period. After finding some resistance at the 80th percentile in February, cattle prices continued to head north and have finally broken through the 100th percentile level set in 2001.
Cattle producers are now enjoying the best prices seen in 30 years in real terms. Adjusting prices for inflation (CPI) is a valuable way to assess the market performance in the long-run because it helps us to gauge how the prices received today compare to prices in the past. With that in mind, it becomes easy to understand why the cattle industry has been swamped with optimism this year.
Based on the duration of the three major upward cycles seen since 1990, which varied from 24-40 months, we still believe prices are likely to continue trending higher for another 12-18 months or so. This will coincide with the looming contraction in supplies projected for 2016 and 2017, and the ongoing support from robust export demand and record beef prices.
That said, we cannot see a major structural change in cattle markets to warrant a return to the real values seen prior to 1980. By the end of this decade, prices should start moving back toward the 1990-2015 range but likely to find strong support above the 50-60th percentile (~400-415¢/kg cwt).
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