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Wednesday, October 14, 2015

MLA cattle projections update continues to feed bulls

By Angus Brown  |  Source: MLA

Key points

  • MLA's latest cattle projections released this week.
  • Few changes to its cattle projections from July, with heavy declines in slaughter and herd still expected.
  • Live exports are also expected to decline, while domestic beef consumption will also be lower.
  • The expected supply contraction will maintain support for cattle prices relative to international markets over the coming five years.

2015-10-14 MLA Projections FIG 1

2015-10-14 MLA Projections FIG 2

2015-10-14 MLA Projections FIG 3

In its April and July updates, Meat and Livestock Australia made some large changes to its original projections released in January. However, the July numbers look like they will be close to coming to fruition. The latest projections update, released this week, gives further fodder for market bulls, despite the price declines of the last fortnight.

The major numbers we like to look at from MLA’s projections are the supply numbers, specifically the size of the herd and the projected slaughter levels.  The October update has largely stuck close to the July levels, with a slight decrease in 2015 projected slaughter, falling from 9 million to 8.85 million head. This takes the decrease on 2014 to 4.1% (figure 1).

This is a sizeable contraction, especially in the second half of the year given that the first half saw slaughter at similar levels to 2014, and goes a long way to explaining the extraordinary price of the last three months.

The only other significant change in the supply projections was a 1.4% increase in the projected slaughter for 2017.

While there has been no change in MLA’s herd forecasts, it’s worth commenting on.  Figure 2 shows the herd since 1976, with the 2016 level of 26.1 million head (black line) expected to be a 22-year low. 

Obviously, a smaller herd limits the ability to supply cattle for slaughter, and this is expected to see slaughter levels hit a 20-year low of 7 million head in 2017.  This will be 21% lower than this year, and 24% lower than 2014.    

The live cattle export market is projected to send 11% fewer cattle this year, limited by supply and the small Indonesian quota seen in the third quarter.  Over the coming years, live cattle exports are expected to fall, sitting in the 890,000-950,000 head range up until 2020. While these levels are well below the levels of 2014 and 2015, they are still stronger than the 2011-2013 average of 721,000 head.

While beef exports are expected to fall, the domestic market is going to bear the brunt of lower supply according to MLA. Domestic beef consumption is expected to fall from highs of 30.7kg/head of population in 2014 to 26.1kg/head in 2020 as beef prices remain high and dietary changes continue.  

What does this mean?

The spread between the EYCI and the 90CL price is heavily influenced by supply, illustrated by the 93% correlation between the price spread and cattle slaughter (figure 3). Quite simply, as supply falls, the price difference between the EYCI and the 90CL price narrows. While figure 3 doesn't give a guide to actual cattle prices, it gives an indication of where they may head relative to the benchmark 90CL export price. 

In 2017, based on the slaughter forecast of 7 milliion head, the spread between the EYCI and 90CL is expected to be 50c. At the current 90CL price of 690c/kg, this puts the EYCI at 740c/kg cwt. Obviously, no one knows where the 90CL price will be over the next two years. However, all projections are pointing towards it remaining strong, and supporting our values.

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