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Thursday, October 31, 2013

Trading scenario - North or south, store cattle are cheap

By Augusto Semmelroth  |  Source: MLA's NLRS, ACU

Key points

  • Store cattle are trading at historically low levels in both northern and southern markets.
  • Buy store/sell finished cattle strategy seems a good option this year. Downside is limited.
  • Risks associated with these strategies are minimal and returns could be substantial depending on seasonal conditions. Northern markets will be more prone to see gains eroded by poor conditions. 

2013-10-29 Trading Scenarios – North Or South , Store Cattle Is Cheap FIG 1

2013-10-29 Trading Scenarios – North Or South , Store Cattle Is Cheap FIG 2

Store cattle prices have plunged in southern markets in the last few weeks, and are now on par with their depressed northern counterparts. Despite the ongoing weather risk factor, percentile analysis suggests store cattle are a good buy at the moment. This article looks at buy/sell trading opportunities and returns under different EYCI price scenarios.

Between July and September, store cattle prices in southern markets traded at a sizeable premium to the north. However, the lack of spring rainfall in key producing areas has seen restocker demand tumble in the south and store prices plummeting to similar levels to northern markets in recent weeks. As a result, the average price young cattle price purchased by restockers is hitting historical lows in both regions. This is shown in Table 1 by the very low percentile ranks for restocker cattle in both regions.

Despite the relatively uncertain price outlook for late 2013 and early 2014, store cattle categories seem to be the best purchase option at the moment. Table 2 shows three different trading scenarios based on this premise. In southern markets, the strategy comprises of buying steers at 300kg lwt and selling them at 450kg lwt to processors in early April.

For northern markets, there are two main strategies. The first is a short-term trading opportunity to buy steers at 300kg lwt and sell them at 360kg lwt in late January to lot feeders (see Northern 1 in Table 2). The second strategy is to hold the same animals to 540kg lwt and sell them in August to processors (Northern see 2 in Table 2).

Table 3 shows the gross revenues, expenses and potential range for margins under the different strategies and price scenarios. Gross revenues are calculated estimating four EYCI prices varying from 280¢ to 360¢/kg cwt.  The values are based on poor, average and slightly above average seasonal conditions. For each strategy, sell prices were adjusted according to their 5-year average premium/discount to the EYCI at the time of turn off. 

Gross expenses include the current purchase price (source MLA’s NLRS) and feed costs when appropriated. Strategies ‘Southern’ and ‘Northern 2’ will make use of 60 days of supplementary grain feeding before animals are sold to processors. Feed costs are calculated using feed grain prices of $210/t in the south and $230/t in the north delivered on farm. Finally, the gross margin range is calculated using the defined price forecasts.

*NOTE 1: The gross margin results should not be compared, as these strategies vary considerably in terms of their execution period. 

*NOTE 2: Northern producers can pursue strategies ‘Northern 1’, ‘Northern 2’ or both, depending on how seasonal conditions unfold and the carrying capacity of the farm.  

What does this mean?

The main idea from this analysis was to show that store cattle are at historically low levels and are a good buy in both southern and northern markets. While we used regional averages in the calculations, the scenarios provide a rough estimate of target purchase prices and potential returns across the east coast - allowing for saleyard price variances.

The big unknown is the weather outlook, especially for northern cattle producers. If their wet season does not disappoint, the EYCI should move towards the upper price range to deliver good sale returns. If, however, conditions deteriorate from here, neither strategy 1 nor 2 will provide decent results. However, sizeable net losses (gross margin – overhead costs) are quite unlikely as price downside is relatively limited.

In the south, the weather risk is more moderated. However, a disappointing wet season in the north will have negative flow on effect for prices and returns. The opportunity to buy cheap store cattle is now; rains in NSW could trigger a price rebound shortly. 

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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