By Matt Dalgleish | Source: MLA, NLRS
It is an expectation at this time of year that seasonal factors lend support to prices in northern markets and younger cattle in these regions run at a premium to both the Eastern Young Cattle Indicator (EYCI) and to similar cattle in the southern regions. Indeed, recent anecdotal evidence from saleyards indicate northern buyers are active in the southern regions looking for value. The purpose of this analysis is to probe a little deeper into the seasonal pattern and see what insights can be identified.
Figure 1 highlights the current premium above the EYCI and southern regions that northern growers have been enjoying since early November 2015 for EYCI style cattle. Recent prices demonstrate that northern stock are selling 31¢ higher than southern stock, on average. An analysis of this period for the last five years indicates that this premium is 10¢ higher than the five-year average of 21.4¢.
Although, as figure 2 highlights, when the north to south price basis is converted to a percentage premium/discount the current premium of 5.3% is very close to the five-year average of 5.8% for this time of year. The shaded green area of this chart represents the seasonal historic variation in percentage basis of northern to southern EYCI style cattle and represents 70% of the variation in basis over the last five years.
This premium in basis is expected to narrow in the coming months and would be expected switch to a discount in early March, if the 2016 season follows an “average pattern”, as seasonal factors switch in favour of southern growers. However, as the 2015 season demonstrates basis can deviate from the average before returning to more “normal” conditions. As figure 2 highlights, the basis for 2015 followed the average quite closely until mid-May and didn’t return to the average until mid-October.
Ideally if there was another indicator that leads this movement in basis between the north and south it could be used for a proxy as to how the current season is shaping up when compared to a “normal” season. As highlighted in figure 3, the percentage basis between northern and southern feeders appears to lead this seasonal movement in basis with the “average pattern” switching from a premium to a discount mid-February.
Keeping an eye on what is happening between the north/south basis for feeders should provide an early clue as to how the 2016 season is shaping up for the overall basis between northern and southern prices.
Current figures indicate that the 2016 season is following the average cycle for variation in basis. This would indicate that the north/south basis is expected to narrow in the coming months, switching to a discount in mid-March 2016.
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