By Matt Dalgleish | Source: MLA, NLRS, ACA, USDA, Steiner, ABS, Trade
The recent dip in the Eastern Young Cattle Indicator (EYCI) to 545.25¢/kg cwt and an improving 90CL export price appears to have stirred processors into action at the saleyards with the underlying EYCI data showing an increase in processor purchases during April. Does this mean processor margins are on the improve too after two months of registering negative returns?
Figure 1 highlights the percentage of saleyard purchases of EYCI style cattle that are bought by processors and while it doesn’t give us a picture of the off saleyard purchase activity it still provides a glimpse of processor demand. The 2016 pattern shows rather subdued processor interest during February and March which coincided with the Mecardo theoretical processor margin cut out model registering negative returns.
The cut out model uses beef export prices to derive a total “cow value” from all of the component parts which can be used to subtract cost of purchase and processing costs in order to calculate a theoretical processor margin. To find out more about the processor margin cut out model click here.
The lift in percentage processor purchases during April to reach levels comparable to this time last season of 21% suggests that conditions for processor margins have improved over the month. Indeed, as outlined in figure 2 the negative processor margins recorded during February and March have narrowed according to the cut out model. The processor margin for April sits at a fairly slim loss of $12.85 per head.
As the cut out model is a theoretical tool designed to represent the average processor, providing a snapshot view of the current trading environment for processors, it is feasible that more efficient processors are in positive margin territory.
The average margin for the 2016 season currently sits at a loss of $26.90 per head. Figure 3 plots the average yearly margin against the annual cow slaughter numbers since 2000 and there is a fairly strong positive correlation between processor margins and the female kill. Generally speaking, higher female slaughter numbers correspond to higher processor margins and this is due to the fact that cow slaughter is higher during times of herd liquidation and lower in times of herd expansion.
The herd liquidation phase is synonymous with unfavourable weather conditions such as drought, high feed prices and the increased turnoff of cattle, including cows, which corresponds to lower cattle prices and expanding processor margins. In contrast, abundant grass, low feed prices, robust cattle prices, and an optimistic outlook combine to entice producers into herd expansion, thereby holding onto breeding stock. Lower cow turnoff usually signals a tougher trading environment for processors and tighter margins.
As highlighted in figure 3 the average processor margin for the current season plotted against the Meat and Livestock Australia (MLA) cow slaughter forecast for this year shows that the 2016 data point is sitting very close to the expected trend line (orange line). Given the available data, this trend line represents a line of best fit and allows us to anticipate how the current season will unfold for processors.
This suggests processors that do not have efficient economies of scale and effective methods to keep their production costs under control will find the 2016 season a challenging trading environment.
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