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Thursday, November 27, 2014

A retrospective view on Mecardo cattle price forecasts

By Augusto Semmelroth  |  Source: MLA, ABS, ACU

Key points

  • Despite the challenging seasonal conditions and unpredictable export demand patterns, our EYCI forecasts have proved largely accurate during 2014.
  • The main idea behind these forecasts is to analyse the underlying factors driving livestock markets and to provide an informed view about the potential price levels under expected supply/demand scenarios.
  • Ultimately, this analysis puts us in a better position to access risks and opportunities in the market in order to fine tune marketing strategies..

2014-11-27 EYCI Forecast Review FIG 1

2014-11-27 EYCI Forecast Review FIG 2

2014-11-27 EYCI Forecast Review FIG 3

Following an earlier article this week looking at how our lamb market forecasts stacked up in 2014, now it’s time to check how our estimates for cattle markets panned out. Despite the great uncertainty regarding the weather conditions for this year, our calls on the direction of the market and price targets for cattle in 2014 have been sound.

Starting with our first forecast for the Eastern Young Cattle Indicator (EYCI) this year in What happens to cattle prices if it doesn’t rain?, Angus looked at the long term performance of cattle markets under drought conditions. Based on the supply/demand fundamentals and the seasonal outlook at the time, our view was that the EYCI could see plenty of volatility in the first half of 2014 depending on rainfall, but upside potential would be limited to 370¢/kg cwt (figure 1).

That target price level was reinforced in April in the article EYCI seasonality likely to return at new higher prices despite the positive autumn break. Back then, our view was that the indicator would stall at 360-380¢ in May/June even if seasonal conditions remained around average levels. Conversely, the indicator should find support at 330¢/kg cwt under a below average rainfall scenario. And that’s exactly where the EYCI headed after disappointing falls in the second half of the autumn.

In May, we reassessed our forecast for winter in EYCI potential recovery limited to 355-65¢/kg cwt this winter. At the time, our view was that the EYCI would move sideways in June and July in the event below average rainfall conditions persisted but downside risk below 330¢/kg cwt should be limited (figure 2).

On the flipside, we pegged a recovery of up to 355-65¢/kg cwt by July-August should seasonal conditions move back to average levels. Although southern markets remained dry throughout winter, the widespread rains seen in northern NSW and Queensland in August triggered a positive recovery for young cattle markets to see the EYCI reaching 360¢/kg by early September.

As the prospects for an El-Nino event in spring started to unfold, we decided to have a look at the potential downside risk for cattle markets in our June article, El Nino and cattle markets, what’s the worst that could happen?. Our El-Nino forecast estimated the EYCI could move as low as 330¢ by September and down to 300¢/kg cwt for the rest of spring (figue 3). Fortunately, this worst case scenario did not eventuate despite some dryness in southern markets. Improving export demand has provided some extra support for cattle markets in recent months.

What does this mean?

It’s always a difficult task to forecast livestock prices, particularly under challenging seasonal conditions and unpredictable export demand patterns like those seen over the last couple of years. As a result, such estimates need to be readjusted on a regular basis to reflect these dynamic changes in supply and demand conditions.

Although we didn’t get all numbers exactly right, the forecasts provided a fairly accurate view about the market direction as well as target price levels under different scenarios. These scenarios are backed by robust analysis of short and long term supply patterns, the current and prospective demand conditions, historical seasonal price movements, rainfall outlook and inevitably, analyst logic and experience.

This kind of analysis provides valuable insights for those in commodity markets, by revealing potential risks and opportunities in the market. Ultimately, this information is a powerful tool for producers to assist short and long-term strategic marketing decision. Make good use of it.

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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