By Angus Brown | Source: MLA
Last week Mecardo published a couple of article on the forward price contracts which are trading on Auctionsplus, and the new Cattle forward contracts being offered by Riemann. When thinking about selling, or buying, on a forward market the first thing that needs to be assessed is ‘what is an acceptable price’.
In physical cattle markets prices are set by matching what a seller is prepared to accept, and what a buyer is prepared to pay, coming together to set the rate at which cattle change hands. Forward markets are no different. A buyer will always have a price they are prepared to pay for cattle in the future, and sellers will always have a price they are prepared to accept.
The problem with forward markets is one of eternal optimism. Buyers expect the market to fall, and sellers expect prices to rise, and as such they can’t come together to agree on a price. A rational look at market fundamentals and price seasonality is a better way to approach coming up with forward prices.
In any pricing forecast you need to start with the current price. The Eastern Young Cattle Indicator (EYCI) on which the Riemann forwards are based, is currently sitting at 705¢/kg cwt. It’s fair to say that is any cattle grower was offered 705¢ for EYCI type cattle for the next 6 months, they would probably take it. This is due to the general expectation that the market will fall, thanks to weak fundamentals and seasonal trends. But how much less should we accept.
We like to use the 90CL Frozen Cow Indicator as a benchmark for cattle prices, and it currently sits at 575.5¢/kg cwt, 19% below the current EYCI. It’s fair to say that buyers would be happy to pay this price for the coming six months for EYCI type cattle, but growers would baulk at forward selling.
The ten year seasonality of the EYCI has the market remaining steady until the end of September, before falling 8% to low in late October. In 2005, when markets followed a similar trend to this year, the EYCI fell 7% into October, and 12% to December.
Based on the current EYCI, and how you think the season will pan out, we can set target prices for the coming six months, and these are outlined in Figure 2.
There appears to be little doubt that prices will fall, and those who are concerned about heavy price falls should look seriously at forward contracting some cattle. Figure 2 gives a pretty good idea of where target prices might be set. If you could sell EYCI type cattle for 670¢/kg cwt for October to January, which is equal to the five year average price fall, we think it would be a very good price.
We would still be sellers at the 10 year average price fall, which would take the EYCI to 648¢/kg cwt. We would become a buyer at the current 90CL level of 571¢, so in our mind the fair price for the EYCI for the coming six months is somewhere between 600 and 650¢/kg cwt, with the mid-point of 625¢ probably a good place to start.
Feel free to use the comment section below to tell us where you would be a buyer or seller of the EYCI for the October to January period.
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