By Angus Brown | Source: Steiner, NLRS
Over the last few weeks we have been pointing out that local cattle markets are starting to look overpriced relative to export markets. There is however, some upside for the benchmark 90CL Frozen Cow export price, as it is expected to return to its historical highs relative to US domestic fresh 90CL Beef.
We know that the 90CL Frozen Cow is one of the major fundamental drivers of cattle prices in Australia. But what drives the 90CL price? Obviously there are a number of factors which impact the 90CL export prices, but its closest relative is the best benchmark.
The 90CL we export to the US is a substitute for Domestic Fresh 90CL Beef, for which there are prices quoted weekly. While imported frozen 90CL beef and domestic fresh 90CL are closely related, there are times when the two prices get out of kilter.
While frozen and fresh trim is largely substitutable, there are some barriers to making the switch, which are mainly due to freight from port and some wholesalers or retailers are only set up to process frozen beef, or fresh beef, but not both. As such the two prices do not move together with a 100% correlation, it is more like 96%.
Figure 1 shows the frozen and fresh 90CL values in the US market for the last 15 years. After heavy crashes last year, both the frozen and fresh 90CL indicators have gained ground in the first half of 2016. The frozen price reached a 9 month high of 205¢/lb last week as weakening slaughter levels in Australia and New Zealand seen beef availability tighten significantly.
The discount of frozen 90CL to fresh has also tightened, now at 12¢/lb, which is 22 month high (figure 2). Strong Australian and New Zealand cattle slaughter in the first half of 2015, along with tightening slaughter in the US, saw the frozen 90CL at a very large discount to fresh in the US. In July the fresh price crashed back towards the frozen level but the discount has been stuck between 15 and 40¢ for much of the last nine months.
Steiner Consulting Group, who produce a weekly report on the US beef imported market, expect imported frozen 90CL to move to a premium to fresh prices over the coming months. This looks likely as figure 2 shows the spread is highly seasonal, peaking n in November or December most years. This year it could come earlier with cattle supply expected to be extremely tight over the coming months.
Adding 12US¢/lb to reach parity with the fresh price will add around 36¢ to the current 600¢/kg swt level in our terms. If the frozen price gets to a 15¢ premium like it did in 2010 and 2011, it will add another 40¢, which could conceivably see the exported 90CL price move to a premium to the current EYCI, and provide significant support to cattle prices.
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