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Tuesday, April 04, 2017

Tepid signs of improved conditions for processors.

By Matt Dalgleish  |  Source: MLA, NLRS, Ag Concepts, Steiner, USDA, Trade

Key points

  • The processor margin for March has improved to a $68 loss per head of cattle processed.
  • Average seasonal movements in processor margin patterns and volume of EYCI cattle being purchased by processors at the saleyard point to the potential of an improved situation during the second quarter of the year.
  • Despite the prospect of improved conditions, processor margins and volume figures are anticipated to remain at the lower end, or below, the normal seasonal ranges for much of 2017.

 

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Early indications within the underlying data, which is used to create the Eastern Young Cattle Indicator (EYCI), that processor demand is beginning to lift off seasonal lows. Suggesting that the second quarter of the year, usually a period where processor margins improve, could see processor demand increase at the sale yard.

Figure 1 highlights the smoothed weekly volumes on a quarterly basis for the three purchaser types of feed lots, restockers and processors, according to the underlying EYCI data since the start of 2015. The pattern displayed by processors shows a reasonably clear trend of two peaks and two troughs over the season. The troughs coinciding with March and September, while the peaks align with May and November. The data for March 2017 showing the beginnings of an upturn in the trend – (red circle).

Taking a look at the weekly volume of processor purchases of EYCI cattle on a seasonal basis (without quarterly smoothing applied) we can see that the pattern for the 2016 and 2017 seasons have been trending below the ten-year average pattern. Indeed, average weekly volumes during the current and last season have been roughly half of the average volumes, trending below the lower end of the normal seasonal range between 3,500-6,500 head per week.

Figure 3 outlines the seasonal pattern in processor margins as calculated by the Mecardo theoretical cut out modelling tool. It shows that conditions improved for processors during March with a narrowing of the negative margin from a $114 loss in February* to record a loss of $68, per head of cattle processed. Interestingly, the peaks and troughs in the average processor margin pattern over the season mirrors those displayed by the smoothed quarterly volume patterns discussed earlier, with troughs during March and September and peaks noted in May and November. 

*The monthly margin figure reported in the previous processor analysis of a $97 loss did not include data for the final week of February - click here to recap on the previous processor margin analysis. 

What does this mean?

The potential of continuing improving processor margins as we head towards the normal seasonal peak in May could encourage some higher volumes of EYCI cattle at the saleyard being purchased by processors. Although, processor margins are not anticipated to turn positive in the next few months so the demand at the saleyard is likely to display incremental gains in volume at best, remaining below the 70% range banding (as displayed in figure 2) for much of the current season.

A likely scenario would be for average weekly volumes of EYCI cattle being purchased by processors to peak around the 3,500 head level during the latter part of the second quarter of the year before declining towards the 2,000 head level as processor margins begin their usual trek south again into the third quarter of 2017.

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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