By Angus Brown | Source: MLA's NLRS
‘The market is always right’ is a term often used when markets looks like they are higher or lower than they should be. At the moment, the market may be right, but the spread in prices of various cattle categories is remarkable.
Spread analysis essentially gives us a snapshot of what is cheap, what is expensive and what is priced about right. Last week’s cattle sales make it hard to work out if the heavy steers are over-priced, cows are under-priced and where the Eastern Young Cattle Indicator (EYCI) actually should be sitting.
In NSW and Victoria, trade and heavy steers are very expensive relative to the EYCI, with prices sitting at close to record premiums to the EYCI. Finished cattle are in tight supply, obviously, with processors chasing cattle in prime condition. In contrast, heavy steers in Queensland are at almost a record discount to the EYCI, with cattle supply still running strong.
While heavy steers look very expensive in NSW and Victoria (figure 1), cows are very cheap relative to the EYCI (figure 2). Cows are currently sitting at a 90-100¢ discount as supply remains relatively strong, which is not unusual for this time of year.
While cows are heavily discounted to young cattle, they are at a 130¢ discount to heavy steers in Victoria and NSW, when the normal spread sits in the 50-80¢ range at this time of year.
Obviously there are not many heavy steers about at the moment in southern states. However, the obvious trade for anyone who does have any on hand is to sell heavy or trade steers, and buy cows, with the spread expected to close up over the coming 2-3 months. The spread will close through either heavy steer prices falling or cow prices rising, or both.
While young cattle are cheap relative to heavy steers, they are expensive relative to cows. There is probably some upside in young cattle prices. However, the probability of young cattle prices rising, and the potential for the price rise, just isn’t as strong as the cow market.
Using spread analysis to forecast price is difficult. If we take heavy steers as the cattle category that is priced correctly, it means that the EYCI should rise to 520¢/kg cwt to come back into line with heavy cattle. If, then, the EYCI rises to 520¢, cow prices need to rise to 490¢/kg cwt to move back to a normal spread. This is around 20% upside. However, if cows are priced correctly, the EYCI and heavy steers have plenty of downside. You should use this price spread information in conjunction with other market analysis to assist your decision-making.
Unfortunately, Queensland is still suffering from dry weather and oversupply, pushing prices to a significant discount to southern states. The good news, though, is that prices are still historically strong in absolute terms.
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