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Wednesday, July 20, 2016

Theoretically feeders could hit 400¢ lwt - but it’s not likely

By Angus Brown  |  Source: NLRS, Trade

Key points

  • Rising feeder cattle prices have been offset by increasing grainfed prices, and falling grain prices.
  • Lotfeeder margins remain relatively healthy considering record prices being paid for feeders.
  • There is room for feeder prices to move higher, with a squeeze in margins, but this looks unlikely.

2016-07-20 FEEDERS COULD HIT FIG 1

2016-07-20 FEEDERS COULD HIT FIG 2

2016-07-20 FEEDERS COULD HIT FIG 3

Recent record feeder cattle prices have defied many pundits, with one question being how can lotfeeders be making money when paying up to $1,600 per head for their main input. A quick update of our lotfeeder margin analysis suggests that the prices currently being paid for feeders are more than fair enough for lotfeeders, with the pain in part being borne by grain growers.

Since hitting a 10 month low at the start of May, export feeder steer prices have experienced a stellar run as tight supply and strong demand collide.  Mediumfed and shortfed feeder paddock values have hit new record highs in recent weeks of 355 and 344¢/kg lwt respectively (figure 1).  The rise has added 14% in 10 weeks, and has both shortfed and mediumfed feeders at a 6% premium to previous records set last September.

For a 450kg feeder steer current prices equate to $1,575 per head, which is $225 higher than the value seen in late April.  So how are lotfeeders coping.  Very well it seems. 

Figure 2 shows the input costs of a 100 day grainfed steer, along with the sale price, as shown by the Queensland 100 day grainfed Over the Hooks indicator.  The 100 day grainfed price has largely kept pace with rises in feeder cattle values, having gained 12% from the low to sit at 576¢/kg cwt last week. 

The rise in 100 day grainfed prices has basically matched the increase in input costs (12%), with falling grain prices making the cost of gain slightly cheaper, and allowing a stronger increase in feeder cattle values.

We can see in figure 3, that despite rising feeder prices lotfeeders have managed to maintain a very healthy margin, assuming cattle going on feed now are contracted at the current quoted rate.  Since mid-2014 it seems lotfeeders have been very successful in passing rising costs onto processors.  This makes sense at the moment, because, as outlined in last week’s comment, grassfed cattle in saleyards are currently making a lot more than the grainfed over the hooks quotes.

What does this mean?

Let’s say Heavy Grainfed cattle prices rise to the current NSW Heavy Steer saleyard indicator of 638¢/kg cwt.  Then, we’ll assume feeder supply tightens further and lotfeeder margins are cut to $60/t, which after overheads is likely to result in a small loss.  If this scenario were to play out, feeders could still pay $1,720/head, or 410¢/kg lwt for a 420kg steer.  The highest longfed price is 390¢kg lwt, so it’s not that far away.

We feel the current pain being felt by processors makes the scenario above unlikely, but there is no doubt that we should see some short term support for feeder prices.  Support should remain in place until cattle supply improves in October, with the only question being over how forward grainfed cattle rates react to the expected improvement in supply.

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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