By Angus Brown | Source: MLA's NLRS, CME
The US cattle market has continued its decline, having now returned to the levels of 2013, before the extraordinary rally. Declines in the US market have been driven by a number of factors, but one, the strength in the US dollar means, we shouldn’t expect our prices to weaken to the same extent.
The general expectation for the US cattle market, as shown in the futures market, was that record levels would sustain for longer than one year. But as it happens, a number of factors converged to send Feeder Cattle Futures (figure 1) especially into a steep descent that even outstripped the pace of the rise seen in early 2014. Since June, US feeder cattle futures have lost 31%.
Live Cattle futures have also declined. However, the fall to the levels of mid-2013 has not been as rapid, having lost 16% since June (figure 1).
The stronger US currency is partly to blame for falling US cattle prices. Just as the lower Aussie dollar has helped our exports by making them cheaper in international markets, the rising US dollar has seen US exports of beef and other meat slump. This in turn has seen more and cheaper chicken and pork in the US domestic market, which is impacting demand. Meanwhile cattle supply is up from the record lows of 2014, and feedlots are using cheap grain to produce heavier cattle, thereby increasing supply.
When converted to Aussie dollars, the US price falls haven’t been as marked, although feeder cattle futures are still 25% lower than in June. The more important price for Australian cattle producers is the live cattle price, which is broadly indicative of the price of cattle from which US exports to Japan are derived.
The fact that US Live Cattle Futures have fallen just 11% in the last six months is positive for Australian cattle prices, and is no doubt helping to drive record grainfed beef demand and feedlot margins.
The Australian cow market is generally driven by US beef import prices, with the 90CL frozen cow being a good indicator of this market. Figure 3 shows that the 90CL price has lost 21% since September, as this beef competes heavily with chicken and pork in US retail markets.
The good news is that in US terms, the 90CL beef price will have to break through support that has been in place since 2011.
This is an interesting market dynamic. The stronger US dollar is partly to blame for lower cattle prices, but it is also the reason prices in A$ terms remain relatively strong.
While the fall in the US market isn’t likely to exert too much downward pressure on our prices yet, they will limit further upside. Back in July we were still saying the Eastern Young Cattle Indicator (EYCI) could get to 700¢/kg cwt. However, this now looks increasingly unlikely as it would likely push processors well into the red, and see slaughter capacity fall further.
If the A$ remains around 70¢, and the US market finds a bottom soon, Australian cattle prices might find a new range from here. This is likely to be wider than we have seen traditionally, but also much higher - in the 500-650¢/kg cwt bracket.
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