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Thursday, June 25, 2015

Using the US situation to forecast finished and young cattle prices

By Augusto Semmelroth  |  Source: USDA, Steiner, MLA, ACU

Key points

  • US live steer and QLD heavy steer prices are expected to return to historical correlation in 2016 and beyond, when the Australian herd rebuild phase kicks off.
  • A realistic target price for heavy steers in Australia for 2016 and 2017 should be at or above 600¢/kg cwt.
  • Young cattle will also break the 600¢/kg cwt mark in 2016 under average seasonal conditions and would have move upside potential if the north has a solid wet season break.
  • We firmly believe domestic cattle markets remain undervalued and will continue to trend higher in the next few years.

2015-06-25 US Article Part Three FIG 1

2015-06-25 US Article Part Three FIG 2

2015-06-25 US Article Part Three FIG 3

To wrap up our three part series on the US market, we will delve further into USDA’s long term price forecasts and assess what they will mean for our domestic cattle markets. Although this kind of analysis is highly conjectural, we are confident these are some of the most relevant supply and price data available to extrapolate what the future will bring. And again, the results are rather encouraging.

As mentioned in the previous article (US herd rebuild to underpin long-term import demand), 2015 marked the first year of a new US cattle cycle and has been characterised by strong female retention, tight domestic beef supplies and a surge in beef import demand. Australia, on the other hand, continues to liquidate its breeding herd at an alarming rate and has become the best placed country to ship unprecedented volumes of lean (manufacturing) beef to the US.

Looking at USDA’s long-term projections, it becomes clear that the US won’t be able to ramp up production in the near term. This will support ongoing robust import demand until the end of the decade. As a result, they are likely to retain their position as the largest export market for Aussie beef during that period (most likely at the expense of other upcoming markets). This leads us to firmly believe that our cattle prices will continue to be highly influenced by US cattle and beef prices in the future.

To put this into context, figure 1 shows how closely correlated the US live steer and the Queensland (QLD) heavy steer prices, quoted in US$ terms, have been since the 1970s. The last three years have clearly been “exception years” as record slaughter levels (and restricted processing capacity) have seen this relationship break down completely.    

That said, we also understand that this recent “detachment” from US prices will finally come to an end as a strong herd rebuild phase looms. As such, the USDA’s long term price projections are then a sound reference point for us to base our long-term price outlook for the years to come. Figure 1 plots the USDA’s price forecast for the 2016-2024 and where the QLD heavy steer price would be based on the 1969-2012 trend. Figure 2 shows the same price forecasts overlaid with the US cattle cycle.

For those looking for a forecast for young cattle, figure 3 shows our EYCI price model and a forecast for the 2016-2024 period based on USDA’s estimates and other assumptions on 90CL and feed grain prices.

Read previous articles in this series:

What does this mean?

Long term price projections are generally taken with a grain of salt despite the all the efforts put into generating plausible scenarios. Yet, they still provide a “fact-based” view on the market based on future supply/demand fundamentals, rather than pure guesswork. As such, they can be a powerful decision making tool for producers for budgeting and strategic management purposes.

One of the key take home messages from this “US-centric” series of articles is to reinforce the view that the US will remain a major importer of Aussie beef in the foreseeable future. This will probably delay the market expansion into Asia and the Middle East, because the looming contraction in exportable supplies will jeopardise our ability to cater for improving overseas demand.

Under this scenario, higher beef and cattle prices will invariably be needed to trigger some form of demand rationing among export markets. This analysis into the US supply/price outlook just reaffirms our bullish outlook for cattle markets for the following years, particularly 2016 and 2017.

Converting the price forecasts displayed in figures 1 and 2 from US¢/kg lwt to A¢/kg cwt using a conservative exchange rate of US75¢, we believe the QLD heavy steer will crack the 600¢/kg cwt mark next year and will likely remain around this level until the end of the decade. This also applies for southern markets.

The EYCI model is currently estimating a “fair value” of around 600-615¢/kg cwt for 2016-2018. Should seasonal conditions improve substantially in the north in early 2016, and feed grain prices ease from current levels, this target level will be easily achieved. In other words, the model will underestimate the potential upside for prices under above average seasonal conditions. 

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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