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Thursday, January 14, 2016

What’s changed in the cattle market

By Angus Brown  |  Source: NLRS

Key points

  • Major cattle market fundamentals have all turned in favour of stronger cattle prices in early 2016.
  • Rainfall has seen tighter supply which will support cattle prices.
  • US cattle markets have rallied since December, while the AUD is lower, both should support export cattle prices.

East Cattle Slaughter Fig1

Fig2

Three weeks is a long time in cattle markets, so they say. After some bearish factors impacted the market late in 2015, leading to some concern surrounding maintenance of record prices, most fundamentals turned the bulls way over the break, leading the Eastern Young Cattle Indicator (EYCI) to the 600¢ mark for the first time.

Regular readers will know we tend to focus our cattle market analysis on some key fundamentals.  Rainfall and local supply are hard to separate, while export markets, world beef prices and exchange rates are also interrelated.  All these key fundamentals have largely turned in favour of higher prices since markets closed for Christmas.

Firstly, and most importantly, rainfall.  It should come as no surprise that rainfall has been good across large parts of northern cattle country over the break.  December rainfall was close to average and better in some areas, while most northern cattle regions have received 25-100mm in January thus far.  This is a good start, but growers will be looking for more.

It’s usually hard to judge cattle supply early in the year, with disjointed yardings and slaughter. However, the first full week of the year saw cattle slaughter down 24% on last year (figure 1), and at its lowest level since 2011, which is a fair indication that supply is tight.

US cattle and beef prices rallied in the second half of December and early January.  Figure 1 shows that both feeder and live cattle futures have bounced off lows, gaining 14 and 9% respectively from the bottom.  While US cattle futures don’t directly impact cattle prices here, they are a reasonable indicator for export beef prices in the US, which should be stronger when they are first quoted later this week.

The final factor working in support of cattle price is the lower Aussie dollar.  The economic and stock market issues in China have sent the AUD/USD exchange rate around 3% lower to 70US¢ (figure 3).  The lower exchange rate should make Australian beef exports more attractive, pushing prices higher and supporting export cattle prices.

What does this mean?

While the rain and tighter supply are more likely to support store and feeder markets, the weaker Aussie dollar and stronger US price should see processors able to pay more for finished cattle. 

It’s hard to see finished cattle prices reaching the record highs of last winter in the short term, a further strong rally in US market would see prices rise. 

Young cattle prices are currently trading at record levels, and could possibly gain another 5% without improvement in finished cattle values.  But obviously any improvement in finished cattle prices on the back of improved fundamentals will allow young cattle prices to continue to rise.  

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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