By Augusto Semmelroth | Source: MLA, NLRS, Steiner
Most cattle markets are trading close to their 10-year lows, with the exception of WA and Tasmania. In percentile terms, the national cattle indicators are now quoted around their 5-15th percentile level, depending on the category. In other words, national cattle prices have been below current levels for only 5% to 15% of the time since 2003.
While December was characterised by stable prices and some cautious optimism for the return of improved seasonal conditions, 2014 is starting to be another tough year for cattle markets. Since saleyards resumed operations last week, all national cattle indicators and the Eastern Young Cattle Indicator (EYCI) fell 5-10% from pre-Christmas levels.
Figure 1 (below article) shows the percentiles for all national cattle categories along with the EYCI-type cattle purchased by restockers. Aside from heavy steers, all categories are now quoted below their 10th percentile, meaning that prices have been above current levels for more than 90% of the time since 2003.
Figure 2 shows a similar percentile table with the EYCI and key export prices. The idea there is to show the remarkable disconnect between domestic cattle prices (EYCI as proxy) and international beef prices. While the EYCI is quoted at the 5th percentile, the 90CL Frozen Cow indicator (US) is now at the highest level in more than 10 years and the chilled grassfed fullset indicator (Japan) is sitting at the 96th percentile.
As with the national indicators, cattle prices in eastern states are also sitting at very depressed levels. Surprisingly, Queensland is the state showing the best prices for finished cattle. Taking the heavy steers for example, the Queensland indicator is now at its 46th percentile (323¢/kg cwt) while in Victoria and NSW, the corresponding indicator is quoted at its 20th percentile (302¢/kg cwt) and 6th percentile (292¢/kg cwt), respectively.
Feeder steer prices are depressed across the board, but are still slightly higher in Queensland at 170¢/kg lwt (22nd percentile). Prices in Victoria and NSW are now quoted at 158¢/kg lwt (11th percentile) and 161¢/kg lwt (6th percentile), respectively.
In WA, the situation is rather different (figure 3). Trade and feeder steers are quoted at 347¢/kg cwt (77th percentile) and 196¢/kg lwt (82nd percentile), respectively. At 253¢/kg cwt, cows are also trading at very similar percentile levels and at a 10% premium to Victorian cows.
What are percentiles?
A percentile is a measure of how often, historically, prices have fallen above or below a particular price level. It gives a brief snapshot of whether a market has more upside or downside, and how large this may be.
Read more about what percentiles are and how they are used.
The main point to this article is that cattle markets are cheap relative to historical levels. It’s a tough call for sellers at the moment, as most categories are now trading at very low and similar percentile levels.
From a strategic point of view, this is definitely a buyers’ market as prices have very little downside from current levels. On the other hand, the upside, while completely dependent on rainfall conditions, is potentially significant. This is also supported by the robust demand fundamental (export prices) and expected tightening supply in 2014.
If you can carry stock until it rains, there is some serious merit in doing so. For the ones with some excess production capacity, it’s an undoubtedly a great time to buy.
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