By Angus Brown | Source: MLA's NLRS, ACA
Historically, purchasing cattle at the southern Australian January weaner sales has been a raffle, with restockers buying cattle hoping, but not guaranteed, to make a profit. There have been years, like in 2012, when weaners bought in January have broken even or made a loss come sale time. On the other hand, the profits made on weaners bought in January 2015 were extraordinary. So what do we expect feeder and heavy steer markets to do in 2016, and what are the risks to the market? Knowing this can help to put some numbers around what a fair price for weaners might look like.
There is little doubt that the 2016 weaner sales will set a record for price, with recent store cattle sales recording prices of around 315-330¢/kg liveweight for steers in the 280-320 kg range in Victoria. This is a good point to start our analysis.
To assess weaner steer value, we can look at their price relative to the Eastern Young Cattle Indicator (EYCI) and how this has ranged historically. This price spread can tell us whether a particular cattle type is in strong, average or weak demand compared to the ‘general market’ (represented by the EYCI).
When analysing the price spread (figure 1), Victorian weaner steers are currently cheap. Taking the EYCI of 595¢/kg cwt, and converting it to liveweight at 54%, we get 321¢/kg lwt. This is actually at a 1¢ premium to the weaner steer estimated price of 320¢/kg lwt. If the spread remains the same until January, weaner steer prices will be at their weakest level relative to the EYCI in 15 years, and at a similar level to January 2007.
We need to dust off the crystal ball to assess whether there is money in buying relatively ‘cheap’ weaners in January. As usual, forecasting prices is not easy. It is even more difficult this year, with prices in uncharted territory and showing significant volatility.
It’s reasonable to start with current prices and look at upside and downside risk from there. Eastern States Paddock Export Feeder Steer prices are currently at 335¢/kg lwt. This is historically the low point of the market for the year, although we likely saw that back in October. On average in the past, export feeder cattle have gained 5% on January by the autumn. Using the current price and expected percentage rise gives us a price around 350¢/kg lwt.
Figure 2 shows that at 350¢, a 460kg feeder will return $1610/head, which yields $564/hd or a 54% return after $150/head in freight and labour costs are included. It’s important to note that we haven’t included feed costs in the calculation, as this will vary widely.
There is some risk to the downside. A poor wet season in Queensland, a dry autumn and weakening export markets are the main factors that could see feeder prices fall back to 280¢, which is around where they were in autumn 2015. This would realise something of a more ‘normal’ return of $242/hd. Historically, most backgrounders have been happy with this sort of profit.
Upside for the feeder market is reliant on good rain and continued strength in export markets, especially Japan. We feel that prices are currently at the upper end of the range, with a maximum feeder price of 380¢ possible. This would yield a margin of $702/head before feed costs.
Figure 2 also includes the same calculations for taking weaners out to heavy steers. Again, feed costs haven’t been included, and the extra feed costs will be significant. That said, even the worst cast margin is around the level that has been routinely achieved over the past 10 years.
So what price can be paid? As always, it depends. Currently worst case prices (by our estimations) allow a reasonable margin, so some might say current weaner prices are about right.
However, anyone operating in a buy/sell system, who has historically accepted a $200-300 margin as being sufficient, would pay up to 450¢/kg lwt for weaners. Sounds farcical? Yes, but a good wet season rain might prove it right.
Want to see more ?
Go to Cattle data
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.
Mecardo will send you its latest market analysis outlook delivered to your Inbox as it's published. You will also receive one month Premium access for free.
You tell us what information you want to hear about, so you'll only be alerted to information that is relevant to you.Learn more about Mecardo Sign Up Now!