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Tuesday, November 11, 2014

BOM forecast – What happens if it doesn’t rain?

By Angus Brown  |  Source: MLA's NLRS, BOM

Key points

  • The latest BOM rainfall outlook is not promising for much of the east coast of Australia.
  • If the November to January period is drier than normal, prices are likely to track sideways until the end of the year.
  • The major period for price risk is January, while there remains significant upside if the 20-40% chance of above median rainfall eventuates. 

2014-11-10 BOM And Cattle Prices FIG 1

2014-11-10 BOM And Cattle Prices FIG 2

The latest Bureau of Meteorology three month rainfall outlook is less than promising for much of the east coast, and Queensland in particular, with models forecasting a 20-40% chance of above median rainfall. If there is a high chance of yet another failed wet season, what does this mean for cattle prices?

Figure 3 shows what looks like a dire outlook for rainfall over November, December and January. However, in reality it is forecasting a 20-40% chance (depending on the colour) of above median rainfall over the period.  The BOM forecast isn’t suggesting rainfall will be below the 30th percentile like it has been for the last 24 months, just that there is a stronger chance of this happening.

To simplify our price analysis, we can say that median rainfall is what is required for confidence to return to the restocker market, and for growers to stop liquidating cattle.

If below median rainfall occurs over the coming three months, we can expect November and December slaughter to continue running at the current record levels (figure 1), as long as prices remain reasonable.  It seems unlikely there will be a flood of cattle overwhelming slaughter capacity, given that the recent very high yardings have been absorbed by the markets.

Over the last year rainfall was well below average, and we saw prices bouncing off spring lows during November and December despite steady slaughter and rising yardings (figure 2).  The major risk in terms of prices appears to be in January.  Last year the lack of rain between the end of 2013 and the opening markets in 2014 saw both the Eastern Young Cattle Indicator (EYCI) and Queensland Cattle Market Index (QCMI) open the year 10 and 17%, respectively, below the December close.  The QCMI recovered most of its ground relatively quickly, while it took the EYCI until March.

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What does this mean?

Put simplistically, based on the BOM rainfall forecasts, we believe there is around a 70% chance of cattle prices going sideways to 10% lower during the November to January period, and a 30% chance of prices going 25-50% higher if there is above median rainfall. 

A betting person would probably take those odds. However, the cost of feed and risk to the viability of the business needs to be taken into account when analysing the cattle market, which is what cattle producers do every day. 

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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