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Wednesday, May 06, 2015

Have grass, what livestock should I buy?

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

Key points

  • Given above average rains in autumn, and stock liquidation last spring, some growers may have excess grass to put stock on.
  • Lamb, wethers and cattle are all stock that can be traded, with lambs coming out with the best gross profit.
  • There is more work in lambs and sheep, and more price downside. However, better feed conversion makes them a more profitable use of grass.

2015-05-05 What Livestock To Buy FIG 1

Having excess feed is not usually a problem for Victorian, NSW and South Australian producers at this time of year. However, April saw good rain through large tracts of the east coast in April. This, together with the heavy destocking we saw last year because of a dry spring, means that there might actually be growers out there looking to trade some stock. So where is the money?

With cattle markets at record highs, and sheep and lamb markets not far off, some might think that there buying stock is a risky proposition.  However, as Mecardo’s recent analysis has shown (see articles below), there may indeed be further upside for both sheep and cattle markets.

For the purpose of this exercise, we’ll look at a three-month trade, comparing store lambs, merino wethers and light steers. Prices used are eastern states prices, but individual state prices are comparable.

Store lambs are still selling reasonably well. A 35kg lamb will cost around $90/head in the current market.  By the end of July, at reasonable growth rates of the lambs should be around 26kg cwt, and a conservative price estimate based on historical trends puts the price at 580¢/kg cwt.  The gross profit is a very good $71/head, or $35,663 on 500 head.

Merino wethers don’t stack up as well as lambs, returning $28,200 on 500 head, but this trade depends pretty heavily on skin or wool returns.  If wethers cut 3kg of wool, rather than the 2kg assumed here, the trade starts to be comparable to lambs.

Cattle are a favourite of many traders. However, even with the solid upside potential in cattle markets, buying light steers doesn’t seem to come near the sheep trades in terms of gross profit. A trade of 75 head returns $18,900, which is still a pretty good return for cattle trading on a historical scale.

Figure 1 and table 1 show the results and calculations behind these trades. We’ve used a wide range of standard assumptions that won’t apply to all individual situations.  The best and worst case scenarios are purely price based. And while there is little downside in cattle prices, and more in lamb prices, even the worst case lamb trade shows a good gross margin.

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What does this mean?

There is more work in sheep and lambs, which (along with a raft of other factors) needs to be taken into account when looking at trades.  However, on a gross profit level, lambs and wethers come out far in front of cattle largely because of superior feed conversion. That is, lambs will gain around 35% more carcase weight than steers on the same amount of grass.

The good news is that whatever type of stock are preferred, there is little risk of making a loss in any of these trades if completed by the end of July.

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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