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Tuesday, October 15, 2013

What’s in store for the EYCI, and what does it mean for you?

By Angus Brown  |  Source: MLA's NLRS

Key points

  • EYCI currently historically low, with further downside limited.
  • Large parts of Qld have a 40% chance of above median rainfall.
  • Put simply, there is a 40% chance of a strong rise in the EYCI by January.
  • Have a clear idea of possible prices before making marketing or buying decisions.

2013-10-14 Whats In Store For The EYCi FIG 1

2013-10-14 Whats In Store For The EYCi FIG 2

2013-10-14 Whats In Store For The EYCi FIG 3

We keep saying there is plenty of upside for young cattle prices when it rains in northern NSW and Queensland. The question is, however, how much upside. Moreover, if we look to trade young cattle, what is the payoff and possible downside risk?

Apart from some minor aberrations, the Eastern Young Cattle Indicator (EYCI) has basically tracked sideways since June, largely staying within the 305-325¢/kg cwt range (figure 1). 

When broken down into its north and south (of Dubbo which is in the ‘north’) components, the price variation increases.  In the north, average price for EYCI-type cattle has ranged between 297 and 330¢, and is currently at 306¢/kg cwt. In the south, the range has been 320-353¢, and is currently 325¢/kg cwt, a 19¢ premium to the north.  Over the last 10 years, southern prices have averaged 7¢ lower than northern prices in October, so they are at a very strong level compared to usual.

Normally the EYCI tracks lower or sideways in November and December, before lifting in January.  On average, the rise into January is small, equating to around 3%. Figure 3 shows the average, best case and worst case price movements from October to January over the last 10 years. 

The best case was in 2007, when drought conditions forced prices much lower in the spring, before a very wet season saw prices rebound 17% (281¢ to 330¢/kg cwt) by January.  

On the down side, the worst case scenario was in 2005, when our cattle market weakened as a result of the US re-entering the Japanese export market, and very dry conditions in central Queensland.  In this case, prices fell 12% by January.  Interestingly, the EYCI was still 349¢/kg cwt in January 2006.  Over the last 10 years, when the EYCI was below 320¢ in October, the lowest level it reached was 275¢/kg (December 2006), with the lowest January price being 301¢/kg cwt (January 2007).

So what to expect this year?  When forecasting cattle prices in the current situation, we obviously need to make some assumptions around the weather as well.  The BOM is saying there is a 35-40% chance of much of Queensland exceeding median rainfall over the October to December period.  We can say with reasonable accuracy, that there is a 40% of the EYCI being above 340¢/kg cwt in January, as median or better rainfall will see a strong price rally due to strong fundamentals. 

On the other hand, however, there is a 60% chance that the EYCI will in the 290-320¢/kg range if large parts of Queensland receive below median rainfall.  

What does this mean?

Here’s the hard part, putting the above information into context.  Let’s say you’re a southern cattle producer with 300kg steers and heifers to sell.  Today they are worth 325¢/kg cwt (southern EYCI), or 175¢/kg lwt, or $526/head.  In 3 months time, they’ll be 390kg animals, our analysis can give an idea of what they might be worth under a different scenarios. 

There is a 40% chance they’ll be worth 335¢ (181¢ lwt) assuming it has rained in the north, the EYCI has rallied to 350¢/kg and southern discount to the north has returned to normal at -15c.  This makes the cattle worth $705/hd, a profit of $179/hd minus feed costs (if any).

There is a 60% chance these cattle will be worth 300¢/kg cwt (162¢ lwt) assuming rainfall has been below average, the EYCI has fallen to 300¢/kg and southern and northern prices are on par.  The cattle are worth $632/hd, a profit of $106 before feed costs.

In the north, the margins are better.  The current cattle price is $494/hd, with a 40% chance of being $737/hd and 60% chance of being $632/hd.  Under the 60% (below median rainfall) chance, feed costs are likely to outweigh any profit.

There are all sorts of holes you can pick in the budgeting here.  However, the point is that growers making decisions on marketing or buying cattle need to work through the scenarios and the possible results before deciding on a course of action.  Having a clear idea of potential prices, rather than just a gut feel, should help immensely.

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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