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Thursday, July 30, 2015

Will cattle prices go up or down? Here's what you need to know

By Augusto Semmelroth  |  Source: MLA, USDA, Steiner, ACU

Key points

  • Mecardo’s cattle price outlook is based on robust supply estimates by the USDA and MLA, coupled with our thorough assessment of price correlations between US and Australia.
  • Finished and young cattle markets expected to peak sometime in 2017 but substantial gains are already expected for 2016, seasonal conditions allowing.
  • Heavy steers are likely to track above 550¢ until the end of the decade, upside up to 700¢/kg cwt in 2017.
  • EYCI is expected move above 700¢/kg cwt sometime between 2016 and 2018 under favourable seasonal conditions. 

2015-07-28 Cattle Outlook FIG 1

2015-07-28 Cattle Outlook FIG 2

2015-07-28 Cattle Outlook FIG 3

Last week we showed how Meat and Livestock Australia’s (MLA) and USDA’s supply projections can be used to estimate the performance of domestic cattle markets against key export price benchmarks in the future. In this article, we go a step further and investigate what they will potentially mean for cattle prices.

For all its flaws, long-term price forecasting remains a highly valuable tool for producers and consumers, providing insights into future returns/margins while supporting strategic decision making. As you may well know, the aim is not to hit the nail on the head. Instead, the real intent is to provide a fact-based and data-driven analysis of the potential price scenarios, using the best information available now.

Let’s start with the outlook for finished steer prices.

Figure 1 shows Mecardo’s price forecast for the Queensland heavy steer until 2020. The key inputs used for the estimates were: USDA’s price forecasts for US live cattle adjusted to 90% of their value (reflecting a more bearish scenario); projected spread between QLD heavy steer and US live cattle based on supply forecast ratios between US and Australia; and two different exchange rate scenarios for the A$ (US65¢ and US75¢).

In a snapshot, the annual average price range for the coming years is expected to be 555-640¢ (2016), 610-705¢ (2017), 575-665¢ (2018), 550-640¢ (2019) and 540-620¢/kg cwt (2020). A lower A$ will likely see prices at the upper limits of those ranges.

Moving into our outlook for the Eastern Young Cattle Indicator (EYCI), figure 2 shows a wider forecast range to reflect the stronger influence of the weather on young cattle pricing. The inputs used for the estimates were: USDA’s price forecasts for US live cattle adjusted to 90% of their values; estimates for export 90CL prices using different FX scenarios (US65¢ and US75¢). Also used was the long-term average discount to US domestic prices, with the EYCI discount to 90CL prices to return to -50¢ to -100¢, at least.

As a result, the annual average price range for the EYCI in coming years is expected to be 650-800¢ (2016), 645-815¢ (2017), 600-760¢ (2018), 560-715¢ (2019) and 545-700¢/kg cwt (2020). These estimates largely assume seasonal conditions around average. Favourable rainfall conditions would push prices towards the upper limits of those ranges.

To conclude, we expect cows to perform well as the herd rebuild gathers momentum from 2016 onwards. Figure 3 shows a price forecast based on projected discounts to heavy steers and the EYCI.   

What does this mean?

The last two years have seen domestic cattle prices deviate from export fundamentals. This has resulted in a classic imbalance of pricing across the value chain. This is a recurrent phenomenon in the beef industry and is mainly driven by dramatic changes in supply. The good news is that under the supply outlook put forward by MLA for 2015-2020, current price transfer inefficiencies will be quickly eroded for the benefit of producers.

Sceptics may say that these forecasts look too bullish. However, they are underpinned by credible forecasts by the USDA and MLA, and our thorough assessment of price correlations between US and Australia.

Overall, short-term headwinds such as a potential El Nino scenario may postpone things a little but will not undermine major long-term tailwinds, the main one being the imminent start of a herd rebuild phase. Moreover, the anticipated robust export demand from US/Japan/Korea and other Asian markets, a favourable exchange rate environment and a return to average seasonal conditions (whenever that happens) will finally allow cattle prices to fully express their potential. Our forecasts merely quantify what this potential really is.   

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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