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Monday, September 16, 2013

Will the EYCI move below 300¢/kg cwt? Watch the weather

By Augusto Semmelroth  |  Source: MLA, BOM

Key points

  • Deteriorating seasonal conditions in NSW and Queensland have pushed the EYCI 7% lower in recent weeks.
  • An average wet season in Queensland should deliver up to 10% recovery, to 320-30¢/kg cwt, for the EYCI this spring.
  • If the wet season fails, the EYCI could fall below 280¢. If the wet season turns out to be above average, upside potential is up to 345-55¢/kg cwt by December.


2013-09-12 Will The EYCI Move Below 300 FIG 1

2013-09-12 Will The EYCI Move Below 300 FIG 2

2013-09-12 Will The EYCI Move Below 300 FIG 3

 

With seasonal conditions continuing to deteriorate over the last month in NSW and Queensland, we take the opportunity to revise our EYCI forecast for spring. While seasonal trends suggests more downside in the short-term, rainfall in Northern NSW and Queensland could be a game changer. However, if the wet season disappoints, the EYCI could fall up to 10% further.

Despite the ongoing depressed levels, the Eastern Young Cattle Indicator (EYCI) was rather stable at the end of the winter. While cattle prices in the south continued to recover, falling prices in the north managed to offset any potential upside for the EYCI. That left the indicator trading within a narrow range between 320¢ and 330¢/kg cwt until mid-August.

By early August, the BOM released a very encouraging rainfall outlook for spring, setting high hopes for a potential widespread recovery for cattle markets. However, the reality was clearly less positive than the BOM had predicted. Since early August, most of NSW and Queensland have barely received any rain. In addition, the BOM has also downgraded its 3-month rainfall outlook rainfall prospects for Queensland for the period of September to November.

While the hot and dry weather has continued to impact restocker and feeder demand (higher grain prices), it has also continued to force large number of animals to slaughter. Average weekly slaughter in Queensland remained around 10-20% higher year-on-year for the period between May and August, according to MLA’s stats.

Seasonally, the EYCI generally falls another 6% on average between now and October before stabilising in November and December. Most of the downside pressure comes from lower young cattle prices in the south, which fall 10% on average during spring. Young cattle prices in yards north of Dubbo usually fall a more modest 5% during the period.

With the odds against a price recovery, could the EYCI defy its seasonal downtrend and regain some ground this spring?

One thing to bear in mind is the fact that there is a significant discrepancy between export demand and export prices and the EYCI this year. According to our price model, which calculates a fair value for the EYCI based on beef export quotes and grain prices, the EYCI is around 70¢, or 23%, below its fair value (figure 2). While this does not imply the EYCI has a 70¢ upside potential in the short-term, it suggests improved rainfall and restocker demand could support a solid price recovery, but only if it rains.

What does this mean?

The EYCI’s performance this spring will be largely dependent on how the wet season unfolds in Queensland. That’s because prices in the south will more than likely ease another 5-10% by October/November, which will wipe off 5-10¢ of the EYCI. 

Should the wet season in Queensland turn out to be average, northern young cattle prices could move up to 10% higher, which would add 25-30¢ to the EYCI and keep it around the 320-330¢/kg cwt level in spring. If rainfall is above average, the upside in northern prices could be a substantial 25%, and that would put the EYCI in a 345-55¢/kg cwt range. Prices could move even higher if there is a flow on effect in southern markets and export demand remains firm.

However, if the wet season disappoints in Queensland, the EYCI will likely test the 280¢/kg cwt support level and depending on the intensity, prices could fall further.  

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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