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Thursday, December 03, 2015

A perspective on the year of the bull run

By Matt Dalgleish  |  Source: MLA, Steiner

Key points

  • In a year that saw unprecedented levels for the EYCI, the team at Mecardo were able to use robust analysis to predict the EYCI movement for 2015 with a good degree of accuracy.
  • Unexpected events can require a reassessment of supply and demand factors influencing the market.
  • Predictive modelling used by the team at Mecardo is based on reliable supply estimates sourced from the USDA and MLA.
  • It is also complemented by robust analysis of correlations between factors that influence the domestic market and overseas impacts. 

2015-12-03 Cattle Forecast Review FIG 1 

2015-12-03 Cattle Forecast Review FIG 2

As 2015 draws to a close, it offers us a good chance to reflect on the year that was and review how Mecardo’s analysis performed throughout the cycle. In a year that saw unprecedented highs in the Australian cattle market this article examines some of our key forecasts.

In late January 2015, Augusto’s article “Cattle markets yet to show their full potential” outlined the upside potential for the Eastern Young Cattle Indicator (EYCI). This article forecast a move towards 600¢ on the back of a return to more normal discounts to the 90CL indicator, reduced supply and a depreciating A$.

As highlighted in figure 1, the expected narrowing of the EYCI discount to the 90CL indicator did not make it all the way back to the longer term averages. However, this did not stop supply factors present in the market and a lower A$ underpinning a strong bull run over 2015, and culminating in EYCI stopping just short of the targeted 600¢ level (figure 2).

Augusto’s follow up analysis in February “Young cattle remain cheap and a good buy” reiterated that the only thing stopping the EYCI from moving towards the 550¢ level was the ongoing strong seasonal turnoff. Using Mecardo’s pricing model, he predicted that the market would begin its steady ascent as soon as supply began to tighten (figure 2).

In late March, as the ECYI appeared to be bottoming out, we published an article from one of our external experts Tim McRae arguing it was time to “get off the fence”. Tim forecast that we could see the Indicator above 460¢/kg cwt by early July, once autumn rains set in and persistent supply restrictions started to bite (figure 2). Tim went on to elaborate that producers who had cattle to sell in late 2015 should be well rewarded – and indeed they were.

Early May saw Angus accompany the Mecardo EYCI bullish chorus, stating that there was “still upside potential for beef and cattle prices”. The rationale behind this analysis was the strong relationship that exists between cattle slaughter data and the spread between the 90CL Frozen Cow export price and the EYCI. Although under favourable conditions the modelling pointed to a potential for EYCI to reach as high as 800¢, Angus qualified that that the EYCI would be more likely to reach a target of 600¢, still a 30% rise on the level at the time (figure 2).

Interested in how we went with our sheep market forecasts? 

Read our article A sheepish start but solid finish

What does this mean?

At Mecardo, we strive to provide reliable forecasting that is based on fact and underpinned by solid evidence. While we acknowledge we will not get it right all of the time, we trust that the methods we have developed will enable us to give an accurate depiction of the various factors that influence the direction of the Australian cattle market. This, in turn, will assist market participants in their decision making. 

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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