Month: January 2019

Cattle prices continued to slide this week, but managed to show some positive signs on Thursday. There were falls across the board on the east coast, as supply continued to overwhelm demand.

Even the Western Young Cattle Indicator (WYCI) has started to weaken, losing 11¢ this week to fall below 500¢ for just the second time in four years.  The WYCI of 496¢/kg cwt is the lowest price in four years.  It’s not unusual for things to be dry in WA at this time of year, but demand for young cattle seems to struggling.  High grain prices will no doubt have something to do with it.

On the east coast the early year price decline continued for much of the week.  The Eastern Young Cattle Indicator (EYCI) hit a low of 468¢ on Tuesday, before regaining some ground later in the week to finish at 471.75¢/kg cwt.  Cattle prices are well short of this time last year, and pre-Christmas, but as figure 1 shows, they are very good compared to anything pre 2015.

The historically strong price may be why cattle continue to be drawn to the market.  If we write off this wet season in the north, cattle producers in northern NSW and Queensland will be waiting on unseasonal dry season rain for feed.  It could be some way off.

It’s interesting to see that even finished cattle prices have tanked early in 2019. The eastern states Heavy Steer at 248¢/kg lwt is the lowest price since mid-2015.  Perhaps the strong supplies in feedlots is adding to supply pressure.

What does it mean/next week?:

Figure 2 shows there isn’t much rain on the forecast for southern cattle areas over the next week.  The best we can expect for prices under this scenario is steady, although an argument can be made for tightening supply of finished cattle.

For southern buyers who are looking for cattle, the decline in prices should be seen as a buying opportunity.  We are two months from an early break, if you are an optimist, and the more cattle that are killed now, means less cattle later on.

In the Friday cattle market comment from last week we mentioned that the Eastern Young Cattle Indicator (EYCI) was likely to find some support in the coming weeks from a firmer 90CL price. In this analysis we take a deeper look at the historic relationship between the EYCI and the imported 90CL into the USA, and what this may mean for the EYCI in the short term.

A quick recap on exactly what the 90CL is can be found here.

Historic price fluctuations of the EYCI and 90CL are outlined in Figure 1 and demonstrate that, for the most part, both price series follow a similar trend with the EYCI spending much of the time at a slight discount to the 90CL. As of last week, the 90CL imported frozen cow indicator closed at 602.8¢/kg CIF, compared to an EYCI close of 477.8¢/kg – representing nearly a 21% discount of the EYCI to the 90CL.

Analysis of the long-term percentage spread pattern between the EYCI and the 90CL shows that the average spread since 1996 has been a discount of 22% (black dotted line on Figure 2). Furthermore, the spread has spent 70% of the time fluctuating between a 1% premium to a 44% discount as identified by the grey shaded zone. Movement in the spread beyond a discount of 66% or a premium of 22% would be considered extreme, as shown by the 95% range boundaries (red dotted lines).

Comparison of annual average EYCI and 90CL prices (expressed in US$ terms to reflect a global beef price) demonstrates that there is a strong correlation between the price series with an R² correlation score of 0.8025 – Figure 3. The correlation measure can only range between 0 to 1 and the strong correlation score suggests that over the long term the EYCI value is heavily influenced by offshore beef market movements.

Dry seasons can see the EYCI more discounted to the 90CL than normal, as was the case in 2014/2015. While more favourable years with adequate rainfall can see the EYCI sometimes move to a premium to the 90CL, like in 2016.

What does it mean?

Opening EYCI levels for 2019 compared to the 90CL show that young cattle prices are sitting right on the line of best fit (green dotted line on figure 3) neither too high nor too low, which quite remarkable given how dry the second half of 2018 has been. This suggests offshore markets like the 90CL are unlikely to exert too much pressure on the EYCI to the topside, nor the downside.

The fact that the current EYCI to 90CL spread is quite close to the long-term average level also reinforces this view, so perhaps we were a little hasty on Friday suggesting that the EYCI would find immediate support from the rising 90CL price. Indeed, from a historic perspective the EYCI is just about right (compared to the 90CL), sitting comfortably in the Goldilocks zone – so perhaps consolidation at current levels is more likely for the moment.

Key points:

• The EYCI to 90CL spread is sitting just below a 21% discount, based off last week’s closing prices.
• The long-term average spread from 1996 to 2018 has been a discount of 22%.
• Based off the long-term price relationship between the EYCI and 90CL, the EYCI is sitting right where you would expect compared to the 90CL level.

The first full week of cattle sales for 2019 provides limited cheer after the festive break with all key reported categories along the east coast registering price falls. There was a glimmer of hope in offshore markets, but the Bureau of Meteorology (BOM) compounded the sad start by giving us a below average rainfall forecast for much of the summer.

Medium Cow led the decline, posting a 7.9% drop to trade at 183.2¢/kg lwt. The Eastern Young Cattle Indicator (EYCI) and Heavy Steers were not far behind Medium Cow, with 6.8% and 6.7% falls, respectively. The EYCI peeled off 32.5¢ on the week to close at 477.75¢/kg cwt (Figure 1).

In the West, young cattle prices managed to hold their ground with the Western Young Cattle Indicator (WYCI) continuing to stabilise near the 550¢/kg cwt area. There was more favourable news from North America though. Light beef volumes from Australia and New Zealand and limited insight into beef volumes coming into the US (due to the federal shutdown) has encouraged the 90CL Frozen Cow indicator higher. The 90CL has climbed 3% since the 2018 close to see it back above 600¢ for the first time since March 2018 (Figure 2).

Unfortunately, this season’s first look at the BOM rainfall outlook for the February to April period paints a gloomy picture for cattle producers across much of the country. There’s a low chance of exceeding median rainfall levels for much of WA, western SA, eastern Queensland and NSW, and most of Victoria (Figure 3). Ironically the lack of rain forecast managed to put a dampener on cattle prices this week.

Next week

As of last Fridays’ close, the 90CL was trading at 611.5¢/kg CIF putting it at nearly a 28% premium to the EYCI. Historically, the 90CL usually trades at a premium to the EYCI but the near 134¢ premium that currently exists is a bit outside the normal range. This should lend some support to the EYCI in the coming weeks if it can remain above 600¢.