Category: Cattle

Key Points

• MLA’s Cattle Industry Projections update shows even tighter supply in the coming years.
• The herd rebuild is expected to be a bit quicker with better seasonal conditions.
• Tight supply should support prices, but demand is highly uncertain.

Meat & Livestock Australia (MLA) have updated their cattle industry projections for April, with the key factor being going from hoping for a break in the drought, to actually receiving some rain. The updated outlook suggests a faster herd rebuild, but it’s going to cost in terms of cattle supply for the next.

The cattle herd is still expected to set an unwanted record on the 30^th of June, but now the forecast is set to be slightly higher than previously thought. The updated Cattle Industry projections peg the herd mid-year at 24.8 million head.

Figure 1 shows the herd projection for this year is 100,000 head higher than the January projections. While this is minuscule in the scheme of things, it is a reflection of tighter slaughter in the first quarter of 2020.

Out to 2023, the improved seasonal conditions have seen herd levels revised from 1.8 to 2.5% higher. Despite the higher herd projections, we are still set for a 27 year low for the herd this year. It is also expected to take until 2022 to get back to herd levels of last year, and even in 2023 it won’t quite be back to 27 million head.

To achieve a faster rebuild of the herd, there have to be fewer cattle going to slaughter.  MLA’s have adjusted cattle slaughter down in all projection years except 2023. The biggest declines are expected this year and next, with projected slaughter down 4.2% (Figure 2).  This year cattle slaughter is expected to be 6.9 million head, a 24 year low. A new low water mark is forecast for 2023, with 6.8 million head the lowest since 1989.

Cattle slaughter is expected to remain relatively tight in 2022, still under 7.5 million head, and only returning to the ‘normal’ levels of most of the 2000-2010 period in 2023. Figure 2 clearly shows the boom and bust cycles for the last 10 years, with droughts and strong slaughter followed by wetter periods and very tight supply.

What does this mean?

It should be relatively comforting for cattle producers that while we are entering a period of uncertainty in regards to demand, tight supply will at least offer some support for cattle prices.  At what level is something we’ll look at next week.

There is even some time for demand to recover, and help values rise before supply will be back near what could be considered ‘average’ levels.

Improved finished cattle prices were noted this week as supply metrics begin to normalize, particularly for east coast cattle slaughter. Department of Agriculture, Water and Environment beef trade statistics for April show Chinese demand for Aussie beef recovering strongly too as an added positive sign for producers.

East coast cattle yarding levels have held firm at around 45,000 head for the final week of April and the first week of May, indicating some stability is returning to the market after some wild swings pre-Easter (Figure 1).

Weekly throughput remains 20% below the five-year trend but is within the normal range for this time in the season, as represented by the grey shaded 70% range zone. In an interesting dynamic between state yarding levels, Queensland is running 25% above the five-year trend as of early May. However, NSW cattle yarding is well below normal at 53% under trend. This is contributing to the lower than average total east coast figures and is perhaps a sign of the appetite in NSW from producers to restock.

East coast cattle slaughter numbers have returned closer to the five-year trend, to sit just 5% below with around 135,000 head processed in the first week of May (Figure 2). Since the Easter lull, slaughter volumes have increased 27% and the return to relatively normal operations have seen demand pick up for finished cattle this week. The National Heavy Steer (CV19) indicator has lifted 4.5% since the end of April to close at 320¢/kg lwt (as at 6^th May).

In further promising signs for beef producers, beef export flows were above the five year average pattern in April (Figure 3). While US flows remain very subdued, a strong increase in exports to China is a good sign that their economy is getting back on track post their COVID-19 shutdown. There will be more to come on this in the Mecardo analysis piece next week.

Next week?

Tight supply and a favourable rainfall forecast continue to favour cattle producers and provide underlying support to prices. While there are headwinds in the form of a disrupted US/global economy, low global cattle prices, and a strengthening Australian dollar, the sign of a re-emerging China should tip the balance towards a more optimistic outlook for prices, at least for the short term.

Key points:

• The monthly flow of Australian live cattle exports for the first quarter of 2020 are running 28% above the average seasonal trend.
• Flows to Indonesia during March dropped to nearly 10% below their normal seasonal levels, according to the five-year average trend.
• Exports to Vietnam during the January to March period have averaged 189% ahead of the five-year trend, lifting market share of export volumes to Vietnam markedly in 2020.

Live cattle export flows have been strong for the first quarter of 2020, despite Covid-19 disruptions. Although there has been a noticeable shift in market share with Indonesia giving up ground while Vietnamese demand expands.

Figure 1 highlights the total flow of live export cattle for the start of the 2020 season compared to last season and the five-year trend. Average monthly flows for the first quarter of the year are running 28% above the seasonal trend with volumes near the upper end of what is considered “normal” for this time in the year (as outlined by the grey shaded 70% range).

After a strong result for February at 96,174 head volumes have eased 14% in March to record 82,468 cattle sent with flows to Indonesia nearly 10% below their normal seasonal levels, according to the five-year average trend for March.

However, total flow volumes were boosted by stronger than average exports to both China and Vietnam. Over the first quarter of 2020 live cattle exports from Australia to China have averaged 73% ahead of the five-year seasonal pattern.

However, the real growth has come from Vietnam as flows over the January to March period have averaged 189% ahead of the five-year trend – Figure 2. Indeed, the growth in the Australian live cattle trade to Vietnam has been robust enough to see a significant lift in market share this season.

During the 2015 to 2019 seasons Vietnamese market share averaged 20%. This has lifted to 34.5% during the first quarter of 2020 and has come at the expense of flows to Indonesia, currently in the grips of a Covid-19 pandemic – Figure 3. Indonesian market share has averaged 53% over the 2015 to 2019 seasons and has dipped to 39% for the first quarter of 2020.

What does it mean?

At Mecardo we have regularly commented upon the fine work Meat and Livestock Australia have achieved in our red meat export space for chilled and frozen product helping to diversify the reach of the sector and creating high value markets for Australian producers across a range of offshore destinations.

Diversification of a customer base is a useful way to bring increased stability to an industry with less reliance on one key destination. It is comforting to see the volume of exports of live cattle continuing to expand in Vietnam, particularly at a time of significant global uncertainty.

The important role of wet markets has been discussed in the rural press recently. They perform a crucial role in food security and access to meat protein for developing countries where access to cold store in home and reliable electricity isn’t like we enjoy in the first world.

Growing diversity in the live export sector continues to support food security and wet markets in our key trading partner’s countries and is a valuable segment of the broader Australian red meat sector.

Key points:

After battling with drought for over two years Australian cattle producers are currently the envy of global cattle producers.  In the US most notably, but also in South America and Europe cattle prices are tanking, while ours remain in the upper echelon.

Earlier in the week, we looked at US cattle values, with bottlenecks depressing prices now, and likely for most of the year as supply backlogs are cleared.  In South America, uncertainty and falling kill rates have also impacted price, but not the extent of the US yet.

Here cattle markets have remained relatively resilient.  No doubt the post-drought tight supplies, and strong demand from restockers has helped on the east coast, but in WA prices remain similarly strong.  In fact, the MSA Yearling is at 590¢/kg cwt, over the hooks, which is a few cents higher than NSW.

Supply hasn’t improved after the Easter break, last week languishing well below average on the east coast (figure 1).  There are no surprises here, with tight supply being exacerbated by a shift to online selling.

With supply down, demand has eased somewhat to match it.  After the initial fall, saleyard prices have steadied (figure 2).  Historically cattle prices are still very good, with the National Heavy Steer Indicator at the 89^th percentile, Feeders at the 88^th and Cows at the 83^rd over 15 years.  Prices have been a lot better in recent times, but historically prices this strong are a rare occurrence.

Meat and Livestock Australia (MLA) released their cattle projections this week, and it seems cattle supplies are going to stay tight.  Next week we’ll have more on what this means for price.

Next week.

If the southern autumn break hadn’t arrived, it did this week.  Figure 3 shows widespread rains in all key southern cattle areas this week, and this is likely to ensure supply remains tight.

Young cattle demand is unlikely to weaken, but store prices can only hang on as long as finished cattle prices stay at solid levels.  The finished market test will come when US slaughter ramps up again, and we see some real price competition in Japan and Korean markets.

Key points:

After a few discussions this week with producers excited about the latest BOM rainfall forecast I thought it prudent to issue a bit of a cautionary note. As outlined in my comment last fortnight US beef markets are in a free fall and keen restockers need to take note of this offshore situation as grass fever now may cause a Corona inspired hangover next season.

Late last week the Bureau of Meteorology issued a great looking three-month rainfall outlook showing 60-75% chance of exceeding the median rainfall across much of the country thanks to warm waters in the Indian Ocean pushing moisture across the continent – Figure 1.

In the last week, I have talked to many keen producers with available feed they haven’t seen in a while considering what is the best cattle trade to put on. Despite offshore beef market uncertainty and the prospect of a deep global recession, it seems grass fever is beginning to take hold.

Since the start of January US Live cattle futures have declined 30% falling from 275 US¢/kg to trade under 190US¢/kg this week as processor shutdowns due to Coronavirus infection at a number of plants in the US have created a backlog of cattle. Lockdown restrictions have seen demand for beef ease significantly from the food service sector.

Despite the tight supply situation and improved seasonal outlook, the Australian cattle market can’t sit in its own isolation for long. The extreme selloff in US prices will create headwinds for Australian prices if the US market cannot rebound in the next few months.

Figure 2 highlights the annual price correlation between US Live cattle futures prices and the National Heavy Steer. Drought in Australia can cause the normal discount that exists between US and Aussie prices to widen, as it did in 2013-15 when we traded well below the line of best fit (dotted line on Figure 2). Similarly, wetter periods or tight domestic supply can see the discount narrow to par (like now) or even head into a premium, like in 2016-17.

However, over the longer-term cattle prices in Australia will revert towards the normal relationship to the US and gravitate back towards the line of best fit. The longer US Live cattle futures remain under 200US¢/kg the more likely the local price of Heavy Steers is going to ease. The most likely path in a scenario of continued weak US prices is to see the 2020-point drift to the left as outlined by the orange arrow in Figure 2.

What does it mean/next week?’

This means that if US prices stay depressed, we could see the National Heavy Steer move towards 175US¢/kg lwt (around 275AU¢/kg based on an Aussie dollar of 63.5US¢). Last month I presented on restocker markets for a Holmes & Sackett/MLA webinar where we released a grass-fed cattle trade matrix showing the theoretical payoff based on a 350kg purchase and a 550kg sale weight – Figure 3.

COVID-19 hadn’t impacted US beef prices fully at that stage and the A$ was being sold off aggressively which was insulating us from the weaker US cattle price moves. This meant that the annual average Heavy Steer forecast for 2021 was still sitting comfortably in the 325-350¢/kg lwt range and restockers could pay in excess of 420¢ lwt for cattle and still make a comfortable margin according to the matrix.

However,  the A$ has now rebounded and if US prices stay sub 200US¢/kg for an extended period this could see the forecast for Australian Heavy Steers in 2021 move closer to the 275¢ region which means that the margins restocker were hoping for could evaporate quickly – to the keen restockers out there… easy tiger!

Key points:

• Since the start of the year, US Live Cattle futures have declined by 30% to trade below 200US¢/kg on a live weight basis this week.
• The spread discount between Australian Heavy Steer prices and US Live Cattle futures has narrowed from a 28% discount in January to a 2% discount this month.
• A recovering AUD has placed further pressure on domestic Heavy Steer prices and continued weakness in US cattle markets could see local prices ease toward 275¢/kg lwt in the coming months.

The Australian cattle market can march to its own drumbeat from time to time, particularly when local climatic factors and the domestic supply situation override offshore influences. However, there is only so far they can deviate and usually the aberrations from the global situation are short-lived.

Since January US Live Cattle futures have been sold off aggressively falling nearly 30% from 275US¢/kg to trade just under 195US¢/kg this week, on a live weight basis. During the early phase of the price collapse in US Live Cattle futures, the Australian dollar was also being sold off which acted as an insulator for Australian cattle producers.

The lower value of the Australian dollar meant that domestic cattle prices didn’t have to come under pressure to remain competitive. However, in the last month the AUD has regained some strength moving from the mid 50US¢ level to the mid 60US¢ level, placing pressure on domestic cattle prices as the US Live Futures market continues to head south.

Figure 1 highlights the relationship between US Live Cattle futures and the National Heavy Steer Indicator in US¢/kg terms and it shows that with the ongoing weakness in US cattle markets and a recovery in the A$ the normal discount that Australian cattle markets have to the US has come under significant pressure.

Indeed, on a monthly basis, the National Heavy Steer to US Live Cattle futures price spread has narrowed from a 28% discount in January to a 2% discount this month (Figure 2). Analysis of the historic spread behaviour shows that since 1998 the monthly average spread has been a 33% discount, with the spread trading between a 20% to 46% discount for 70% of the time. Furthermore, movements beyond a 7% to 59% discount range would be considered extreme.

Figure 3 demonstrates the annual average price correlation between US Live Cattle futures and the National Heavy Steer in US¢/kg terms. Dry climatic conditions in Australia can see local prices deviate from the normal relationship (as indicated by the line of best fit between the annual data points) such as that which occurred during the 2013-15 seasons.

Similarly, wetter conditions or times of tight supply in Australia can see the local prices move towards a narrow discount spread or sometimes even to a premium spread to the US prices for a short period of time. This occurred most recently during the 2016/17 seasons and is also present during the current season.

What does it mean?  

As of this week, US Live Cattle futures are trading below 200US¢/kg. However, as an annual average they are sitting at 245US¢/kg. If US Live Cattle futures remain sub 200US¢/kg for an extended period this will begin to see the annual average drift leftward (as per the path of the orange arrow (Figure 3).

Furthermore, if the AUD continues to probe higher this will add further pressure to domestic heavy steer prices. In USD terms the Australian National Heavy Steer is sitting at 192US¢/kg lwt. US Live Cattle futures remaining under 200US¢ could see it move closer to 175US¢, which equates to around 275¢/kg lwt in Aussie dollar terms based on an A$ at 64US¢.

Easter usually leads to plenty of variation in saleyard indicators. With some sales not running due to the break and processors closing for some extra days, it is hard to get a handle on pricing. This week we saw some falls for slaughter cattle, but feeders found some support.

Figure 1 shows cattle slaughter took a dive last week and is likely to have spent this week at similar levels. Cattle slaughter is not as low as Easter last year but did see its lowest week for 2020.  It is probably not bad timing for processors, who are likely still seeing some pretty significant demand swings.

This week the improving Aussie dollar saw export prices in our terms weaken. The 90CL Frozen Cow Indicator was steady in US terms, but 16¢ lower in our terms at 748¢/kg swt.  Figure 2 shows the 90CL is still well above the lows hit back in March and apart from the spike late last year, it has never been better.

There are positive signs for export beef demand from the US.  According to The Steiner Consulting Group, cattle slaughter in the US has fallen heavily with a COVID-19 outbreak at two plants putting production on hold.  Closures are expected to be short term, but they will put pressure on beef supplies while seeing cattle prices fall.

Locally, feeder cattle prices rallied this week, with the National Indicator up 12¢ to 368¢/kg lwt.  Tight supply remains the driver of the store cattle market.

Heavy Steers and Cows were down, according to National Indicators, but this might have been due to intermittent sales. We will know more next week.

Next Week

There are plenty of reasons for cattle prices to fall, with shifting demand, a volatile currency and rising wheat prices all applying pressure. However, the main driver, for the time being, remains supply, which is unlikely to improve until the spring.

Key Points

Key supply metrics in the domestic cattle markets appear to be returning to more normal levels and this helped cattle prices stabilize somewhat this week. However, the volatile nature of global cattle markets, particularly in the USA is some cause for concern over the longer term.

East coast cattle market yarding levels have continued to pull back toward the seasonal average pattern with throughput reported at 47,298 head, down from over 70,000 head the week prior. Yardings are now trending just 14% above the five-year average for early April – Figure 1.

East coast slaughter has returned to above-average levels, demonstrating that processors responded to retailer’s demand for product to cover off on the panic buying that was evident in supermarkets during March. Weekly slaughter has stabilized just above 140,000 head into early April, although the shorter trading weeks heading into the Easter break could see these figures drop in the near term – Figure 2.

The more normalized supply has seen cattle market prices stabilize this week. National Feeder Steers easing just 2¢ to close at 356¢/kg lwt. National Heavy Steer dipped 7¢ to 585¢/kg cwt while Medium Cow managed an 8¢ gain to 452¢/kg cwt – Figure 3.

While domestic markets showed more stability the same cannot be said of offshore markets. A key long-term lead indicator for Australian cattle prices is what is transpiring in the USA. The US Live Cattle Futures have been sold aggressively over the last fortnight to see them hit lows unseen in over a decade with the June 2020 contract hitting 76.60US¢/lb midweek. At the middle of January, it was trading at 120.00US¢/lb so the fall from grace on Covid19 concerns has been significant.

What does it mean/next week?

US beef prices have been downgraded on the back of growing concerns that Covid19 will impact heavily upon the US economy and flow through to significant declines in global economic growth.

While the tight season for supply domestically, improved climatic conditions and lower Australian dollar will provide a buffer for Australian beef producers in the short term a significantly reduced global beef price will act as a significant headwind into the medium to longer-term horizon.

Key Points

• Tallow and Meat & Bone meal (MBM) are by products of the slaughtering process.
• MBM follows a similar pattern to Soybean meal, and tallow with palm and soy oil.
• The correlations have been reducing in recent years, especially with MBM.
• There may be a lag effect between MBM and soymeal.

Without sounding like the stereotypical Scotsman, I am a big fan of offal. It’s nutritious and is a good form of recycling. In this analysis, I examine two offal products from the livestock industry – tallow and meat & bone meal. This will provide some insights for livestock producers and those intensive livestock industries.

Let’s start with some definitions.

Tallow is rendered beef/sheep fat, which is solid at room temperature and can be stored for lengthy timeframes without decomposing. Tallow has a wide range of purposes including shop, candles and deep-frying.

Meat and bone meal (MBM) is produced from abattoir waste products which are not suitable for human consumption. The MBM is extensively used in animal feed, with around 650kmt of rendered meal produced in Australia.

Why are we talking about offal? Well, two reasons.

1. The livestock price within Australia is part of a complex of different components which all add up to buyers capacity to pay. Offal is one of the many components.
2. Many Mecardo subscribers are users of MBM or tallow.

There is a high degree of interchangeability between agricultural products, as in many cases they are replaceable with one another. For instance, I can buy a beef sausage or if unavailable I can replace with pork.

It is, therefore, a valuable exercise to examine which products are potential replacements for MBM or tallow, as they may provide opportunities to hedge price risk.

MBM and soymeal make an obvious bedfellow, as both are used as protein meals in animal feed. In figure 1 the monthly average price for MBM and soymeal is displayed in A$/mt. The two commodities tend to follow a similar pattern.

Tallow is rendered fat, and plant-based oils are a possible replacement. In figure 2, the monthly average price for tallow, soy oil and palm oil are displayed in A$/mt. All three commodities tend to follow a very similar trend. The closest relationship however seems to be between palm oil and tallow.

In my initial analysis, one of the first things that I noticed was that the correlations seem to be reducing over time.  During the period 2005-2010 the correlations between MBM/soymeal and tallow/palm-soy were extremely high (table 1).

Whilst tallow still correlates at a reasonable level, MBM has lost its correlation. An initial inspection of the data points towards a potential lag between a movement in soymeal flowing through to local MBM pricing.

It may be that further data analysis may yield promising results to improve the ability to use alternate products for price risk management purposes.

Remember to listen to the  Commodity Conversation podcast by Mecardo

What does it mean/next week?:

MBM and Tallow are important co-products in the livestock industry, and equally so to intensive livestock producers.

It must be noted that the data used for MBM was monthly data supplied by MLA. If analysis daily pricing data, it may yield a different response.

For those users of Tallow/MBM, there may be options for hedging price risk using alternate futures contracts such as Soymeal or Palm/soyoil.

The main takeaway however is that both tallow and MBM tend to follow what is happening overseas with their respective ‘partner’ commodities.

Livestock producers are not flying blind, with price information still available, but it is a bit harder to get a snapshot of the market.  With cattle sold at ¢/kg rates in many markets, there are still averages available, which Meat and Livestock Australia (MLA) are calling the CV19 Indicators.

Cattle markets in general appeared to find some support this week.  With export values bouncing higher, and some good rain forecast for New South Wales and Victoria growers might have found some confidence to hold onto cattle.

Feeder cattle prices continued to slide this week, but as reported in last week’s analysis, this was driven by squeezing lotfeeder margins.  Still, looking at figure 1, cattle producers could be forgiven for continuing to sell.  At 350¢/kg lwt there have only been some rare occasions when feeder prices have been higher. The problem is the record was set just a month ago, and is still pretty fresh.

Restocker cattle prices remain strong, despite rising grain values.  A quick scroll through Auctionsplus showed light 200-250kg steers still making over 400¢/kg lwt.  We are back to more normal spreads, with ¢/kg rates fall as cattle get heavier, but there were plenty of sales between 350 and 400¢.

Cow values eased marginally this week, but have only given up 8.5% from the peak. Figure 2 shows that Cow prices are still better than most other times in the past 3 years.  Autumn normally sees cow supply improve, but it should be tighter this year than last.

Next week.

The rain forecast for the coming week should see cattle prices find support, but pressure will continue to come from tight processor and lotfeeder margins.  Grass finishers will continue to drive young cattle prices, with margins still good if feed is cheap.

There was some positive news on the export market front, but its manufacturing beef which usually does well in an economic downturn.  It is the higher value end of the market which is of concern.