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Cattle supply continues to track higher in saleyards, and price lower.  After a bit of a bounce two weeks ago, dry weather and more numbers resumed the slide, with the EYCI this week hitting a 26 month low.

A couple of weeks ago we wrote in this column that the Eastern Young Cattle Indicator (EYCI), and cattle prices in general, might have found a floor.  Turns out we were wrong.  Figure 1 shows the EYCI falling below the spring lows of 2015, and heading towards 500¢.

While weakening demand has been playing its part in lower prices, this week supply was the culprit.  Figure 2 shows EYCI yardings hit an 18 week high, and were, in fact the strongest September yardings on record.

Rainfall and grain prices are not helping demand.  Since late August ASX East Coast Wheat Futures have gained $25, with feed values rising in sympathy.  This is obviously continuing to pressure lotfeeders.

There wasn’t a lot of joy for any cattle types this week.  All state domestic feeder steer indicators have fallen back under 300¢, except in South Australia. Heavy Steers are just above 500¢ in Victoria and SA, but look destined to break this support level as well.

Over in WA the Western Young Cattle Indicator (WYCI) has also weakened, but only eased 6¢ to 589¢/kg cwt.  Unlike the EYCI, which is sitting 26% below this time last year, the WYCI is just 4.7% lower, so things aren’t too bad for WA producers.

The week ahead

Once again there is no rain on the forecast for major cattle areas, so we don’t expect prices to rise any time soon.  There is some good news though, the longer cattle prices continue to fall, and the more cattle are liquidated, the better prices will be in the medium term if it ever rains again.

Grainfed cattle prices have fallen in line with the rest of the market, with the consistent decline putting pressure on lotfeeder margins.  With pressure on lotfeeder margins comes lower feeder cattle prices, although, on a relative scale, they are performing ok.

The Queensland Over the Hooks 100 day Grainfed Cattle indicator continued to ease last week.  Grainfed cattle prices are now at two year lows, sitting at 513¢/kg cwt.  This is the culmination of a 10% decline since mid-June, with the indicator now sitting at a 14% discount to the same time last year.

Figure 1 shows that grainfed cattle input costs, being feeder cattle and grain prices, have also been on the decline over the last two months.  Input costs are not, however, sitting at a two year low, in fact they are not sitting far from the Grainfed cattle price, at 507¢/kg cwt.

Obviously this means lotfeeder margins are on the squeeze, as input costs approach selling costs.  Figure 2 shows that feeder steers bought last week, and contracted at the current price, will return just $20 in both northern and southern regions.  After overheads most lotfeeders are likely to be making a loss, but things are not as bad as during the high grain price days of 2009-2011.

The situation is a bit different now, compared to 2009-2011.  Back then cattle on feed numbers were low, with cattle going through feedlots at break-even to keep the doors open.  Currently there are plenty of cattle on feed, and we have seen over the past couple of years that weak margins don’t last long.

Having record numbers of cattle on feed is part of the problem, as strong numbers exiting feedlots is partly responsible for pushing the price of finished cattle down.

Interestingly input costs are basically the same in northern and southern markets, but feeder and grain prices differ.  In the north sorghum and feed cereals are priced in the $280-300/t range, while in the south feed barley is at $210-230/t.  By contrast, feeder cattle in the south are cheaper, with the Medium-fed paddock feeder at 330¢/kg lwt, while the short fed feeder, more common in the north, is costing 309¢/kg lwt.

Key points:

• Grainfed cattle prices have been on the decline, losing 10% over the last two months.
• Lotfeeder margins are currently low, and likely to result in fewer cattle on feed this quarter.
• When feeder cattle supply improves in the spring, prices could fall a further 20¢/kg lwt.

What does this mean?

It’s not unusual to see tight feeder cattle supply causing low lotfeeder margins at this time of year.  The question is what happen when supply improves in September and October.  Under current grainfed cattle and grain prices, feeder prices will have to fall 20¢/kg lwt for lotfeeder margins to improve back to $100/head.  Figure 2 shows that $100/head is more in line with recent history.

Alternatively the grainfed cattle price could rise 25¢/kg cwt, which would also restore margins to $100/head at current feeder cattle values.  This is not out of the question if the number of cattle on feed has declined.

Key points:

• Current average monthly restocker purchases of EYCI cattle at the saleyard are at 5,500 head per week and is sitting 24% below the seasonal weekly average of 7,250 head.
• Current average monthly lot feeder purchases are at 5,700 head per week and is placed 18% below the seasonal weekly average of 7,000 head.
• Current average monthly processor purchase volumes are at 2,800 head per week and is 10% above the weekly average of 2,550 head recorded so far this season.

Since the start of Winter there has been a changing dynamic at the saleyard for young cattle purchases. Declines in average volumes have been noted for restockers and lot feeders, on the back of reduced pasture availability and higher feed costs. However, processor purchases have bucked the trend as their margins are stubbornly clinging on to positive territory.

 Analysis of saleyard average weekly volumes from the underlying EYCI data shows that over the last three months both restockers and feed lots have been reducing their buying activity, despite the price of young cattle declining 16% since the start of June. Figure 1 shows the weekly purchase volumes by buyer types averaged over each month since the start of the season. The recent decline in purchases of EYCI style cattle by restockers and lot feeders is clearly evident, with restocker volumes currently 24% below the seasonal average and lot feeders are 18% under. Interestingly, over the same time frame processors have increased their activity at the saleyard, such that current processor volumes are sitting 10% above the seasonal average.

Over the season so far, restocker purchases have been averaging around 7,250 head of EYCI cattle per week. However, average purchases for the last month have reduced to 5,500 head as unseasonal dry conditions, highlighted by the rainfall deciles from June to August (figure 2), sap some of the optimism out of restocker demand.

Similarly, feed lots had been averaging purchase volumes of around 7,000 head per week since the start of the season, but in the last month this has reduced to an average of 5,700 head. A spike in global grain prices saw feeder margins squeezed in early Winter. This was followed by higher basis levels for grain, particularly in the Northern NSW and Southern Queensland regions, as the persistent dry and frost events begin to impact upon expected yields in these areas.  Read more about current feeder margins here.

An updated Mecardo processor margin model (figure 3) shows August remains in the black, with an average per head profit of $17.50 recorded for the month. Indeed, the processor margin has been positive since May and this probably accounts for why the current processor purchase activity of around 2,800 head per week is sitting above the average recorded since the 2,550 head at the start of the season.

What does this mean?

The updated Bureau of Meteorology three-month weather outlook indicates a move to a more neutral condition for much of the country. The BOM expect rainfall to be below average in southwest Australia, above average in parts of southeast Queensland, and has a 50/50 chance of being above or below average elsewhere.

The prospect of higher than average rainfall to parts of southern Queensland and Northern NSW may see a revival in restocker activity here, providing some support to young cattle prices in these areas. Although, it may be too little too late to provide some relief for lot feeders in the form of a narrowing basis, particularly if forecast frosts into September continues to weigh on expected yields in these regions.