Tag: Cattle

Weekly east coast cattle slaughter draws closer to this seasons peaks and throughput eases as producers respond to lower cattle prices with all national cattle indicators and the Eastern Young Cattle Indicator (EYCI) all registering declines this week.

In contrast to the declining throughput and price movements, weekly East coast slaughter for the period ending 5^th May still managing an increase from the previous week’s numbers as processors increase activity post the shortened Easter and ANZAC holiday periods – Figure 1. Weekly cattle slaughter rising 14.5% to just over 125,000 head, not far off the peak slaughter levels experienced during March.

After the spike in throughput along East coast saleyards last week producers respond to the softer price pattern with an 13.5% fall in yardings noted to see 60,332 head change hands. Despite the decline yardings reported this week still the second highest weekly figure so far this season and at the higher end of the normal seasonal range for this time of the year, suggesting that demand remains relatively firm as the price declines haven’t been excessive – figure 2.

Indeed, the Western cattle markets were broadly stable, while only marginal declines cited in the East for young/store cattle. The EYCI down a mere 1.5% on the week to 634¢/kg cwt – figure 3. In national markets, trade steers less than 1% softer (345¢/kg lwt), feeder steers declined 1.8% (342¢/kg lwt), while medium cow shed a mere 2.1% (216¢/kg lwt). The more moderate falls reserved for the heavier end with medium steers leading the charge recording a 5% fall at 292¢/kg lwt, while heavy steers (not so heavy it seems) posting a 2.6% drop to 293¢/kg lwt.

The week ahead

As figure 3 outlines, a firmer 90CL beef export price as the US market demand begins to fire up should lend some support to cattle prices into next week. The 90CL another 2% higher to close at 637.6¢/kg CIF should start to provide some enthusiasm to processors. The 90CL posting a fourth successive week on week gain and has lifted 3.9% since mid-April.

On Tuesday Mecardo published the semi-regular look at processor margins on slaughtering cows.  The model confirmed that processors are still struggling, with the cost of the cow and processing outstripping the value of the meat and co-products produced.  We thought we take a look at where prices might settle under current beef prices, when supply finally reverts to something towards normal.

The current margin on cows for processors comes in at negative $34 per head.  The margin model is based on a cow weighing 500kgs liveweight, or 260kgs carcase weight.  Basically the loss being worn by processors at the moment equates to 13¢/kg cwt.

Obviously cattle processors are not in the business of breaking-even, they aim to make money.  The processor margin model shows an average profit on cow processing of $50-70 per head for most of the year.  The average margin drops to $0-10 during the tight supply months of July to September.

With break-even just 13¢ away, there is not much prospect of cow prices falling during the tight supply period we are about to enter.  Come October, however, for processors to make the average $50/head margin, cow prices would have to fall 31¢/kg cwt, or 6.5%, to 430¢/kg cwt.

In fact, prices in Queensland are nearly there, sitting at 446¢/kg cwt last week (figure 1).  There is still upside potential for cow prices over the coming months, with the prospect of tight supply sending processor margins toward the $150 losses seen last year.  To reach these deeply negative margins under current beef prices, cows would have to make 520¢/kg cwt.   Last winter and spring cows were making 540¢, so this is not out of the question.

Beef export prices govern all cattle prices, and all cattle prices move together.  We can use projected cow prices to give an idea of heavy steers and young cattle prices.  Figure 2 shows that heavy steers have ranged between a 50 and 100¢ premium to cows over the past three years.  The EYCI has held a premium as strong as 200¢, and as weak as 100¢.

 

Key points:

• The processor margin model gives us an idea of where cow prices might go under tightening or loosening cattle supply.
• Cow prices could rally up to 15% during winter, and fall 6% from current levels later in the year.
• Heavy steer and young cattle prices could range from 15% higher, to 20% lower depending on seasonal conditions.

 

What does this mean?

When you get out to forecasting young cattle prices, the ranges can be quite large.  The EYCI could go as high as its 2016 peak.  However, during dry spring the EYCI premium to cows could be squeezed back to 100¢, which under current beef export prices, would see it as low as 520¢/kg cwt.  This equates to a 20% fall in price, and would represent a two year low.

Obviously the season will in part govern where processor margins sit, and how the young cattle premium reacts.  What we do know is that supply should be stronger this year in the spring and summer, so unless we see a rally in export prices, or a fall in the Aussie dollar, we shouldn’t be budgeting on similar prices to last year from October onwards.

As the title suggests, after three short weeks growers came to the party this week.  Not only were cattle yardings well up, we had to go searching back through the data to find the last time we saw a yarding this big. Price reacted accordingly, and fell, but not by as much as might be expected.

Figure 1 shows east coast cattle yardings rallied an enormous 87% on last week, and 52% on the last full week of sales.  With yardings this week hitting 69,737 head, we had to go back to the second week in December 2015 to find larger supply.

All states contributed to the larger yardings, with Queensland up 64% while NSW had the largest yarding at just under 30,000 head, up 82%.  The southern states had the largest increases, Victoria yarded 128% more cattle, and SA 240%.

It would be hard for prices to not fall under the weight of such yardings.  However, falls were relatively minor.  The Eastern Young Cattle Indicator (EYCI) fell 15¢ to hit a six week low of 643.75¢/kg cwt.  EYCI yardings were very strong, doubling this week and sitting 9,500 above the same week last year.  Given the increase in supply, we can say demand remains relatively strong.

It was cows, as shown in figure 2, that wore the biggest fall, with 20¢ declines in NSW and Queensland.  Victoria managed to maintain strong prices, still sitting at 487¢/kg cwt.

There were no issues with supply hitting prices in WA, where the Western Young Cattle Indicator rallied 30¢ to 673¢/kg cwt.  Supply tends to only get tighter in WA at this time of year, which should keep prices at the upper end of the range.

The week ahead

Given the influx of cattle this week, we expect things to tighten up pretty quickly next week.  The autumn break has arrived in the south, which will support prices there, but it’s been a bit dry in the north since Debbie did her thing.  This, along with continued strong prices, might have been a factor in the large yardings this week.  June is only four weeks away.  Prices never fall in June, apparently.

Key points:

• The broad price trend for F1 Wagyu steers and heifers mirrors the EYCI movements, with a moderately strong correlation between the two price series present.
• The average premium spread for F1 Wagyu over EYCI cattle since mid-2015 has been 83%.
• F1 Wagyu prices have spent most of the time trading 75-95% higher than the EYCI over the last few years.

As it is international Star Wars day (May the fourth be with you) and the Australian Wagyu Association’s conference being held in Albury this week we couldn’t resist both the pun and the focus on Wagyu premiums over comparable young cattle, based off the Eastern Young Cattle Indicator (EYCI) underlying data.

Figure 1 outlines the average monthly price for F1 Wagyu Steer and Heifers** weighing between 200-400kg lwt, according to AuctionsPlus data since July 2015, to comparable young cattle using the average monthly Eastern Young Cattle Indicator (EYCI) level. The price movements show a reasonably similar movement over time between the two series with the Wagyu F1 cattle, understandably, commanding a healthy premium over the EYCI.

While figure 1 shows the broad directional movements of the EYCI mirrored in the Wagyu price pattern an analysis of the correlations between the two price series shows a moderately strong positive relationship displaying an R squared of 0.67 – figure 2 (you can find a handy explanation of the R squared measure here). Essentially, this means that F1 Wagyu prices and the EYCI can be expected to move up and down in unison, more often than not.

An analysis of the percentage spread that has been achieved by F1 Wagyu cattle within the same weight range of EYCI cattle shows an average premium of 83% has been attained since July of 2015 – figure 3. Although the percentage spread can vary at any given time the 70% range between a premium spread of 72%-94% (green band) highlights where the series has fluctuated for 70% of the time. The two red dotted lines between 61% to 104% give an indication of the 95% range (two standard deviations away from the average for the statistically minded reader) and gives an indication of when the spread is nearing historically extreme levels.

**The first cross of a Wagyu full blood 100% bull over another breed is referred to as an F1.

What does this mean?

On average, the F1 Wagyu producer can expect to receive a premium spread between 75-95% above the EYCI most of the time. Recent discussions with Wagyu F1 producers indicated that forward basis agreements had been under negotiation with processors to determine an EYCI plus an agreed percentage spread as a settlement price when cattle were due for delivery. This historical spread analysis will give an idea of what type of premium for F1 Wagyu cattle above the EYCI is within a fair and reasonable range.

Key points:

• So far during 2017 heavy steer spreads to the EYCI have been trekking along the lower end of the normal range for East coast cattle.
• The spread pattern in each state has been roughly mirroring the pattern set by the 2011/12 average pattern, the last time we experienced a favourable season along the East coast.
• Young cattle are likely to continue to outperform finished lines for the next six months but the discount spread is likely to narrow as we transition into a drier climate into 2018.

During a favourable season optimism runs high among restockers and opportunistic cattle traders supporting demand and prices for store/young cattle. The added buying competition between the three main purchasing groups (restockers, lot feeders and processors) will often see the Eastern Young Cattle Indicator (EYCI) outperform the price patterns for finished lines, as there is really only one buyer type for fat cattle – the processor. This piece will take a look at what can be expected for the spread pattern between heavy steers and the EYCI along the East coast for the next six months.

The most recent favourable season for cattle traders along the East coast occurred during 2011/12, on the back of widespread rainfall that began in 2010. Each figure accompanying this analysis piece displays the spread pattern for heavy steers compared to the EYCI for 2017 for Queensland, NSW and Victoria. Overlaid with the spread pattern for the current season is the average spread pattern for 2011 and 2012, along with the long term spread pattern and the “normal” range (highlighting where the spread has fluctuated for 70% of the time over the last decade).

Interestingly, so far for the 2017 season the spread pattern in all three states has been following a similar trajectory to the 2011/12 average pattern. In addition, each state’s spread pattern for this season is trending close to the lower end of the 70% banding, reflecting that the favourable conditions have supported young cattle prices more than the price for finished cattle. Perhaps somewhat unsurprisingly the state that was hit hardest by the most recent cattle turnoff, Queensland, is experiencing the widest spread between young and finished cattle as the requirement to rebuild the herd is likely to be most evident in that region.

The Queensland heavy steer to EYCI spread normally experiences a trough during Winter and, based off the current pattern, a widening of the discount spread to 20-25% during the middle of the year would not be out of the question. The NSW heavy steer to EYCI spread is likely to remain fairly stable through the middle of the season, ranging between a 7-12% discount for the next six months. The Victorian heavy steer spread normally follows an opposite pattern to Queensland, on account of the different seasonal factors present in the north/south of the country, and is anticipated to reach a peak during Winter near the 3-5% discount level.

What does this mean?

It is likely the spread patterns for each state will continue to trek along the lower end of the 70% band for much of the second half of the year. However, as the confidence level on longer term climate predictions for the 2018 season grows into the later stages of 2017 spreads may begin to return to more normal levels, particularly if the transition from a wetter to drier climate cycle becomes more evident.

A short week due to the Easter holidays and young cattle prices took a small breather as east coast slaughter figures trek sideways. The Eastern Young Cattle Indicator, marginally softer to close yesterday at 660.75¢/kg cwt, 6¢ softer than this time last week.

Figure 1 shows the pattern for East coast slaughter, with marginal week on week change as just over 112,000 head processed. The Easter dip in slaughter levels seeing numbers processed that were not too dissimilar to this time last season. Although for most of this season slaughter figures have been trending around 10% below the 2016 levels.

Young cattle prices holding above 660¢ for the last week, encouraging an increase in supply with daily yardings creeping up over the last few days to see a 25% increase in daily throughput for EYCI cattle from this time last week with just over 18,000 head reported at east coast saleyards. The first time daily numbers of EYCI cattle have been above 18,000 head since late February. The increased yardings resulting in a slightly softer EYCI this week – figure 2.

The week ahead

A very dry week ahead to much of Queensland and parts of northern NSW will allow for more supply to start to flow once sales begin after the Easter break – figure 3.
Young cattle prices likely to consolidate near current levels with a slightly softer bias in the coming few weeks post Easter. Have a safe and enjoyable break, be sensible on the roads if you are out and about.

Key points:

• Analysis of annual rainfall deciles over the last century shows that the chance of back to back wet seasons lasting longer than two years is uncommon
• The most recent transition from a wetter than normal to a drier than normal period was over the 2011/12 seasons
• The current season is showing some price movement and slaughter pattern similarities to the 2011 and 2012 seasons

The 2016 season was without doubt the wettest for the nation since the 2010/11 deluge and has been the underlying cause of optimism among restockers, encouraging a rebuild of the herd and supporting young cattle prices to record highs. The recent rains have provided a boost to cattle prices over March – but could the prospect of a dry second quarter in 2017 and 50/50 chance of El Nino developing later in the season signal the beginning of the end for further increasing cattle prices?

Analysis of annual rainfall deciles across the nation since 1900 shows that the chance of back to back wetter than average years going beyond a two-year period is fairly rare, with a much drier than normal season often following up within the next two years. Indeed, over the last decade the much wetter 2010/11 seasons were followed up with a rainfall deficient 2013, 2014 and 2015 to much of the east coast, prompting a significant cattle turnoff during that time.

Figures 1 and 2 highlight the price and slaughter patterns comparing the current season to the 2011 and 2012 years. Interestingly, all three seasons have seen price increases for the Eastern Young Cattle Indicator (EYCI) over February/March. While the 2017 rally looks impressive, in percentage terms it is not too dissimilar to the gains recorded during 2011. The EYCI rose 8.2% over February/March 2011 compared to the 8.6% gain seen this year, albeit over a shorter timeframe. In terms of the weekly slaughter pattern there was a bit more volatility in the series during the first half of the year in 2011, although the 2012 pattern has been a reasonably good template for the current season, so far.

The second and third quarter of the 2011 and 2012 season saw young cattle prices ease from their peak in late March, bucking the common seasonal trend towards higher cattle prices during Winter. During the final quarter of 2011 and 2012 the EYCI diverged as the forecast of a very dry 2013 saw cattle slaughter in the final months of the year continue to climb, pressuring prices lower toward the year end.

Figure 3 focuses on data from the last two transitions from a wet to dry period and how the percentage price movement of the EYCI responded over the season. Overlaid on the chart is the percentage price patterns for 2017, 2011, 2012, an average of the 2011 and 2012 pattern and a potential seasonal range (calculated from the most recent five seasons that experienced a shift from wet to dry conditions).

What does this mean?

The analysis suggest that it will be unlikely to see the EYCI peak beyond 10-12% from the season opening price of 635¢’kg cwt, which would place the potential peak this year at 700-715¢. At this stage, the peak is still anticipated during Winter, with prices staging a decline in the final quarter of the year as the prospect of a return to drier conditions prevail. The magnitude of the correction lower for the EYCI is anticipated to be in the 10-15% range scheduled for late 2017 or early 2018, towards the 550-570¢ level.

Due to the Easter break this is the last analysis piece to be released this week. The usual Friday market comments will be released on Thursday – have a safe and happy long weekend.

Cattle markets continued to rise this week as tight supply and improving demand continued.  The Eastern Young Cattle Indicator (EYCI) has streaked to a new 2017 high, and sits 100¢ higher than last year.  Finished cattle prices have participated in the rise, but have been left in the wake of young cattle.

Figure 1 shows that the strong prices failed to draw out more cattle this week, with East Coast cattle yardings increasing just 1,300 head.  Cattle yardings were down 28% on the same week last year.   In fact almost every week of autumn (except for Easter) 2016 saw yardings above 60,000 head.  Over the last 8 weeks cattle yardings haven’t managed to crack 52,000 head.

Most of the action was again in young cattle markets this week.  The EYCI gained 27¢ this week to hit a six month high of 666¢/kg cwt, almost exactly 100¢ higher than last year.  The increase in young cattle prices was largely driven by feeders and restockers.  Queensland feeders gained 15¢/kg lwt, while in NSW they were 9¢ higher, to hit 344¢ and 357¢/kg lwt respectively.

Slaughter cattle prices haven’t managed to hit new 2017 highs yet.  Heavy steers bounced back this week, gaining 27¢ on the east coast to sit just below the opening price of 2017, at 568¢/kg cwt.  It’s s similar story for Cows, with prices sitting a few cents below the February high.

Export prices eased marginally this week, with the 90CL indicator coming off highs, down 4¢ to 614¢/kg swt.  While export prices have improved from the start of the year, if supply picks up here we can expect cattle prices to head back towards export levels.

The week ahead

It will be interesting to see if the rise in the EYCI stops, or at least starts to slow.  It’s hard to see any increases in supply, as it seems the cattle either aren’t there, or are unable to make it to market.

The concern for buyers is if supplies are tight now, it’s a long time until September when the spring supply hits the market.  There might be a flush when the floods recede, but it’s likely to be short-lived.