Tag: Commodity

Surging weekly Queensland throughput and above average NSW throughput weighed on cattle prices in these regions dragging down the east coast figures this week with the Eastern Young Cattle Indicator (EYCI) dropping to levels not seen since the start of the season.

Figure 1 highlights the yarding pattern so far this year in Queensland with the large jump in throughput evident for this week compared to the 2016 trend and the five-year average pattern. The 19,246 head recorded a 57.8% increase on the average for this time of year. Queensland the only state to see price falls in all NLRS reported saleyard categories of cattle with QLD Feeder Steers leading the decline posting a 4% drop to 353¢/kg lwt.

NSW experiencing price declines in all NLRS saleyard categories, apart from Medium and Heavy Steers, with Trade Steers headlining with the biggest percentage decrease, down 6% to 332¢/kg lwt with elevated NSW throughput appearing to contributing to the price pressure – figure 2.

The EYCI dropping 3% on the week to close at 636.5¢/kg cwt despite beef export prices managing to hold onto the recent gains with the 90CL frozen cow tracking sideways to finish the session off at 585.5¢/kg CIF – figure 3. Softening US cattle futures creating some headwinds for the 90CL and providing a barrier to local cattle prices extending their gains achieved since the start of the season.

Register here for the MLA/Mecardo Cattle Market Webinar scheduled for the 16th February at 1pm AEST. Registered participants will be able to view a copy of the webinar at a time that suits them if unable to view it live.

The week ahead
While it is not uncommon to see weekly throughput in Queensland test toward the low 20,000 head vicinity during March/April the surge reported this week comes a little earlier than anticipated. Perhaps brought forward by the attractive price levels and the prospect of a drier than normal February – April period as forecast by the Bureau.
If you haven’t already done so, please consider signing up for the cattle market webinar we are running in conjunction with MLA on the 16th February – see link above for further details.

Key Points 

• Diverging price trends between the US and Australia during much of 2016 saw the usual EYCI discount spread to US Feeder Steers move into extreme positive spread territory.
• A lift in US cattle prices in the last quarter of 2016 saw the spread return to a discount.
• Current US Feeder Steer prices at 122US¢/lb translates to around 351A¢/kg lwt while the EYCI is trading at around 342A¢/kg lwt

Often at Mecardo we look at local and global cattle price relationships in US$ terms as the US cattle market is one of the key drivers of Australian cattle prices over the longer term. However, in this analysis we flip the magnifying glass to take a look at global prices in our terms.

Figure 1 shows a handful of global cattle prices compared to the Eastern Young Cattle Indicator (EYCI) expressed in A$ terms on a live weight basis. Clearly, we can see for much of the period between 2010 to 2013 US Feeder Steers held a reasonable premium to comparable cattle prices in Brazil, NZ and Australia. However, during 2013 to 2015 the US market took off and the prices there doubled from 300¢ to over 600¢/kg lwt. During much of the 2013 to 2015 period prices in Australia remained subdued due the very high drought induced turnoff and Brazilian prices were kept under wraps due to a rapidly devaluing currency, while prices in NZ showed some modest gains.

Australian cattle prices started to rally into 2015 as seasonal conditions improved and for much of the 2015/16 seasons continued to probe higher as restocker demand buoyed the market and an optimistic outlook encouraged the beginning of a herd rebuild. In contrast, being further along the rebuild phase, US cattle prices began to ease during this time frame as production here increased.

The divergence between US and Australian prices can be seen by the sharp narrowing of the percentage discount spread between the EYCI and US Feeder cattle as highlighted in figure 2. Indeed, the spread narrowed so much that it went to positive territory for much of the 2016 season. Overlaid on the chart for figure 2 is the green band showing where the spread has fluctuated for 70% of the time, the 95% range as indicated by the two red dotted lines and the long-term average spread, which sits at a 43% discount of the EYCI to US Feeder Steers, when comparing priced expressed in A$ terms.

Taking a look at the correlation between US Feeder Steers and the EYCI we can see a moderately strong relationship between the two series when looking at annual average prices expressed in A$ terms – figure 3. Although, as previous Mecardo analysis has shown, the correlations between Australian and US prices are stronger when comparing annual average prices in US¢/kg.

Click on the links above and below to read past analysis on correlations between US and local prices in US$ terms.

EYCI and 90CL beef export price
US Live cattle futures and National Heavy Steers

What does this mean?
The lift in US prices since October has taken some of the downward pressure off local prices. Although from a longer term historical perspective local prices remain in overvalued territory and have not been helped by a stronger A$ during January.
A continuation of the downtrend in US prices or a significantly higher A$ (above 85US¢) would see some pressure return on local prices. However, on the flipside, tight local supply, a continuation of the herd rebuild and the remnants of a very favourable weather pattern during 2016 should be enough to see local cattle price remain buoyant for the first half of the year.

The last week in January, or the first week in February, is usually the time when southern cattle reach their annual price low-point, relative to northern markets and the Eastern Young Cattle Indicator (EYCI).  Recent price movements suggest this will again be the case, so what does this mean for pricing over the coming months.

Figure 1 shows that since early January we have seen a sharp correction in the relative prices of young cattle in EYCI saleyards south of Dubbo.  The discount for young cattle in the south has widened from 10¢ in early January, to just move past the 10 year average, and sit at 22¢.

Young cattle prices in yards south of Dubbo haven’t actually changed, but the EYCI has gained 15¢, driven by a 19¢ appreciation in yards north of Dubbo, hence those in the south have become relatively ‘cheap’.  This is despite absolute prices being at record levels of 633¢/kg cwt, for this time of year.

More interesting is what happens from there with the southern spread to the EYCI.  Over February, March and April, the southern discount becomes a premium, as the supply of grass finished cattle tightens, as grass supply wanes.

In the north the supply of finished cattle starts to improve in January, with the result being a weakening premium to the EYCI, bottoming out in May.

Figure 2 shows that the EYCI generally tracks sideways to slightly higher, in February and March.  With the southern discount to the EYCI narrowing, to a steady or higher EYCI, this suggests we might see 20-30¢/kg cwt upside in southern young cattle prices in the coming month or two.

It young cattle destined for slaughter, or trade steers and heifers, which are set to benefit the most over the coming months.  Figure 3 shows that young cattle sold to processors improve 8% over the late summer and autumn.  From the current level of 595¢/kg cwt, a narrowing of the discount to parity, would see the price reach 630-640¢/kg cwt.  Prices haven’t been this good since October.

Key points:

• The southern cattle prices discount to the EYCI has fallen to its annual low point for the year.
• From the start of February southern young cattle prices generally improve 20-30¢ relative to the EYCI.
• Finished cattle have further to improve than restocker or feeder prices, and prices are unlikely to fall in the short term.

What does this mean?

Seasonality in cattle markets is driven by cattle supply, and the case of the southern discount to the EYCI is no different.  Seasonality in this case is reliable, which suggests that young cattle in general, and trade steers and heifers in particular, are likely to improve in price over the coming month or two.

Whether it’s worth holding cattle to profit from this upside depends on the costs of carrying cattle through, and the direction of the EYCI.

In the north the decreasing premium to the EYCI is usually counteracted by a small improvement in the EYCI itself, and as such there it only the risk of cattle prices falling in general to discourage putting more weight on cattle.

Cattle prices edged higher this week, as markets remain in a holding pattern, seemingly across all levels.  Export beef prices have started the year relatively steady, putting a base in the market.  Slaughter cattle are maybe a little too expensive for processors, but tight supply and restocker demand is supporting prices.

Regular readers will know we often quote the 90CL Frozen Cow indicator as a benchmark for export beef prices.  Historically the 90CL has had a good relationship with cattle prices here, and it is reported weekly, hence we like to use it.

This week the 90CL edged a little higher, hitting 590¢/kg cwt, almost exactly the same level as this time last year (figure 1).  In fact, the 90CL indicator has tracked in a historically narrow range for much of the last 12 months, bouncing between 550 and 600¢/kg swt.  Tight supply out of Australia and New Zealand has been somewhat counteracted by weakening demand from the US.

According to the weekly Steiner report, beef demand in the US has improved recently.  This has been on the back of cheaper domestic beef, and improving margins for retailers, therefore they have been pushing beef in their marketing campaigns.  For us it’s strange to think retail or fast food marketing campaigns could have any impact on cattle prices, but apparently it’s good for us if McDonalds sell more burgers in the US.

Locally it was Queensland where the action was this week.  The Qld trade steer indicator rallied 50¢ to 625¢/kg cwt (figure 2).  The saleyards in Queensland are a full dollar higher than the Over the Hooks quote.

The week ahead

Figure 2 shows there is little difference between state trade steer indicators, which is normal for this time of year, as markets move into a holding pattern.  The next major market move is usually lower in autumn, as northern weaner cattle and cull cows hit the market.  How much impact this has this year will depend on rainfall, obviously.