By Matt Dalgleish | Source: MLA, Mecardo.
The underlying data that is used to create the Eastern Young Cattle Indicator (EYCI) can be filtered to give an insight into the optimism/intentions of different buyer groups. The prospect of rain can impact restockers, feed grain price movements can prompt lot feeders into action and processor margins can determine how enthusiastic meat works are at the sale yard. This piece looks at these three buyer groups and how they are behaving, in relative terms, this season.
A simple comparison between the price spread behaviour of restockers, lot feeders and processors when purchasing EYCI eligible cattle can give an understanding of how each buyer group is responding at the sale yard compared to previous seasons. Analysis of the percentage spread discount or premium each buyer group is willing to pay for EYCI style cattle between the different buyer groups and across the season can demonstrate whom is driving the market.
The restocker spread to the EYCI has been deteriorating steadily as the unseasonably dry Autumn and Winter took hold with the spread moving from a 6% premium in March to a 7% discount in July, reaching well below the normal range in spread behaviour - Figure 1. The recent NSW rains helping to narrow the restocker spread discount back toward 4%, but still well short of the premium spreads you would normally find at this time in the year.
In contrast feed lot buyers have been paying an increasingly higher spread to secure EYCI eligible cattle, moving from a 3% discount spread in March to a 7% premium spread in August - Figure 2. It’s somewhat counterintuitive to see lot feeders so keen to secure younger cattle given the increased feed grain prices and diminishing feeder margins. However, in dry times like these with limited pasture in the regions that are fed lot intensive there are not many options left but to put cattle through the feed lot, if you want to get to the finished product.
Traditionally, meat works tend to be the final buyers of young cattle if restockers and lot feeders haven’t already outcompeted them in the bidding process. Usually this means that the processor spread to the EYCI is the most discounted of the three buyer types. However, strong processor margins, robust beef export flows and firm export prices have seen processors keen to support the EYCI as it has softened toward 440¢/kg cwt with meat works paying a premium spread to the EYCI as high as 4% in recent times, the highest monthly spread on record - Figure 3.
Key points
* Restocker interest in young cattle reduced as the dry took hold into Autumn/Winter with the restocker spread moving from a 6% premium to a 7% discount.
* Strong processor margins have encouraged the processor spread to a 4% premium during August, which is the highest monthly recording since the data began being collected in 2004.
* Improved seasonal conditions in NSW this week has seen the restocker spread narrow rapidly from a 7% discount to a 4% discount, suggesting that a sustained return to more favourable conditions would see restocker support return to the young cattle markets swiftly.
What does this mean?
As the season turned drier restockers pulled their buying support for young cattle allowing the EYCI to soften throughout Autumn/Winter. Although, the restocker spread shows that this buying group is responsive to rainfall, or even prospect of rainfall. Given the current size of the herd and the forecast growth in demand for red meat from Asia it won’t take much to reinvigorate restocker interest when the season turns more favourable again.
Softening young cattle prices helped to insulate fed lots from rising feed grain prices and relatively firm finished cattle prices encouraged stock into feed lots as the dry persisted. Improving processor margins, strong offshore demand and robust beef export prices have meant that meat works have provided some support to young cattle prices as the EYCI eased, particularly during August.
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