By Matt Dalgleish | Source: MLA, BOM, Mecardo
In early May we published a piece on the likely impact of a dry Autumn on young cattle prices which suggested that a fall to the 470¢ region was on the cards for the Eastern Young Cattle Indicator (EYCI) if it remained dry. This analysis provides an update on the EYCI into Spring, based on the current Bureau of Meteorology (BOM) rainfall forecast.
In the May analysis, we outlined that improved rainfall conditions could see the EYCI gain towards the 520¢ region, while a continuation of the dry would pressure it towards 470¢. As it happened both outcomes occurred. June 2018 saw relatively normal rainfall deciles recorded and the EYCI responded by testing toward 520¢ (516¢ was the high on July 7th) but a return to very much below average rainfalls across nearly all of NSW during July put the pressure back on young cattle prices to see a steady decline throughout the month to reach 477¢ by early August.
No doubt the release of the BOM rainfall outlook for August, pointing to a very dry finish to Winter (Figure 1) has added to the headwinds facing young cattle prices. The range and severity of the forecast rainfall shortage expected for August this season isn’t too dissimilar to the dry Spring that occurred during October of 2002 (Figure 2).
Indeed, as the May analysis demonstrated, the price behaviour of the EYCI for the first half of 2018 had been mirroring the pattern set in the first half of 2002 (Figure 3). Both seasons saw an unusually dry Autumn/Winter period. In September of 2002, some Spring rains breathed life into the EYCI with prices staging a 15% lift, but a return to severe dry conditions in October saw the EYCI give back all the gains plus some, dropping 18% into the middle of November.
As the price behaviour in Figure 3 highlights, it is not uncommon to see the EYCI decline during the October period. The ten-year average seasonal pattern and the average dry season pattern, filtered for seasons that have been relatively dry, both show percentage price falls in the EYCI occurring over Spring.
Key points
* The dry conditions forecast for August 2018 are similar in the range and severity of the dry Spring of 2002.
* During October of 2002 the EYCI peeled off 18% and the historic price behaviour of the EYCI shows that Spring price declines are not uncommon.
* An EYCI of 425¢ into early Spring 2018 is not out of the question.
What does this mean?
Based off the forecast rainfall deciles issued by the BOM for August, it wouldn’t be out of the question to see a similar magnitude price decline for young cattle to what occurred during the dry October of 2002.
Indeed, the recent weakness in the EYCI may already be the beginning of the downside pressure as the dry continues to play havoc on cattle producers. Extrapolating the magnitude of the October 2002 drop onto the previous EYCI peak we saw during early July puts the EYCI at the 425¢ level into early Spring.
A well-known Split Enz tune advocates that “history never repeats” – let hope for the sake of cattle producers they’re right.
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