By Matt Dalgleish | Source: MLA, Steiner, USDA, CME, Mecardo.
The last time Mecardo revised their long term Eastern Young Cattle Indicator (EYCI) forecast was in early April 2018. As six months of unseasonably dry conditions have passed we thought it an opportune time to assess what the crystal ball tells us for the 2019 season and beyond.
In our April EYCI forecast release we pegged the EYCI to finish the 2018 season at an annual average of 546¢, so far this season it has averaged 508¢. It is unlikely to expect the EYCI to rally enough over the next quarter to see it finish the year averaging near our April forecast, but the modelling inputs used back then for the climate factor was assuming a relatively normal rainfall pattern throughout Autumn and Winter.
As we all know the dry spell that hit much of the East coast took its toll on young cattle prices and restocker activity. Adjusting the EYCI model to reflect the drier 2018 that we have experienced puts the annual forecast just below 500¢, suggesting that we are close to fair value in the EYCI now according to the model.
Indeed, our range model analysis places the EYCI, currently at 487¢, comfortably within the middle of the “fair value” boundary - as identified by the grey shaded zone in Figure 1. As can be seen from the range model pattern the EYCI has spent most of the last two decades trending within the estimated range.
During the drought inspired high cattle turnoff in 2013-2015 the EYCI breached the lower band of the fair value range. Similarly, the frantic restocker activity experienced during the wetter than average 2016 season saw the EYCI break above the upper boundary of the fair value range, but for these two exceptions the EYCI trend has been contained by the estimated range.
Turning to the long-term forecast model for the EYCI as we head toward the end of the decade we can see that the model predicts a period of sideways consolidation within the 400-500¢ region, with a slight downward bias as herd numbers and beef production increases – Figure 2. Assuming a relatively normal rainfall pattern for the 2019 season the EYCI model forecasts an annual average of 470¢/kg cwt, with a likely range between 425-515¢ (Table 1.)
Key points
* Range forecast models suggest the EYCI is currently within the fair value range and unlikely to experience any significant upward nor downward price pressure.
* The long-range forecast model predicts the EYCI to average 470¢ over the 2019 season, with a potential range of 425-515¢ and assuming a reasonably normal rainfall pattern.
* A return to a wetter rainfall scenario would see the EYCI average 530¢ in 2019 and could stretch toward 580-600¢ during the seasonal cycle peak.
What does this mean?
As with all modelling the predictive value of the output is only as good as the inputs that drive the forecast levels. Current climate models seem to suggest a return to more normal rainfall conditions was as we head into 2019 and this scenario is what has been factored into the EYCI model.
However, a much wetter than anticipated 2019 would reinvigorate the herd rebuild and encourage restockers back into the market, in a similar fashion to the 2016 season. Under this wetter scenario the EYCI could reach toward an annual average of 530¢ and a likely range between 490-580¢.
Share Ag News Via