Last week we took a look at Meat and Livestock Australia’s (MLA) latest Cattle Industry Projections, with the headline point being a dramatic fall in supply over the coming years. Tighter supply will always be supportive of prices, and here we try to put a finger on the short and long term price impacts of the coming supply squeeze.
Ad - Get your Seeder set up the right way. Contact Air Seeder Consulting Services and have your Seeder running right before you start - Ad
Ad - Get your Seeder set up the right way. Contact Air Seeder Consulting Services and have your Seeder running right before you start - Ad
To assess short term price impacts we can take MLA’s forecast for 2019 slaughter and deduct the cattle which have been slaughtered already. This gives us an idea of how MLA see cattle supply panning out for the remainder of 2019.
MLA is forecasting cattle slaughter of 7.7 million head for 2019. Official ABS slaughter figures for January to March, combined with an estimate for April based on MLA’s weekly slaughter numbers, tells us that around 2.6 million head have been killed so far in 2019. This is up 8.1% on the same period in 2018 and leaves 5.53 million head for slaughter to hit the 7.7 million head target.
For the remainder of the year, cattle slaughter will have to be down 7.3% on 2018 to hit the 7.7 million head target. Cattle supply won’t need to be extraordinarily tight for the rest of the year, figure 1 shows that levels similar, or slightly higher, to 2017 will be enough to hit the target.
Ad - Get your Seeder set up the right way. Contact Air Seeder Consulting Services and have your Seeder running right before you start - Ad
Ad - Get your Seeder set up the right way. Contact Air Seeder Consulting Services and have your Seeder running right before you start - Ad
To assess what tighter supply means for prices we need to account for a range of other factors. The Mecardo Eastern Young Cattle Indicator (EYCI) model does this, factoring in major fundamentals to get a pretty good fit.
The latest MLA cattle supply forecasts give a price of 483¢/kg cwt for the EYCI in 2019 (Figure 2). Currently, the EYCI is just a touch above this at 499.75¢. So far this year the EYCI has averaged 467¢, also not far off the forecast. It’s likely, with a better season, the EYCI will head more towards the 2020 forecast for the remainder of the year, which at 562¢ is back towards the top of the historical range.
In the coming years, MLA’s projected slaughter levels suggest the EYCI will be above 500¢ through to 2021. In 2016 and 2017 we saw rampant restocker demand push the actual EYCI 5-10% above the levels predicted by the model. This is possible again if rainfall is better than average.
Key points
* MLA's industry projections call for tighter cattle supply for the rest of 2019 and coming years
* Factoring in fundamentals, the EYCI should maintain levels above 500¢ for the coming 2.5 years
* Better than average seasons could see the EYCI move back toward 2016-17 levels
Ad - Get your Seeder set up the right way. Contact Air Seeder Consulting Services and have your Seeder running right before you start - Ad
Ad - Get your Seeder set up the right way. Contact Air Seeder Consulting Services and have your Seeder running right before you start - Ad
What does this mean?
Pricing models are only as good as the inputs used, and obviously, these input values can vary wildly. The best projections for inputs available now suggest cattle are still good buying, but plenty can change.
Over the longer term, as local supply normalizes, prices will ease. The model uses largely average values out past 2022, and this pushes the EYCI back below 400¢, which seems unlikely. However, the forecasts for the next few years seem more accurate, and stronger prices than 2019 should persist out to 2022.
Share Ag News Via