By Angus Brown | Source: BOM, MLA, Mecardo.
There is always risk when looking at where prices might go if the drought breaks. It is the risk of calling it too early, as the dripping tap is turned off, rather than fully on, and the tinge of green dries, leaving little feed. Regardless, with recent falls in some areas and some follow up forecast, we thought it’s time to put some numbers around what will happen if the wet season arrives in earnest.
Last week Matt ran our Eastern Young Cattle Indicator (EYCI) model and put some numbers around where the market is headed under current fundamentals. Rain on the east coast isn’t going to move export prices too far, or the Aussie dollar. It will, however, significantly shift the restocker supply and demand equation. Those who still have cattle will hold on tight and those that have destocked will be looking for something to eat grass.
Fortunately enough, we have seen a very similar dynamic in recent times, with 2016 being the peak of the EYCI and the restocking frenzy. Whether or not supply/demand returns to similar levels depends on rain, but this time it could be even stronger as a dearth of cattle looks to be deeper this time.
Given the recent herd liquidation, it’s not a stretch to expect east coast cattle slaughter to fall back to 2016 or 2017 levels if and when it rains (Figure 1). This would see a decline of 7% when the usual trend is for cattle slaughter to rise as we move towards the end of the year.
With cattle, it’s not as simple as looking at supply and getting a price. Export market fundamentals play a role in setting the base cattle prices and local supply governs where the EYCI sits relative to export prices. This is represented in Figure 2, which shows the EYCI premium or discount to the 90CL, which is set by supply.
The strong restocking demand in 2016 saw the EYCI sitting well above the curve, while it was closer to historical ‘fair’ pricing in 2017.
Key points
* East coast rain will see cattle held on farm and restocker demand bolstered.
* Strong restocking demand in 2016 saw the EYCI at a significant premium to the 90CL.
* If we see drought-breaking rain and the 90CL stays in the 550-600¢ range, young cattle prices could gain 25-35%.
What does this mean?
Figure 3 shows where we think the EYCI will head when the rains arrive. The largest premium the EYCI has held over the 90CL Frozen Beef price in the summer has been 80¢ in December 2016. It’s hard to see price getting there without very widespread wet season rain. Getting back to parity with the 90CL would add 15% to the EYCI and see it back at 550¢.
A spike in demand, with widespread drought-breaking rain, would put the EYCI back at a strong premium to the 90CL. If the 90CL stays in the 550-600¢ range, we could see young cattle prices gain 25-35%. This is the maximum payoff from the risk of buying cattle before the rains have truly arrived.
Share Ag News Via