Farm Tender

Mecardo Analysis - FSR, restockers and cattle prices

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By Matt Dalgleish | Source: ABS, MLA, Mecardo. 

Kerry Lonergan, ABC Landline legend and renowned agricultural market commentator, mentioned Mecardo’s use of the female slaughter ratio (FSR) when assessing cattle market dynamics in a recent Landline market report. Mecardo coined the phrase FSR and are keen observers of the interrelationship that exists between the FSR, restocker buying activity and young cattle prices.

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Last year Mecardo published analysis that showed there was a link between the annual average FSR and restocker saleyard buying activity of EYCI eligible cattle. Since 2011, the annual restocker price spread to the Eastern Young Cattle Indicator (EYCI) has enjoyed a strong correlation to the annual average FSR scoring an R2 of 0.8859 (Figure 1).

The relationship highlighted that when the annual spread restockers were prepared to pay above a 2% premium to secure EYCI eligible cattle, it coincided with an annual average FSR below 47%, which is consistent with a herd rebuild phase. In contrast, an annual average restocker spread below a 2% premium was synonymous with an annual average FSR above 47% and indicative of herd destocking.

Currently, the 2019 average restocker spread is at a 2.4% discount and the annual average FSR has lifted from 52.5% to 54.4% on the back of a huge surge in the FSR during March, peaking at its highest monthly level ever recorded at 58.1%.

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An issue using the FSR to assess cattle market dynamics is that the ABS data used to create the FSR is delayed by nearly two months. Mecardo has overcome this by using the relationship that exists between the FSR and the restocker spread to create an implied FSR, which uses more frequently reported restocker data, that can act as a lead indicator to the actual FSR. The implied FSR indicates that the recent rains have been having an impact on the indicator with the implied FSR easing since March (Figure 2).

2019-05-16 Cattle 1 2019-05-16 Cattle 2

Key points
   * In March the female slaughter ratio has hit the highest monthly figure ever at 58.1%
   * Recent implied FSR behaviour suggests we may see a peak in the actual FSR in the next few months, signalling the beginning of a long-term downward trend in the FSR.
   * Peaks in the long-term FSR cycle correspond quite closely to when the EYCI began an upward price cycle.

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What does this mean?
The recent implied FSR pattern suggests that we are likely to see the actual FSR begin to ease in the coming months. Indeed, the FSR may be peaking right now and entering a long-term downward cycle.

Figure 3 highlights the long-term cycle for the FSR (inverted) and the EYCI using a 12-month rolling average of the two data series. Interestingly, peaks in the long-term FSR cycle correspond quite closely to when the EYCI market bottomed and began an upward price cycle.

2019-05-16 Cattle 3