By Angus Brown | Source: MLA, ABS.
A couple of weeks ago we looked at Meat and Livestock Australia’s (MLA) cattle industry projections, with a lower herd and lower slaughter one of the main findings. This week we take a stab at some price forecasting based on the projected supply numbers.
Forecasting prices is fraught at the best of times. When the weather is one of the biggest drivers of supply and demand it makes it even harder. MLA are assuming a return to somewhere near ‘normal’ seasons over the coming four to five years and with it, tighter cattle supply.
We know that unlike the lamb and sheep market, where price usually has a pretty good relationship with supply, the cattle market has more factors. With Australian beef competing in international markets, cattle and beef prices in competing countries have an impact on our price.
A few years back we found a relatively strong relationship between Australian cattle slaughter, the price of beef exported to the United States, and the Eastern Young Cattle Indicator (EYCI). The basic premise is that the stronger slaughter is, the lower the EYCI is relative to the 90CL Frozen Cow Beef price. Manufacturing beef such as 90CL is one of our biggest beef export market, so it makes sense that the price of this has an impact on cattle prices at saleyard level.
You’ll often see figure 1 in our weekly comments, as the difference between the 90CL, the EYCI and the Western Young Cattle Indicator (WYCI) gives a good snapshot of how local supply and demand is shaping. Recent weeks show cattle prices at their largest discount to the 90CL since 2015.
Figure 2 shows 2018 has ended up pretty close to the predicted discount, with slaughter of 7.86 million coinciding with a 66¢ discount for the EYCI to the 90CL. It’s a long way back for both slaughter and the average EYCI discount this year. MLA’s slaughter forecast of 7.6 million should push the EYCI back to a 20¢ discount to the 90CL. The discount is currently 150¢.
For the low slaughter year of 2020, the EYCI discount should shrink to 9¢, while with rising slaughter in 2021 and 2022 the discount widens out again.
Key points
* MLA’s forecast for lower cattle slaughter is a pointer to higher prices in coming years.
* The model for the EYCI relative to the 90CL price held well in 2018.
* There is up to 150¢ upside for the EYCI if MLA’s cattle slaughter forecast is correct.
What does this mean?
We know the cattle market is in for some upside when it rains, and figure 2 tells us the average EYCI should be around 20¢ below the 90CL indicator. Based on the current 90CL price this would put the EYCI at close to 600¢/kg cwt.
We saw in 2016 that rampant restocker demand pushed the EYCI to spend the year at a premium to the predicted level. Whether this is repeated remains to be seen, but while the 90CL is strong, there is plenty of upside if MLA’s slaughter forecasts come to fruition.
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