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Mecardo Analysis - US cattle futures limiting in short term but supportive longer term

  • By: "Prime" Ag News
  • Aug 02, 2018

By Angus Brown | Source: CME, MLA.

The growth in the US cattle herd might be slowing, but there are still plenty of cattle coming through the system. Cattle prices in the US are reflecting the stronger supply situation, and as we know, what happens in US cattle markets affects what happens here.

Matt’s article earlier in the week highlighted the fact that US cattle herd growth appears to be slowing. In fact, further dry weather may see US producers move into a herd liquidation phase. This is good news for Australian cattle producers, as the less beef produced in the US the better for our high and low value export markets.

The further good news comes from a look at prices. US Live Cattle Futures, the equivalent of Heavy Grainfed Cattle, have fallen markedly from the heady days of 2014-15 when they tipped over 160¢/lb (Figure 1). Now at 110¢, US Live Cattle Futures are not back at the disastrous levels of 2009-10, but they have fallen far enough to see production growth slow.

2018-08-02 Cattle Fig 1

The story is similar for US Feeder Cattle Futures. The recent rally has US feeder prices back at the top of a two-year range, but over the longer term prices are well behind the 2014-15 record highs. Compared to pre-2011 levels, feeder cattle prices are very strong at a 50% premium, so it’s interesting to see herd growth slow when prices remain historically good.

The upshot for Australian cattle prices is shown in Figures 2 and 3. The recent rally in the QLD 100 day Grainfed Steer price has it sitting at a 10% premium to US Live Cattle Futures. Driven by high grain prices and weak finished cattle supply, it’s hard to see further rallies with a rise in the US market.

2018-08-02 Cattle Fig 2

2018-08-02 Cattle Fig 3

For young cattle, we can see why support has started to turn up in Figure 3. The Eastern Young Cattle Indicator (EYCI) discount to Feeder Cattle Futures has opened up thanks to the expensive feed situation and stronger supply. It has been much wider during the last drought, which coincided with US cattle boom, but the smaller herd should assure we don’t see a repeat of this.

Key points

   * US Cattle Futures markets appear to have found a base well above historical lows.

   * Over the medium and longer term, this is positive for ongoing strong Australian cattle prices.

   * In the short term, upside in grainfed cattle prices might be limited by US competition.

What does this mean?

The news is good for the medium and longer term. Slowing US herd growth, or even a liquidation, while prices are still historically strong means that we are not headed back to heavy or young cattle prices sub 400¢, with the Aussie dollar moving back to parity with the US.

For the short term, finished cattle prices might find upside limited as the strong US supplies become cheaper than ours. Grassfed beef is fast becoming the premium product, even more so when there is no grass, so it might have a little way to go yet, but grainfed beef upside looks limited.