How far to fall depends on export prices

cattle

Last week we looked at Meat & Livestock Australia’s herd and slaughter projections, with the herd rebuild leading to stronger supplies starting this year. The question then turns to price, and we can look at some simple models which at least tell us where prices will sit relative to international benchmarks.

When a commodity is traded internationally the usual microeconomic supply and demand curves don’t really fit at a local scale.  That is, levels of supply don’t have a linear relationship with price, if demand is steady. 

Lower supply will equate to higher prices in general, but much depends on what is happening in our major export markets.  Export markets are where most of our beef demand is generated, so while cattle prices are governed by local supply and demand, ultimately it is the export market which sets the base price.

What we have found is that Australian cattle supply does have a pretty good relationship with price, as represented by the Eastern Young Cattle Indicator (EYCI) premium or discount to the 90CL Frozen Cow price.

Figure 1 shows the strong correlation between annual slaughter and the average annual EYCI/90CL spread.  In 2019 processor bottlenecks pushed the EYCI much lower than the trendline, but tighter supply in 2020, and even in 2021 saw the EYCI return to the trend relative to the 90CL.

The point for 2021 was literally off the chart, we had to extend the slaughter lower, and the price higher, and were surprised to see it came in pretty close to where the extended trendline would be.

MLA’s 2022, 23 and 24 slaughter forecasts have been plugged in to the equation, and we can see the EYCI premium will fall with the heavier slaughter rates, back to -50¢ in 2024.

With the 90CL being such a driver of our prices, it would be nice to know where it is headed, and it has at least been in the right direction for cattle producers in recent years.  Figure 2 shows that the last 300¢ rise in the EYCI has been matched by the 90CL, and it is what has been pushing prices higher

What does it mean?

If we assume the 90CL stays around 900¢, MLA’s supply projections put the EYCI at around 960¢ this year, 900¢ in 2023 and 850¢ in 2024.  These prices are still historically very good, but well down on the prices seen early in 2022. Then there is the chance the 90CL could ease. 

Fundamentally international beef prices should find support for the coming year, but the very strong pricing will eventually encourage herd rebuilding, and likely see the 90CL ease.  Maybe not back to 600¢, but enough to wipe 30-40% off the EYCI’s current highs over 2-3 years.

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Key Points

  • Australian cattle prices fluctuate around export beef prices based on supply.
  • Higher cattle slaughter over coming years will see the EYCI premium to the 90CL ease.
  • There is risk of a lower 90CL and stronger cattle supply seeing cattle prices ease over 2-3 years.

Click on figure to expand

Click on figure to expand

Data sources: MLA, ABS, Steiner

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