As we move through spring and the pace of grass growth picks up, at least for those that have moisture, thoughts turn to utilizing growth. Hence, we’ve had a query as to the profitability of buying weaners and holding for six months. Here we run the numbers.
Cattle
prices have been relatively stable over the past six months when we look at long-term
trends. Looking closer though we can see
that markets have gained 15% since mid-June. In a financial or other commodity
market, 15% would be a huge move, but when we have seen much larger
fluctuations over the past five years, volatility seems to be something we are
used to.
Volatility
creates opportunity if you’re on the right side of it. Figure 1 shows the Eastern Young Cattle
Indicator (EYCI) and the Online Young Cattle Indicator (OYCI), which are both
at a 15-month high. Normally this might be a signal to sell, but we know that
fundamentals like herd direction and international beef prices suggest we are
on an upward trend.
Looking at
the OYCI spread to the EYCI indicates store cattle demand and supply. Figure 2
shows the OYCI spread to the EYCI bouncing around, but at a level well below
the highs of the strong herd rebuild of 2021-22. This tells us that store cattle are still
reasonable value.
Light
weaner cattle, in the 200-250kg lwt range are much more expensive than the
average. Angus steers in this range were making 480-540¢/kg lwt last week, so
we’ll use this value for the buy price.
We’ve got
our buy signals, so what do we think about prices down the track? If the cattle put on 1.25kgs per day for six
months, they’ll reach the export feeder weight of 400kgs. Export feeders are
currently making around 400¢/kg lwt.
While we are bullish on prices, we’ll use 400¢ as the expected price,
475¢ as the best case, and 350¢ as the worst case.
Note that this trade calculation does not allow for any feed costs;
these will vary between enterprises and should be calculated on a case-by-case
basis when considering any trade.
What does it mean?
Figure 3 shows the gross margin for buying light steers looks pretty good (all other costs aside). If cattle have to be fed the margin will be tighter, and a dry summer would curtail prices. Despite this, there appears to be little downside in buying light cattle to clean up excess feed in the current market.
Key Points
- Spring grass growth is taking off in some areas, with thoughts turning to cattle trading.
- Store cattle are currently priced at levels that are low relative to the EYCI.
- Gross margins on trading light cattle look good at the moment.
Click on figure to expand
Click on figure to expand
Click on figure to expand
Data sources: MLA, Mecardo
