We’re not the most expensive any more

Angus cattle

With the falling Eastern Young Cattle Indicator (EYCI) and a weakening Australian dollar young cattle in Australia are no longer the most expensive in the world. Heavy cattle are maintaining their premium to the US for now.

It’s always prudent to keep an eye on what is going on in US cattle markets.  As a major customer for Australian beef, and also a major competitor in Japan and Korea, movements in the US markets can impact prices here.

US Feeder cattle prices have rallied in recent months, at least on a spot contract basis.  The seasonality was factored in to futures contracts, but the current spot price sits at a seven year high (figure 1).  The extreme grain prices that were squeezing feeder margins have abated somewhat in the US, and feeder cattle prices have rallied accordingly.

Figure 1 also shows Live Cattle Futures (based on a finished grainfed steer) have remained relatively steady this year.  The concerns surrounding inflation, interest rates, and the economy in general in the US don’t seem to be impacting demand for beef in the US just yet.

Last week we outlined where we might find some support for the EYCI after the current downtrend.  Figure 2 supports the theory that support should show up soon.  With the rise in US Feeder Cattle Futures and the fall in the EYCI has quickly seen a 250¢, or 22% Aussie premium turn into a 128¢, or 13% discount.

It’s hard to work out the ‘normal’ spread for US Feeders to the EYCI.  Since 2012 we have seen wild swings in price due to seasonal conditions in both the US and Australia.  Generally the EYCI should trade at a discount, the premium is abnormal.

For finished cattle the relationship for Live Cattle Futures to Heavy Steers is stronger than for young cattle.  With cuts from both US and Australian cattle competing for market in Japan and Korea this makes sense. 

Figure 3 shows Australian finished cattle are still at a strong premium to their US counterparts.  This indicates there should be some downside in finished cattle prices, as processors claw back some margin when slaughter supply increases.

What does it mean?

Ultimately the prices of finished cattle in the US will have a stronger impact on Australian values than feeder cattle.  As such this analysis suggests there is  likely more downside in store for both finished and young cattle in the short and medium term. 

The consistent strength in US prices is good news in terms of limiting downside in cattle markets, and likely indicates that the base of the cattle market has lifted. 

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Key Points

  • The falling EYCI and rising US Feeder Futures sees Australian young cattle at a discount.
  • Australian finished cattle are still trading at a strong premium to US Live Cattle Futures.
  • There is more downside for cattle prices, but the base has lifted considerably.

Click on figure to expand

Click on figure to expand

Click on figure to expand

Data sources:  MLA, Mecardo

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