Cattle price milestone prompts big decisions

10 Aug, 2016 01:03 PM
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The Eastern Young Cattle Indicator bolted through the milestone 700 cents per kilogram carcase weight mark last night.
The Eastern Young Cattle Indicator bolted through the milestone 700 cents per kilogram carcase weight mark last night.

FERVENT restocker action fuelled by rain in key growing regions has pushed the cattle market into unparalleled territory, placing some very big decisions on the doorsteps of producers.

The speed and extent of the latest spike, which saw the Eastern Young Cattle Indicator bolt through the milestone 700 cents per kilogram carcase weight mark on Tuesday night, was above expectations.

After the cattle price benchmark flatlined just under 660c/kg during July, general consensus was it had reached a peak.

However, the feed growth that has occurred courtesy of out-of-season rain on winter crops, particularly in Queensland and Northern NSW, has sent restockers into overdrive.

Agents say the depth of restocker pockets has also probably been greater than originally thought.

Meat and Livestock Australia data shows restockers accounted for 41 per cent of EYCI-eligible purchases in July, up from 35pc in the same month last year.

“Good rain, and thus more feed than forecast - and the fact it has been widespread - has driven that,” said National Livestock Reporting Services operations manager Damon Holmes.

Lotfeeders, enjoying relatively good grain prices, have kept restockers honest, accounting for 44pc of EYCI cattle bought for the past four months.

Those two sectors have easily plugged the gap left by margin-challenged processors, whose purchases have dropped from 29 to 15pc of the share during July.

The big question now is how someone buying 300kg steers for more than $1200 is going to turn a profit, given the chances are not good of selling on the same market.

And whether those with 300kg steers now will decide to take the money and run.

Livestock marketing specialists and farm business consultants say the bottom line when facing these tough decisions is that a producer must take a position on the market and be realistic about what weight gains are possible.

Andrew Wilkie, Objective Livestock Marketing at Goondiwindi, Queensland says reverting back to what is in the paddock is the best bet for those trying to decide whether to buy on the current market.

“Graziers are in the business of converting pasture to kilograms of beef,” he said.

“If you have feed to graze, you need to buy livestock - and the reverse is true.”

Producers can’t assume the market has hit its peak.

“If you worked on that theory a month ago, you would have been wrong,” Mr Wilkie said.

“Yes, there is a real possibility if you buy at these rates, you’ll be selling at a lower rate.

“So you have to find ways to mitigate the risk as much as possible - there is risk in buying livestock at any time, so that is nothing new.”

Ways to do that included making sure you had the right cattle for the job and getting your target market sorted, he said.

Consultant John Francis, Director of Holmes Sackett, Wagga Wagga, said there was plenty of talk of cashing in, given the the money was so good at the moment.

In most cases, that would not be the right decision, he said.

Economic analysis indicates producers with 300kg steers now would be in a better position growing them for longer and accepting a lower per kilogram price down the track.

At a plausible 1.5kg/day weight gain over 100 days, the market could drop 30pc to $2.80c/kg liveweight for the returns to still be there.

While nothing is impossible, a 30pc drop in that time frame is unlikely, Mr Francis says.

“The problem when you get into unprecedented prices is history doesn’t provide much of a guide, the way it does in ‘normal’ times,” he said.

“Having said that, between August and December, going back to 1996, the average drop has been 7c/kg or just 4pc.

“The biggest drop was in 2006, when it dropped 53c, or 26pc, but that was in the midst of drought.

“So there is a fair possibly a producer will do better hanging onto what they have now and putting more beef on them, rather than selling now and doing nothing with that feed.”

As for the producer buying at current prices: At the same 1.5kg a day gains, under a 20pc market drop, the gross income will be $1400 but the costs involved will make the producer’s result close to breakeven.

“If the steers were kept for another 60 days - which might be a possibility in areas like the New England where the season is starting - that generates a 10pc return, which is still not very exciting,” Mr Francis said.

“If you don’t do 1.5kg a day, you’re in bloodbath territory.”

The bottom line?

“It’s dangerous territory to start to trade if you think a 20pc reduction in the market is possible because margins will be very skinny,” Mr Francis said.

The NLRS’s Mr Holmes said if the market did follow trends, an EYCI around the mid-600c/kg cwt in the next three to six months was on the cards.

Restocker demand will be the key determining factor, analysts believe.

Cattle supply is forecast to get even tighter.

“The best indicator of that is the Eastern States slaughter figure,” Mr Holmes said.

“The female contribution is starting to drop back - this week it is at 47pc compared to a peak of 52pc, which indicates we have turned the corner and are in the rebuilding phase.

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FarmOnline
Shan Goodwin

Shan Goodwin

is the national beef writer for Fairfax Agricultural Media.

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Sorry did i get it wrong..? Rankins Springs is still open..?!
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No doubt a few frosted Freddies out there who will wish they had taken a closer look at the AGC
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Matthew, I was wondering if you had followed up this story with the farmer after the whole