Stronger cattle prices should persist in the medium term

Stronger cattle prices should persist in the medium term

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About 2.6 million head of cattle have been killed so far in 2019, which leaves 5.53 million head if slaughter is to hit the target.

About 2.6 million head of cattle have been killed so far in 2019, which leaves 5.53 million head if slaughter is to hit the target.

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The Stock Take: Mecardo's Matt Dalgleish analyses the supply squeeze on cattle.

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Cattle supply is forecast to take a dramatic fall over the coming years.

Tighter supply will always be supportive of prices, but just what impact will the coming supply squeeze have over the short, medium and long term?

To assess short term price impacts, we take Meat and Livestock Australia's (MLA) forecast for 2019 slaughter of 7.7 million head and deduct the cattle which have been slaughtered already.

About 2.6 million head have been killed so far in 2019 which leaves 5.53 million head if slaughter is to hit the target.

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For the remainder of the year, cattle slaughter will have to be down 7.3 per cent on 2018 to hit the forecast.

However, this isn't far from 2017 levels, so cattle supply won't need to be extraordinarily tight for the rest of the year.

FIGURE 1: Mecardo EYCI price model. The model uses largely average values out past 2022, and this pushes the EYCI back below 400, which seems unlikely. However, the forecasts for the next few years seem more accurate, and stronger prices than 2019 should persist out to 2022.

FIGURE 1: Mecardo EYCI price model. The model uses largely average values out past 2022, and this pushes the EYCI back below 400, which seems unlikely. However, the forecasts for the next few years seem more accurate, and stronger prices than 2019 should persist out to 2022.

The Mecardo Eastern Young Cattle Indicator (EYCI) model factors in major fundamentals to assess what supply means for price. Using the latest cattle supply forecasts gives a price of 483/kg cwt for the EYCI in 2019.

So far this year, the EYCI has averaged 467, which isn't far off the forecast. It's likely, with a better season, that the EYCI will head more towards the 2020 forecast of 562 for the remainder of the year, which is back towards the top of the historical range.

In the coming years, MLA's projected slaughter levels suggest the EYCI will be above 500 through to 2021.

In 2016 and 2017 we saw rampant restocker demand push the actual EYCI 5-10 per cent above the levels predicted by the model. This is possible again if rainfall is better than average.

What does this mean?

The best projections available now suggest cattle are still good buying, but plenty can change. Over the longer term, as local supply normalises, prices will ease.

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