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Mecardo / MLA presentation: Where to for Australian cattle prices? - 21/7/15

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Visit http://offers.mecardo.com.au/cattle-market-outlook-webinar-july-2015-recording-1 to watch a recording of the webinar.

The last couple of months have seen Australian cattle prices surge to unprecedented levels. Strong demand fundamentals, particularly in our key markets, and the expected tightening in Australian supplies, bode well for a continuation of this good fortune. So, how far could cattle markets go? What risks are there? And what’s likely to happen if El Nino eventuates? MLA's Ben Thomas joins Mecardo's Augusto Semmelroth to outline MLA's latest industry projections and what they mean for the cattle market outlook

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Mecardo / MLA presentation: Where to for Australian cattle prices? - 21/7/15

  1. 1. Where to for Australian cattle prices? 21 July 2015 Presented by: Ben Thomas, MLA & Augusto Semmelroth, Mecardo TO ACCESS THE AUDIO: You may listen to the webinar using your computer speakers. Alternatively (or if you have any quality or other issues): 1. Dial 1800 896 323 on your phone 2. Enter participant code = 55153077
  2. 2. Some housekeeping » 15 minutes Q&A at the end » Use Chat Box (bottom left, near cog) to lodge a question anytime during webinar » Short survey at end » For any technical issues: – Dial to speak to Redback Conferencing • *0 • 02 8014 5150
  3. 3. MLA July 2015 Beef Projections Ben Thomas
  4. 4. Disclaimer Care is taken to ensure the accuracy of the information contained in this publication. However MLA cannot accept responsibility for the accuracy or completeness of the information or opinions contained in the publication. You should make your own enquiries before making decisions concerning your interests. MLA accepts no liability for any losses incurred if you rely solely on this publication. Information contained in this publication is obtained from a variety of third party sources. To the best of MLA’s knowledge the information accurately depicts existing and likely future market demand. However, MLA has not verified all third party information, and forecasts and projections are imprecise and subject to a high degree of uncertainty. MLA makes no representations and to the extent permitted by law excludes all warranties in relation to the information contained in this publication. MLA is not liable to you or to any third party for any losses, costs or expenses, including any direct, indirect, incidental, consequential, special or exemplary damages or lost profit, resulting from any use or misuse of the information contained in this publication. Care is taken to ensure the accuracy of the information contained in this publication. However MLA cannot accept responsibility for the accuracy or completeness of the information or opinions contained in the publication. This information is not medical advice and you should consult a health professional before making any decisions concerning your interests.
  5. 5. About MLA Meat and Livestock Australia Ltd (MLA) strives to be the recognised leader in delivering world class research, development and marketing outcomes that benefit Australian cattle, sheep and goat producers. Working in collaboration with the Australian Government and wider red meat industry, MLA's mission is to deliver value to levy payers by investing in initiatives that contribute to producer profitability, sustainability and global competiveness. MLA is a producer owned, not-for-profit organisation and not an industry representative body.
  6. 6. MLA Membership
  7. 7. Industry structure
  8. 8. MLA does not collect or set the levy Producer levy
  9. 9. Levy allocation summary
  10. 10. Small improvement in rainfall this year
  11. 11. Historically high adult cattle turn-off Source: ABS, MLA forecasts 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15f 16f 17f 18f 19f 20f 5 6 7 8 9 million head f = forecasts
  12. 12. Female slaughter has remained high… Source: ABS J F M A M J J A S O N D 42 44 46 48 50 52 54 % females of total Five-year ave 2014 2015
  13. 13. Lowest cattle herd in 20 years Source: ABS, MLA forecasts 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15f 16f 17f 18f 19f 20f 20 22 24 26 28 30 million head f = forecasts
  14. 14. Eastern Young Cattle Indicator (EYCI)
  15. 15. Eastern states cattle slaughter
  16. 16. Australian beef and veal exports Source: DA, MLA f orecasts 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15f 16f 17f 18f 19f 20f 400 600 800 1,000 1,200 '000 tonnes sw t f = f orecasts
  17. 17. Chilled grassfed beef exports to the US Source: DA Note: 2015 is Jan-Jun
  18. 18. What consumers think…
  19. 19. Take home messages • Australian beef supplies are forecast to tighten considerably • The herd rebuild will be a long and gradual process • Keep an eye on production developments in the US
  20. 20. Before we start » Presentation is content rich – Charts and Figures. » Charts will be used to show trends and tell a story – don’t get too caught up on the details. » Outlook remains bullish for cattle markets. – ↓Supply - ↓ A$ - ↑ export demand - ↑rainfall – Has not yet been fully priced into cattle markets. » Focus on key drivers, US vs AUS market dynamics and price forecasts. » Relevant information for strategic long-term decision making.
  21. 21. Export and US-centric outlook 22% 12% 35% 31% Japan Korea US Other Figure 2. Beef exports by region - 2014/15 US/Jap/Korea = 70% Source: DAFF 50% 55% 60% 65% 70% 75% 80% 550 700 850 1,000 1,150 1,300 1,450 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016f 2018f 2020f Exports Exports - % of prod. (rhs) Figure 1. Beef exports as % of production '000 tonnes swt Source: DAFF, MLA Projections » 70% of our exports are still directly or indirectly affected by US beef prices
  22. 22. US import demand vs AUS herd liquidation 300 350 400 450 500 550 600 650 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2014 2015 5-year average Figure 2. US Cow/Bull Slaughter '000 head Source: USDA 150 200 250 300 350 400 450 500 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2014 2015 Average Source: DAFF, ACU Figure 3. Australian cow/heifer slaughter '000 head
  23. 23. Surge in exports to US - 5 10 15 20 25 30 35 40 45 50 Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec 2014 2015 5-year average '000 tonnes swt Source: DAFF Figure 1. Australian beef exports to the US -30% -20% -10% 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% - 50 100 150 200 250 300 350 400 450 500 550 600 Japan Korea US Dev. Asia Other 2014/15 2013/14 Change year-on-year (rhs) Figure 2. 2014/15 vs 2013/14 Beef Exports - by Country '000 tonnes swt Source: DAFF
  24. 24. US vs AUS cattle prices 0 50 100 150 200 250 300 350 400 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015 US live cattle QLD Heavy Steer Source: USDA, MLA, ACU Figure 1. US live cattle vs QLD Heavy Steer US¢/kg lwt R² = 0.9213 0 50 100 150 200 250 300 350 400 0 20 40 60 80 100 120 140 160 180 200 USLiveCattle QLD Heavy Steer 1969-2012 2013-14 2015 Source: USDA, MLA, ACU Figure 2. US live steer vs QLD heavy steer - US¢/kg lwt -70% -60% -50% -40% -30% -20% -10% 0% 1970 1973 1976 1979 1982 1985 1988 1991 1994 1997 2000 2003 2006 2009 2012 2015 % discount to US Source: USDA, MLA, ACU Figure 3. QLD Heavy Steer discount to US live steer
  25. 25. US cattle cycle and price outlook 0 50 100 150 200 250 300 350 400 60 70 80 90 100 110 120 130 140 1970 1975 1980 1985 1990 1995 2000 2005 2010 2015 2020 US¢/kg lwt Cattle Herd US Live CattleSource: USDA, MLA, ACU Figure 1. US cattle cycle - US live cattle (Projections) million head
  26. 26. Finished cattle price outlook » Scenario analysis – USDA long-term price forecast (95%) – Exchange rate – Projected Discount to US price » Conservative scenario: – AUD/USD: 80¢ – Discount to US: 30% – Target ≈ 550¢ » Better-case scenario: – AUD/USD: 70¢ – Discount to US: 25% – Target ≈ 650¢ 100 200 300 400 500 600 700 800 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 Forecast Range QLD Heavy Steer Source: USDA, MLA, ACU Figure 1. QLD heavy steer price forecast A¢/kg cwt
  27. 27. Domestic cattle bridging the gap 200 250 300 350 400 450 500 550 600 650 700 750 800 A¢/kg EYCI 90CL (A$) Source: MLA, Steiner Figure 1. EYCI vs 90CL Frozen Cow -400 -350 -300 -250 -200 -150 -100 -50 0 50 100 A¢/kg EYCI spread to 90CL Source: MLA, Steiner Figure 2. EYCI spread to 90CL Frozen Cow
  28. 28. Bullish outlook for export beef prices 50 100 150 200 250 300 350 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 90CL US 90CL AUS Figure 1. 90CL US Domestic vs 90CL Export US¢/lb Source: USDA, Steiner -35% -30% -25% -20% -15% -10% -5% 0% 5% 10% 15% Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Range 70% 2015 2014 10 Year Average Source: MLA's NLRS, Steiner, ACU Figure 2. 90CL Export (AUS) spread to 90CL US
  29. 29. EYCI model – return to fair value 200 250 300 350 400 450 500 550 600 650 700 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 ¢/kg cwt Figure 1. EYCI and EYCI price model EYCI EYCI Model Projection Source: MLA, ASX, Steiner, ACU -300 -250 -200 -150 -100 -50 0 50 100 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 ¢/kg cwt Figure 2. Spread - EYCI to model Source: MLA, ASX, Steiner, ACU Drought
  30. 30. EYCI price outlook » Scenario analysis – Estimated 90CL price based on US live cattle forecast (70-80% premium) – Spread to US Domestic 90CL to return to -5 to -10%. – Grain prices to ease slightly from current levels – AUD/USD: 70¢ » Forecast model - Caveat – Calculates fair value based on export/grain fundamentals. – Underestimates EYCI potential under positive rainfall scenario - by up to 5-10%. 200 250 300 350 400 450 500 550 600 650 700 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 ¢/kg cwt EYCI EYCI Model Forecast Source: MLA, ASX, USDA, Steiner, ACU Figure 1. EYCI, price model and forecast
  31. 31. Store vs finished cattle prices -15% -10% -5% 0% 5% 10% 15% 20% 25% 30% 35% Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Range 70% Average 2015 2011 Source: MLA's NLRS, ACU Figure 1. EYCI restocker NSW spread to Heavy Steers 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% 55% Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Range 70% Average 2014 2015 Source: CME, ACU Figure 2. US Feeder spread to Live Cattle -5% 0% 5% 10% 15% 20% 25% 30% 35% 40% 45% 50% Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Range 70% Average 2014 2015 Source: CEPEA/ESALQ, ACU Figure 3. Brazilian Weaner spread to Live Cattle
  32. 32. Take home messages » MLA and USDA projections are the backbone for our price outlook » Move towards a more export-centric cattle/beef market » US cattle cycle and US import demand – major drivers of Aussie cattle markets until 2020 » Domestic cattle markets remain slightly undervalued » Heavy steer price outlook – 550-650¢/kg cwt » EYCI price outlook – 650¢ (fair value) +700¢/kg cwt (favourable seasonal conditions) » Favourable export fundamentals finally starting to drive domestic prices – Improved price transfer: Export-Processor-Producer » Store cattle fundamentally undervalued – lacklustre restocker demand » Potential outperformers in the next years (cows/heifers? young cattle?)
  33. 33. More information & Survey » More info - Jenianne Hall: – jhall@mecardo.com.au, 0438 624 154 » Non-Mecardo subscribers will receive one month of Mecardo Premium for free

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