In January 2015 we published an in depth report into the cattle cycle and how it impacts prices. This article outlined the basis of some of our forecasting methods and provided some detailed background into our analysis that the Australian cattle market in late 2014 was undervalued, had deviated from fundamentals and was due to correct into 2015.
Indeed, our analysis piece published in October 2014 forecast the current Eastern Young Cattle Indicator (EYCI) level of 345¢/kg cwt was 70% below where our forecast model was predicting and we stated that EYCI reaching 600¢/kg cwt was a definite possibility in the 2015 season. At the time a few cattle market participants probably thought our forecast unrealistic but we knew it was backed with some robust analysis.
Now that we have seen EYCI test 600.75¢ and Meat and Livestock Australia (MLA) have released their projections for the 2016 season we thought it prudent to undertake another in depth analysis piece to outline what we can expect for Australian cattle prices in the coming year.
This week, in conjunction with MLA, we delivered a webinar outlining our thoughts for the beef industry this year and, in particular, how the US cattle cycle will influence the local cattle cycle and local prices. Much of the information we conveyed in the webinar was sourced from our most recent in depth analysis piece on the cattle cycle.
Cattle markets display distinct production and price cycles. Recurring trends have been observed in the US reflecting the biological constraints of livestock production. More importantly, the trends have also reflected producers’ attitudes towards their herd (i.e. to expand vs reduce). That, in turn, is underpinned by their expectations about the current and future profitability of their businesses. By definition, cattle cycles have a herd expansion phase followed by a period of stock liquidation.
As a general rule, cattle prices peak in the transition between cycles and coincide with low herd numbers. On the flipside, prices tend to hit a bottom when herd numbers peak, or a year earlier. In other words, production and price cycles are inversely correlated.
What does the US cattle cycle have to do with the Australian cattle market?
But what does the US cattle cycle have to do with the Australian cattle market? Don’t we have a cattle cycle of our own?
The answer to the first question relies on the fact that 92% of the yearly changes in our cattle prices since 1969 can be explained by changes in US prices. With that in mind, understanding structural changes in the herd size in the US, and consequently its price cycle, is vital when trying to interpret long-term price trends for our market.
The answer to the second question is, yes and no. Although ‘mild’ cattle cycles were observed until the late 1980s, they’ve become almost indistinguishable since. On the contrary, the most obvious pattern seen during the period has been the steady increase in the herd size during the 1990s followed by a plateau over the last 10-15 years. Yet, our cattle markets still seem to follow a price cycle alongside with the US.
Read the full article for more information about the US cattle cycle, its relationship with our market, as well as expected trends and price projections for 2016.
- Livestock production is notoriously cyclical. Supply is undoubtedly the most distinct price driver for cattle markets within a cattle cycle. Further, production and price cycles run inversely.
- The Australian cattle market are relatively small players and price takers in the global beef market. As a result, our long-term price trends tend to be dictated by external forces, in particular the US cattle cycle.
- Knowing ‘where’ in the cattle cycle we stand, at specific points in time is of critical importance as it can help us to ‘foresee’ and anticipate general price trends a few years in advance. That, in turn, can help producers to fine tune their long-term operational and marketing strategies.