Overdue, Overhyped or Overheated?

With one-third of 2021 already in the rear-view mirror, the Australian cattle market continues to defy expectations and history. Throughout April, weaner cattle prices have never been higher, rural properties are hotter than a second hand Landcruiser and confidence levels across rural Australia are well above the rest of the economy – according to AuctionsPlus inaugural confidence survey “The Gavel” (more details below).

Extensive consultation with AuctionsPlus participants, Australia’s largest cattle marketplace, in recent weeks and culminating at Beef 2021, points to a very interesting market outlook which can be summarised into three categories:

Overdue

For much of the first half of 2020, the word “overdue” was being used about the widespread rain events that finally brought the devastating drought of the previous years to a close for most regions of eastern Australia. Then into the second half of 2020, “overdue” shifted to being used in reference to the rise in the cattle market, with respect to the “overdue” prices that were being received for many producers throughout this period.

By April 2021, the context of “overdue” has largely shifted to reflect sentiment and optimism within the market. This can be best demonstrated by “this run of very high cattle prices has been overdue”, or “cattle producers have been overdue for a period of high prices”. Indeed, much of the feedback received appears to be using “overdue” with a level of expectation that these current price levels will continue and this now 15-month run of prices has been “owed” to the industry.

But maybe there is another way that 'overdue' should be utilised?

Maybe “overdue” would be best used in reference to the national herd and the “overdue” rebuild of the national cow herd. With regional herd deficits in 2021 exceeding 200,000 head, or 25-40%, across many NSW regions, and likely much greater in parts of Queensland – many producers may see that herd rebuilding, both on an individual farm scale, and nationally, is long “overdue”. However, historically herd rebuilding has been only possible with good seasonal conditions, so in this instance, overdue should really be saved for “we are overdue for a run of good seasons”.

Finally, from a buyer and processing sector, “overdue” is certainly being utilised in reference to a price decline. Sustained cattle price rises for almost 15 months, an EYCI above 900c and unprecedented breeder cattle prices has created many a financial headache for buy-in restockers, cattle processors and beef exporters. Like all commodity markets at all-time highs, it is inevitable that cattle prices will decline – it is when, how far and for how long, that are the real valuable, or “overdue” answers in this instance!

Given the various takes on “overdue” in context of the Australian cattle market, I think there is one clear conclusion – perspective is crucial.

Overhyped

The AuctionsPlus Market Insights team has been asked some tough questions in recent weeks – two of the most interesting have been detailed below.

Yes & No. To clarify, that is a weak yes for FOMO, and a definite no for overhyped.

Let’s start with the hype question. Hype is what is given to boost the anticipation for a favourable outcome. Think of the Wallabies before the first Bledisloe test, or Carlton at the start of each AFL season. Great anticipation…but then reality hits and the hope dies. But with the cattle market, how can something be overhyped when it is proven and real? The EYCI at 900c is real. Weaners steers exceeding $1,800/head is real. So, a definite no, the cattle market is not overhyped.

However, any anticipation for prices to rise further, or even be sustained, into the latter half of 2021? Now that could be hype.

Is the record market being partly influenced by FOMO – the Fear of Missing Out? Yes. Prices for young cattle and breeding stock in many instances have been bolstered well above equilibrium market levels as producers worry about “getting their hands on some nice lines”. With the lowest cattle herd in many decades, the supply of young cattle entering the market would have already been tight in 2020 and 2021, regardless of the seasonal conditions. Given the widespread very good season, the supply has been constricted even further, as producers retain breeding lines and finish weaners to heavier weights. However, instead of FOMO in the current market, maybe the situation is better described as FOWG – the “Fear of Wasting Grass”.

All answers are general in nature and AuctionsPlus cannot give personal advice. However, the recent rise in the value for second hand Landcruiser has been amazing…almost like they are laden with gold coins in the glovebox.

On a serious note, the equation between selling very valuable steers to purchase even more valuable PTIC heifers has probably been considered by most producers. AuctionsPlus results, calibrated by producer feedback, has shown that many producers have been offloading both weaner steers and heifers at roughly equal rates – keen to cash in on the record prices. However, the follow-on purchase has been focused on PTIC heifers, and when available, cows with calves at foot.

The chance to “refresh” genetics and individual herd demographics is not being overlooked in the current market, even with the record high prices. Indeed, history has shown that periods of high prices and increased on farm incomes is the natural period to refresh and consider future breeding programs and investments. Results from recent bull sales have been outstanding, which is simply the best indicator to the confidence for the industry.

Overheated

To steal from an earlier section, the most overused question in recent months is “surely the market can’t go higher?” It was only in the final quarter of 2020 that the EYCI went above the 800c/kg cwt barrier. Now at the end of April 2021, the EYCI has gone into the 900’s, with a recent surge in supplies not making any impact on the overall price level.

Given the true and accurate price discovery process utilised for most of the young cattle market in Australia, be it online or through physical saleyards – the quoted prices each day and week are a true reflection of the market sentiment. Indeed, it could be very confidently stated that the young cattle market would be one of the most transparent and accurate agricultural markets going around. Again, this leads back to one of the earlier sections – it’s not hype…the prices are real!

But given that producers and markets always like to consider other scenarios, where could the market be if things go awry into the second half of 2021? What if Australian cattle prices fell back to the pack internationally? The possibility of a dry, cold Winter in 2021? The economic recovery stumbles in key markets?

Source: IPCVA (Argentina, Paraguay); MLA’s NLRS (Australia); Esalq/Cepea (Brazil);USDA/Steiner Consulting Group (US)

Compared internationally, Australian cattle prices have never led the pack by this far, for this long. While Australian prices in the past five years have been well above the South American heavy weights of Argentina and Brazil, the US has traditionally been the leader and the highest. However, the rise in Australian prices through the past 15 months has it standing out – well ahead of the pack - and history says this does not last! Australian took the lead briefly through 2016 but fell back steadily in the following years as the drought influence hit.

At an EYCI exceeding 900c/kg cwt in late April, the lead has been maintained, if not widened. To bring Australia back to the pack, or at least in the range of US prices, it would need to ease a conservative 20-30% from current levels. That would leave the young cattle market at around 650-720c/kg cwt. Comparatively, the EYCI in 2020 averaged 741c/kg cwt, while in the drought influenced 2019, it averaged 487c/kg cwt.

So, while a revision back to the pack for Australian cattle prices on an international scope would be an EYCI that is 20-30% lower than current levels, it would still be historically high for Australian producers.

One of the most important charts for the Australian cattle industry has taken a significant downwards turn recently, with the Southern Oscillation Index falling for the past three months (BOM). While still somewhat in neutral territory, at -0.3, it has fallen from the La Nina indicating values of the second half of 2020. According to the BOM ‘sustained negative values of the SOI lower than −7 often indicate El Niño episodes’.

Somewhat more comforting for producers is the most recent three-month rainfall outlook from the BOM, which points to a continuation of above average wet conditions for May – July. With a very dry April for most regions, the favourable outlook will be welcome for many producers and continue to be factored into intentions for the second half of 2021.

However, if the recent forecast is off, and we see a dry Winter into Spring 2021, it will most likely be absorbed by many producers, who already have ample feed in front of an overall smaller herd. The impact on prices will be marginal if average Winter weather patterns deliver – with the EYCI maybe back into the mid 800’s. However, a cold, dry run could see many producers contemplating how to deal with the coming Spring, especially if holding very expensive weaners and breeders purchased earlier in the year in a falling market. Under this scenario, a price revision of 10-15% is very feasible, which takes the EYCI to 765-810c/kg cwt by late Spring 2021.

The cattle market in the past 15 months has been largely driven by supply factors, as demonstrated by the commentary within this article. As such, any price correction through the remainder of 2021 will most likely come from the supply side, including seasonal conditions. However, what about demand? Is there anything to be concerned about?

History does tell us that any “major” demand hit for Australian beef in international markets, that smashes cattle prices, comes out of the blue and is largely unforeseen. This ranges from BSE in key markets, the GFC and wild ride for the A$, or self-imposed trade restrictions. While in early May 2021, there is nothing on the horizon that can be seen…though no one was planning for a global pandemic either!

The quick response to this question would be yes, there are always concerns and hot issues to watch. The level of the Australian dollar, China tensions, the price competitiveness of Australian beef (given the high local cattle prices) and consumer preferences are just some of the issues. Indeed, the decade low in total export volumes so far in 2021 may very well be hiding any underlying demand issues in key markets, and may do so for several months, if not years to come. For the time being, the A$ is steady, and international demand looks robust and unlikely to have a major negative impact on the Australian cattle market heading into the second half of 2021.

Summary

Take your pick with how you want to use this one. But I would think that Australian livestock producers are “overdue” for a run of good seasons. Swinging annually from drought to flooding…while it makes for a great poem, does little to help the long-term viability and planning of the industry. Give Australian cattle producers a run of good/average seasons…and watch what can be achieved.

Looking at prices from a historical perspective, these are phenomenal prices! Unless you are buying…then perspective might be very different. However, it’s when hype and optimism shift to expectation and complacency that things may get interesting. With the current market levels, when you hear someone say “I expected better prices” …run, run fast!

It does not take a genius, or even an economist, to predict that prices will decline once they have peaked. For the Australian cattle market currently, any price correction will come from the supply side, with the most likely scenario being a dry Winter and 2021-22 buying hesitancy. The best-case scenario is the market eases lower in the later half of 2021 and into 2022, gradually coming back to internationally competitive levels & enabling both buyers and sellers to have confidence in the market.