NO CATTLE producer could fail to notice that the Australian cattle market runs in cycles, but what drives those cycles?
The weather and cattle supply, obviously. But less self-evidently, the United States - or more specifically, the US cattle market.
And judging by the red-hot US market, Mecardo analyst Augusto Semmelroth thinks it's reasonable for finished steers in Australia to hit 525-600¢/kg (carcase weight) in 2015. That translates to about 280-320¢/kg live.
Mr Semmelroth has looked closely at the issue. He calculates that since 1953, 86 per cent of yearly shifts in Australian cattle prices can be explained by changes in US cattle prices.
That relationship infamously broke down over the past few years, when US cattle prices soared to record highs while Australian prices flopped around in the doldrums.
That was a case of weather and a related oversupply of cattle overriding all other price signals, Mr Semmelroth wrote in an comprehensive analysis, but he thinks the the US market remains the best guide to where prices will go once drought has broken over a large area.
And he thinks that Australian prices should go through the roof.
US v AU cattle cycles: The Australian cattle market has been driven by the US cattle market for decades, but the extreme climatic conditions of the last few years overrode those signals. A key to assessing future prices is looking at how Australian prices will look against US prices if the climate factor is removed.
In the last cattle cycle - which Mr Semmelroth pegs as running from 2006-2014 - US cattle prices rose 71 per cent, while Australian prices only gained 16 per cent during the same period when assessed in US dollar terms.
“When quoted in $A terms, our prices have actually finished the cycle 1.5 per cent lower than when they started,” Mr Semmelroth noted.
US v AU discount: The Australian cattle market has long run at a discount to the US cattle market, but in 2014 that discount extended out to 53 per cent. A correction back to long-term average discount levels should go a long way towards bringing profitability back to the local cattle market.
From 2004-12, the Australian cattle marketed operated at a discount of between 20-30 per cent against the US market. Between 1980-2004, the discount wavered in the 30-50 per cent range.
(Mr Semmelroth isn’t clear on why that discount has been entrenched over the past 50-plus years: he thinks its likely to do with US domestic demand and the lotfeeding finishing system favoured in the US.)
In 2013, the discount began to deepen - out to 53 per cent at the end of 2014, the biggest shortfall Australian cattle have recorded against the US since 1978.
Mr Semmelroth concludes that on this indicator alone, Australian cattle prices have a long way to climb before they are back into the 20-30 per cent discount range that prevailed before drought hit.
In an aside to Fairfax, Mr Semmelroth noted that US feeder cattle prices peaked last year at around 240US¢/lb lwt. Converted to A¢/kg lwt (at current exchange rate of US78¢), that translates to around A665¢/kg lwt.
Those sort of prices would comprehensively satisfy the calculation by Northern Territory Cattlemen’s Association president David Warriner that cattle producers consistently need A300c/kg to be sustainable.