What to look out for in 2016 for cattle markets?

1 February 2016

Presented by: Ben Thomas, MLA & Robert Herrmann, Mecardo

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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, albeit not as

strong as in 2015. » Focus on the US cattle cycle and its impact upon local prices» Shrinking local discount to US prices due to tightening cattle

turnoff» Herd rebuild phase to support store cattle prices to see them

outperform finished lines

» Relevant information for strategic long-term decision making.

2016 Beef projectionsBen Thomas – Manager, Market Information

We know the trend, but…

How low will beef supplies go?

When exactly will that be?

How high will cattle prices go? Or have we already hit the peak?

What markets will be least / most affected?

Slaughter declined in 2015 – even with dry

2010 2011 2012 2013 2014 2015 20160

20,00040,00060,00080,000

100,000120,000140,000160,000180,000200,000

weekly slaughter 10 week rolling average

Adult slaughter down 16% in 2016

1977

1980

1983

1986

1989

1992

1995

1998

2001

2004

2007

2010

2013

2016

f20

19f

4000

5000

6000

7000

8000

9000

10000

110007.6 million head

Jakarta wet market prices keep increasing

2007

2008

2009

2010

2011

2012

2013

2014

2015

0

20000

40000

60000

80000

100000

120000

140000

Knuckle Blade Trimmings

Live cattle exports down 17% in 2016

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

f20

18f20

20f

0

200

400

600

800

1000

1200

14001 million head

Herd dropping to 26 million head in 2016

1970

1973

1976

1979

1982

1985

1988

1991

1994

1997

2000

2003

2006

2009

2012

2015

f20

18f

15000

17000

19000

21000

23000

25000

27000

29000

31000

33000

35000Low natural increase will mean herd of 25.7 million head in 2017 – same as 1994

Cattle on feed trending towards 900k head

Feb-04

Dec-04

Oct-05

Aug-06

Jun-0

7

Apr-08

Feb-09

Dec-09

Oct-10

Aug-11

Jun-1

2

Apr-13

Feb-14

Dec-14

Oct-15

Aug-16

-2-1.5

-1-0.5

00.5

11.5

22.5

3

500,000

600,000

700,000

800,000

900,000

1,000,000

1,100,000

Cattle on feed (RHS)6-month rolling average margin index (LHS)

A$ forecast to stay below 70US¢

Dec-15 Mar-16 Jun-16 Sep-16 Dec-16Westpac 0.68 0.66 0.66 0.67 0.69NAB 0.7 0.68 0.69 0.7 0.7CBA 0.66 0.65 0.67 0.69 0.7Average 0.68 0.66 0.67 0.69 0.70

Beef and veal exports down 18% in 2016

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

f20

18f20

20f

400000

500000

600000

700000

800000

900000

1000000

1100000

1200000

1300000

1400000

Per capita consumption continue declining

1990

1992

1994

1996

1998

2000

2002

2004

2006

2008

2010

2012

2014

2016

f20

18f20

20f

20

25

30

35

40

45

$0.00

$5.00

$10.00

$15.00

$20.00

$25.00

Conumption (LHS) retail beef (real) retail chicken (real)

Kg/

pers

on

Conclusions

• Australian cattle supplies will bottom out in 2017

• Production will recover quicker than in previous drought recoveries

• Exports continue to stretch product on the domestic market

• Prolonged period of lower year-on-year quarterly production

While the likely trends are clear, the speed of change and market impacts are less so• How high are cattle prices going?

• How quickly can the herd and production be turned around?

• Which markets are likely to react more to the lower product availability and higher prices?

About MLA

Meat and Livestock Australia Ltd (MLA) strives to be the recognised leader in research, development and marketing.

MLA delivers value to levy payers by investing in initiatives that contribute to:

• Producer profitability

• Sustainability

• Global competitiveness

MLA is a producer owned, not-for-profit organisation and not an industry representative body.

Thank you

Ben Thomasbthomas@mla.com.au

ph: 0400 300 612

Disclaimer

To the best of MLA’s knowledge the information contained in the publication accurately depicts existing and likely future market demand. However, 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.

US Cattle Cycle and US Cattle Prices

» Cattle supply and prices are cyclical

» 8 major cycles over the last 100 years

» Expansion phase 3-8 years

» Liquidation phase 2-5 years

US Cattle cycle influence on Australian prices

» Similar cycles in Australia but impact on price is subdued

» Australian market is “export-centric”

» Domestic cattle prices should follow US cattle and beef markets

Australian cattle cycle and US influence

» Strong price correlation between US and Australia

» During 2013-14 domestic market deviated

» 2016 season signals a return to “normal”

Spread discounts to shrink

Heavy steer and EYCI price forecast

EYCI price forecast – supporting evidence

Take home messages» MLA and USDA projections are the backbone for our

price outlook» Cattle markets present distinct long-term structural

supply cycles, which in turn, determine price cycles.» Tightening cattle turnoff in 2016 will continue to see

discounts to US prices shrinking to underpin firm domestic cattle prices.

» The EYCI, and store cattle in general, will outperform finished lines in 2016.

» Cattle producers should enjoy favourable margins, particularly breeding operators.

More information

» Matt Dalgleish – Market Analyst– matt@agconcepts.com.au

» More info – Andrew Whitelaw:– andrew@mecardo.com.au, 0457 054 169

» Non-Mecardo subscribers will receive one month of Mecardo Premium for free