HOW much does weather impact slaughter cattle prices?

A recent statistical and economic analysis highlighted the significant influence of weather on Australian cattle and lamb markets, suggesting that up to 54 percent of cattle price and 32pc of lamb price variability can be attributed to weather, over the long-run.

The independent study was conducted by consultants DecisionNext on behalf of the Australian Meat Processor Corporation.

Although livestock producers, policymakers and other stakeholders generally recognise the sensitivity of cattle and lamb markets to weather, the specifics – how, why, and to what degree – remained less understood, the report suggested.

However understanding the variables impacting livestock prices is crucial for producers and policymakers concerned about market dynamics and competition.

The research used theoretical economic modelling and statistical techniques to measure the effect of weather. A technique called variable selection was used to search for the best weather variables, location, and time aggregation for explaining markets.

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The findings of these models suggested that in the short run, 25pc of cattle price and 22pc of lamb price variability (graph below) is attributable to weather – however the inclusion of grassfed cattle production raised the attributable cattle price variability to 40pc.

Over the longer-run, factoring in the role of weather in driving herd rebuilding decisions and herd size, and about 54pc and 32pc of the price variability directly or indirectly can be attributed to weather for cattle and lamb prices, respectively.

The results highlight that despite including a relatively limited number of variables used to explain a large and diverse market, 51pc of the variability in prices over time can be explained and attributed to weather conditions and supply and demand factors.

“These values likely underestimate the weather’s full impact on prices,” the report’s authors said.

Prices were statistically shown to be the next largest factor in driving price variability over time, however, this would include factors such as demand, as well as serving as a catch-all for variables not directly included in the model.

Key weather drivers of price

The research discusses that while weather is conceptually recognized for driving market conditions, breaking down weather’s complexities into specific regions and variables is essential for effectively monitoring conditions and staying informed.

The report found that monthly average rootzone soil moisture in the southern Queensland and northern New South Wales region within the Murray-Darlin Basin to be the strongest weather variable, location, and time aggregation for explaining Australian cattle markets.

For lamb markets, monthly precipitation in areas around the South Australia Gulf and southern Victoria were found to be the most explanatory.

These locations for the cattle and lamb markets are near concentrations of dense animal populations for each species.

“The results show, as well, that while no single location and variable can explain all interactions between weather and markets nationally, a singular measure of weather in a single region explains a large portion of the movements in cattle and lamb markets, even more than animal supply in the short run,” the report said.

These findings underscored the importance of weather in market dynamics and highlighted the need for improved forecasting and information dissemination to enhance decision-making among producers, processors, and policymakers, as well as policies that supported minimising processing constraints during periods of increased supply.

Short-term, long term

In the short term, weather affects livestock markets by altering the marginal costs of production – meaning, when feed availability decreases, production costs rise, prompting producers to decide between keeping animals on grass, purchasing feed, or sending them to slaughter, the report said .

“These shifts move the supply curve,” the report said. “The supply shift is most apparent in the response of restockers, who’s comparative advantage is tied to feed availability and must be responsive to changing growing conditions.”

“The shift in the supply curve, particularly during times of drought, can push supply volumes beyond the processing capacity of the industry, which then drives down prices. Alternatively, when pasture is abundant, processors face increasing competition among themselves to seek animals for processing in order to keep their average processing costs low, given large fixed investments.”

Over the medium to long-run, the impacts from the short-term weather shocks build into larger and longer term outcomes, such as changes in the supply of breeding animals, which then directly impact how many animals are available for slaughter and exports, the report said.

Export volumes of beef and lamb are impacted by both the quantity of supply available and the relative competitiveness of the Australian sector to global markets.

Price variability

The research results highlighted that price variability over time is largely attributable to price itself.

This could be viewed in two ways:

• The correlation of demand shocks over time captured through price movements, and
• The price movement not directly attributed to the model’s variables.

On this basis, the price variable may overstate its influence on price variability, neglecting other unaccounted variables, the report suggested.

“For instance, a flood causing price increases from shocks to market access is not linked to weather variables, but would instead be attributable to price. This is because while we can observe the shock in one location at one point in time, statistically variables cannot be included across all locations and all points in time, and be able to attribute each change to just weather, particularly in a production system as vast as Australian cattle and lamb production.”

Therefore, the results reflected how weather directly impacts markets in the short term and how these effects translate into long-term changes in herd size and slaughter availability, the report said.

“Accordingly, these results should be viewed as lower-bound estimates of the weather’s full market impact.”

In addition to explaining how much the variability of prices can be attributed to weather, the methods presented marginal effects of the impact of the weather variables on markets, and specifically of importance here, price.

The results from the cattle models showed that for every reduction in soil moisture of 1pc in one month steer prices are lower by 2c/kg. Conversely, improved weather allows producers to raise animals at reduced marginal costs, resulting in price increases as processors compete by raising bids for livestock.

To consider a situation similar to a minor drought – where a persistent change in soil moisture occurs, such as a six-month decrease in soil moisture by 5pc – was estimated to decrease saleyard steer prices by around 60c/kg. More persistent and more dramatic changes in soil moisture would push the impacts even further, the report said.

The findings from the research might be used to better model and predict future animal supply conditions and their impact on price, the report suggested.

“This would help the industry stay efficiently proactive to future conditions. Further, this research highlighted how weather contributes to market conditions particularly when processing capacity is constrained.

“Research aimed toward predicting when and where constraints may occur, and efforts that would reduce those constraints, would help minimize the impact of shocks to regional markets that impacting national markets negatively.”

Click here to read the full report.