Ripley Atkinson

A FORWARD pricing curve for the Australian cattle industry is not showing much of a curve, with the company behind the trading tool predicting prices to remain steady for most of this year.

For the past two years, United States-based financial services company StoneX (formerly FC Stone) has been working to develop a forward pricing tool the Australian cattle industry.

It released its Australian Feeder Cattle Swap in February 2022 and executed its first cattle trade later that year. Since then, the company has been onboarding clients and trying to firmly embed the swap in the Australian cattle market – with liquidity being key to its success.

Former Meat & Livestock Australia analyst Ripley Atkinson has recently started as the livestock and commodities manager for StoneX Australia and has put out his first two forward price curves for the year – which extend until September.

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While cattle prices have started out the year a lot stronger than last year, he was not expecting much more of a rise – with meat still hard to shift and feedlots still working through expensive rations.

“If you look at the current market dynamics, there is a lot of confidence but there is also a lot of expensive grain sitting in feedlot silos,” Mr Atkinson said.

“A lot of the feedlots bought grain at $500/t last year before harvest thinking they weren’t going to get a harvest and there was going to be no grain around.

“Now, they are sitting on expensive $500/t grain while the market at the minute is trading around $400 and purchasing feeder steers at $3.50/kg, or more, on a rising market.”

Mr Atkinson said forward contracts for 100-day cattle were not too crash hot and the international meat market was still a tough trading environment.

“When you think about those market dynamics, it has to limit the increases on feeder cattle prices because the margins aren’t there for lotfeeders,” he said.

All eyes on Cyclone Kirrily

As can be seen in the table above, the StoneX forward pricing curve is predicting a small increase in prices over the next two-to-three months. Mr Atkinson said a good season in Queensland and New South Wales was likely to continue holding back supply.

“When you think about the cattle that will be held back in Qld with this rain coming and plenty of green feed in NSW, there is not going to be a lot of cattle in the coming months,” he said.

“But they will turn up leading into winter and that is naturally going to place a bit of downward pressure on prices.”

Cyclone Kirrily has formed off the coast of Qld and is forecast to bring more than 100m to large part of North, Central and Western Qld in the coming week. Mr Atkinson said it could have an impact on the forward curve.

“It wouldn’t surprise me to see numbers fall off a cliff, there’s rain lifting market confidence and it looks like access to paddocks will be limited,” he said.

“I think the forward curve will react to this shortage in cattle, but we will have to watch to see what the spot market does once this system moves into Central Qld and we see how much rain there is.”

American production not impacting Australia yet

Over the last two years, the American industry has gone through a major herd liquidation which has moved meat into some of Australia’s major markets. But with numbers already depleted and some states receiving rain, American production has been sliding.

Many have pointed to the American situation as an opportunity for the Australian industry to send more meat into countries like Japan, Korea and China.

Mr Atkinson said there was no evidence to suggest the American situation was impacting Australian markets yet – but he was watching it closely.

“It is not affecting feedlot cattle yet, there is an argument to suggest it is impacting the processor cattle that go into trim – because that has been running strong in-terms of exports to the US,” he said.

“Once we start to see some data out of the US to get idea of how much production is going to fall, we can work out what impact it will have on our market towards the back end of the year.”

Increasing need for hedging

In his market update today, Mr Atkinson charted the Eastern Young Cattle Indicator back to 2000 to demonstrate how volatile the cattle market has been in recent years.

“With Q1 2024 showing the largest price change increase in the EYCI since 2000 (admittedly we’re only 25 days into the new quarter),” He said.

“Whilst Q3 2023 represented the largest price change decrease since 2000, simply put, in the space of 6 months, Australia’s cattle industry in price terms has been the most volatile since records began. It would be remiss of me to say “on record” because no doubt that won’t be the case by the end of the decade.

“These price changes continue to reaffirm how important risk management is and highlights how the StoneX Australian feeder cattle swap can be utilized to mitigate and manage the risk the cattle market carries.”

How the swap tool works

Swaps are a financial derivative product via paper contracts where the risk is offset between two parties – with equal and opposite risks. In this example, StoneX stands in the middle, meaning the counter-party for both buyer and seller is StoneX. Neither side knows who the counter-party is. This eliminates any counter-party risk, and also maintains anonymity between the two parties – an important feature for the cattle and beef industry in Australia, where many players like to ‘hold their cards close to their chest.’

Margin facilities may also be provided by StoneX after the program’s launch, meaning participants would not have to tie-up working capital to trade.