Agribusiness

How to budget cattle prices in the current market

Ian McLean, Bush AgriBusiness Pty Ltd*, 18/04/2016

A COMMON question from beef producers at the moment is what cattle prices should be used for budgeting purposes in today’s cattle market environment?

Whether today’s prices or those of 12 months ago are used will make a big difference to the budgeted bottom line.

Unfortunately no-one has a crystal ball, however historical price data can provide a useful basis for determining rational prices for use in budgeting.

This can be done using decile analysis, which is a commonly used statistical tool to analyse the distribution of data. The underlying assumption in this approach is that current beef prices are a cyclical high and not a tectonic shift, as outlined in a previous article on Beef Central.

The chart below demonstrates the use of decile analysis for the Queensland cattle market, in real terms (adjusted for inflation) over the last 30 years, showing when prices were in each of the top and bottom three decile ranges, with the middle four shown together.

How decile ranges work is that the market has been in each decile range for 10pc of months over the last 30 years. Current prices are in the top decile range (between the 90th and 100th percentile).

Click on image for a larger view

Click on image for a larger view

Whilst this graph shows the cyclical nature of the cattle market (when expressed in real terms) and the movements through decile ranges, it doesn’t give us prices to use in budgeting.

The table below provides information to determine decile ranges for livestock classes based on average Queensland saleyard price data from MLA’s NLRS. To interpret this table, the highest decile range for yearling steers is between the 90th and 100th percentiles, which from the table below is $2.72 to $3.39c/kg. Note that these prices are based on monthly average prices by class and therefore do not capture extreme highs and lows of individual sales.

If the saleyard price is not the most appropriate for your operation, then you can apply the average long term relativity of your market to the relevant saleyard price to utilise the data.

Decile table of QLD beef prices in real terms (today’s dollars)

Copyright Bush AgriBusiness. Analysis uses data from MLA’s NLRS & ABS.

Copyright Bush AgriBusiness. Analysis uses data from MLA’s NLRS & ABS.

 

Deciding what prices to use in your budget will depend on what time-frame you are looking at, and what your prediction on future market movements are.

The short to medium outlook for the market is quite good and expected to stay high (see article on ABARES market predictions), so for the current calendar year and into next financial year you may be comfortable using prices in the top decile range or even the 90th percentile prices.

Looking forward two to three years, you may decide that somewhere in the 8th or 9th decile range (70-80th and 80-90th percentile range respectively) may be appropriate. The cyclical pattern in the above graph can provide some guidance in determining what decile range to use over different time frames.

I suggest, though, that the longer the time-frame, the closer the budgeted price should be to the median (50th percentile), as reversion to the mean is a powerful and enduring force.

If sums are being done for a property purchase, which requires a very long outlook, then I would suggest that median prices be used. If the sums don’t work at that then future market downturns will place the business under serious financial stress.

The current beef prices are a welcome change for the industry and the market is likely to stay strong in the short to medium term, which is excellent for those producers currently in production and reassuring for those looking to restock.

There is every reason for the beef industry to be optimistic at the moment, however being too optimistic in the budgeting process can lead to nasty surprises and huge disappointment down the track.

 

At Bush AgriBusiness we believe that rational, evidence-based business management and decision-making underpins good long term performance. In the absence of a crystal ball, we trust that the above information will assist producers to budget in the current cattle market.

For more information producers can refer to the ‘Improving the performance of Northern Beef Enterprises’ publication which Ian co-authored with Phil Holmes, and Ian’s FutureBeef webinar recording titled ‘Strategies to Increase the Profitability of Extensive Beef Businesses’.

 

Upcoming Business EDGE Workshops

* Ian McLean will be delivering Business EDGE workshops, which deliver key business skills and financial literacy for grazing business managers, in the following locations in the coming months;

  • Charters Towers, April 7-8
  • Emerald, June 2-3
  • Toowoomba, June 6-7
  • Gayndah, July 12 & 13
  • Taroom, July 18-19
  • Biloela, July 21-22

For more information visit www.babusiness.com.au/thebusinessedge

 

 

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Comments

  1. Chris Gunther, 20/04/2016

    Well said Sam, replacement cost is what all the traders use, whether it’s grain , washing machines or cattle.
    Another pearl of wisdom is , don’t sell and sit, cause you don’t realise your profit until you replace.

  2. Ron Shaw, 19/04/2016

    Very sound advice Sam. I worry (for the longevity of those) who are rushing and buying into the livestock industry at the moment (e.g. buying shares into new/expanding feedlots). These people are buying into the industry “at the top of its market”, with hungry eyes focused on potential future profits. Profits which are based on “optimistic speculation” (and that’s the nice way of putting it)!! If these people only had the opportunity of the knowledge (and some wisdom) put forth in this article.

  3. SAM STAINES, 18/04/2016

    A cattle trader told me years ago.”The profit you make on trading stock is not the difference between what you bought the beast for and the amount you were paid for the beast .IT IS WHAT YOU SELL FOR TODAY AND WHAT THE REPLACEMENT COSTS IS”.In other words if you bought a beast 18 months ago for $600 and sell him today for $1500 that means nothing.So you sold the beast for $1500 and replace it for $875 then the cash flow generated is $625 .( your bank statement says so).So far that has worked for me for 45 years and long may it continue.Sam Staines

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