It was to be expected
The Snapshot
- The Australian to US heavy steer spread is pretty much back to normal long term levels, near a 30% discount.
- Slaughter projections of 7.25 million head for 2023 would suggest an average spread discount of around 50US cents/kg for the Australian Heavy steer this year.
- The current discount spread is around 80US cents, so local heavy steers are a little undervalued at present.
The Detail
Way back in April 2022 we took a look at the spread between the Australian Heavy Steer and it’s equivalent in the USA, the Choice Fed Steer. Pricing back then had Australian steers at a premium, but we pondered how long this uncommon situation would last, with the Australian cattle slaughter volumes increasing to more normal levels as we rebuilt the herd.
Well, here we are. 2023 has opened with the local cattle market weakening. Meanwhile, the third year of drought in the USA and a strong herd liquidation has seen US cattle price rally strongly in the final quarter of 2022.
A look at the pattern of the heavy steer price spread between Australia and the USA highlights that we are nearing the long term average spread discount of around 28% and very much back within the normal range (which is between a 10% discount to 45% discount, as identified by the grey shaded 70% range on the chart shown below).
Currently the price spread sits at a discount of 27%. The seasonality spread chart (above) shows that the trend in the spread pretty much reverted to normal in the final quarter of 2022 with the weekly spread price pattern closely mimicking the path of the average seasonal trend (dotted black line).
Meat and Livestock Australia (MLA) are due to release their cattle market outlook for 2023 soon. The current forecast for annual cattle slaughter has the 2023 season pegged at 7.25 million head. Based on this annual slaughter volume we would expect the annual price discount between Australian and US heavy steers to average about 50US cents/kg, as per the line of best fit on the scatter plot below.
Currently the spread discount of Australia heavy steer to the US equivalent sits at a discount of around 80US cents/kg so it would be fair to say that Australian Heavy Steers are a little undervalued compared to the US Choice Fed Steer, or alternatively the US are a little overvalued.
What does this mean for local heavy steer prices? Well, we could see some support creep in for the Australian Heavy Steer over the coming weeks/months or some of the strong price gains seen in the US may start to fade away while local prices hold their value. We could even see a bit of both. My personal feeling is that we are a little undervalued locally so I’m betting on a slight to moderate lift in local pricing.