New year, updated model
- The fair value model for the national heavy steer price predicts an average annual price for 2022 at 365 c/kg.
- The EYCI fair value model estimates the annual average price to be 828 c/kg cwt for the 2022 season.
- Both the EYCI and the heavy steer have started the 2022 season in over-valued territory according to their respective fair value modelling.
The start of a new year give us the opportunity to calibrate our fair value modelling tool and re-assess for the coming seasons. The way our fair value tool works is that it calculates how key historic demand and supply input values have impacted the price of cattle and provides a fair value measure for the current and future season based on current input estimates.
Now that the 2021 season is completed we can update the tool with the actual figures, comparing the actual model inputs to what the actual modelling outcome was. In the case of the heavy steer fair value model, the actual annual average price for 2021 came in at 410 c/kg lwt and, based on the actual inputs to the model, the fair value estimate for 2021 was 402 c/kg lwt.
The fair value model range for 2021 was expected to be 366 c/kg to 437 c/kg for heavy steer prices, the actual range came in between 355 c/kg to 476 c/kg.
Based on current demand and supply input estimates the fair value model for the national heavy steer price predicts an average annual price for 2022 at 365 c/kg lwt and a potential range over the season between 332 c/kg to 397 c/kg lwt. Presently, the heavy steer price is above the modelled range closing at 445c/kg lwt as at the end of January 2022 so you could say we are starting the year over-valued, according to the model.
The Eastern Young Cattle Indicator (EYCI) fair value model paints a similar picture to the heavy steer model, with the model favouring a move lower likely into 2022. The actual average annual price for the EYCI in 2021 was 961 c/kg cwt, whereas the fair value model had it pegged at an average annual price of 921 c/kg cwt. The EYCI saw an actual range between 831 c/kg to 1147 c/kg over the 2021 season, whereas the modelled range according to the fair value model came in at 709 c/kg to 1131 c/kg.
Turning to 2022 the EYCI fair value model estimates the annual average price to be 828 c/kg cwt, with a potential range of 640 c/kg to 1020 c/kg cwt. As was the case with the heavy steer modelling we are already starting the 2022 season with the EYCI sitting well above where the fair value model says it should be, according to the estimated inputs to the model.
The EYCI has already declined nearly 7% from a January 2022 peak of 1190 to close at 1112 c/kg as at the end of January. Despite the sharp easing during January the current EYCI level sits 9% above the top of the modelled range and very much in over-valued territory, according to the model.
It is important to note that the accuracy of both of these modelling tools is only as good as the input estimates used. One key input estimate is annual cattle slaughter volumes, which Meat and Livestock Australia is currently forecasting to be 6.7 million head for the 2022 season. If the actual slaughter figure comes in higher or lower for 2022 this will impact the modelled outcomes. Similarly, if any of the other input estimates vary significantly from the actuals then the accuracy of the fair value forecast provided in this analysis will be negatively impacted.