The Muster Agriculture & FMCG roundup Cattle prices: This is not...

The Muster
Agriculture & FMCG roundup

Cattle prices: This is not good night, this is goodbye
The EYCI has now corrected ~20% from its Oct’16 highs and approaching its long-run discount to US90CL prices. Margins look to be returning to processors for the first time in ~2 years and YOY comparisons for domestic cattle prices are becoming more difficult as we enter 4Q17 which will likely emerge as a headwind for livestock agents. The first stage of the cattle price correction is underway, with the second stage (being the inverse correlation to grain prices) looking increasingly likely as dry conditions see volume return to the domestic market as US production is accelerating. We remain cautious on cattle prices, noting the following potential flow on effects to the sector:
Agency returns to deteriorate: A decline in cattle prices without an offsetting volume gain creates a headwind for livestock agents such as ELD & RHL. We estimate livestock agency represented ~30% of ELD FY16 GP and ~20% of RHL’s FY16 ProForma GP (when adjusted for recent acquisitions in water and merchandise).
Processing returns improving: A return to a normal relationship between the EYCI and US90CL should see an expansion in cattle processor returns. AAC via its Livingston processing facility is exposed to recovering processor margins.
Live export margins to recover: A normalisation in the relationship between Australian and global cattle prices should be beneficial to the returns of live export operators. This should be a partial offset to headwinds in the agency business for RHL.