Where to for Australian cattle prices?21 July 2015

Presented by: Ben Thomas, MLA & Augusto Semmelroth, Mecardo

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MLA July 2015 Beef ProjectionsBen Thomas

Disclaimer

Care is taken to ensure the accuracy of the information contained in this publication. However MLA cannot accept responsibility for the accuracy or completeness of the information or opinions contained in the publication. You should make your own enquiries before making decisions concerning your interests. MLA accepts no liability for any losses incurred if you rely solely on this publication.

Information contained in this publication is obtained from a variety of third party sources. To the best of MLA’s knowledge the information accurately depicts existing and likely future market demand. However, MLA has not verified all third party information, and forecasts and projections are imprecise and subject to a high degree of uncertainty.

MLA makes no representations and to the extent permitted by law excludes all warranties in relation to the information contained in this publication. MLA is not liable to you or to any third party for any losses, costs or expenses, including any direct, indirect, incidental, consequential, special or exemplary damages or lost profit, resulting from any use or misuse of the information contained in this publication.

Care is taken to ensure the accuracy of the information contained in this publication. However MLA cannot accept responsibility for the accuracy or completeness of the information or opinions contained in the publication. This information is not medical advice and you should consult a health professional before making any decisions concerning your interests.

About MLA

Meat and Livestock Australia Ltd (MLA) strives to be the recognised leader in delivering world class research, development and marketing outcomes that benefit Australian cattle, sheep and goat producers.

Working in collaboration with the Australian Government and wider red meat industry, MLA's mission is to deliver value to levy payers by investing in initiatives that contribute to producer profitability, sustainability and global competiveness.

MLA is a producer owned, not-for-profit organisation and not an industry representative body.

MLA Membership

Industry structure

MLA does not collect or set the levy

• MLA

• Animal Health Australia

• National Residue SurveyProducer levy

Levy allocation summary

Small improvement in rainfall this year

Historically high adult cattle turn-off

Source: ABS, MLA f orecasts95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15f 16f 17f 18f 19f 20f

5

6

7

8

9 million head

f = f orecasts

Female slaughter has remained high…

Source: ABSJ F M A M J J A S O N D

42

44

46

48

50

52

54

% females of total

Five-year ave 2014 2015

Lowest cattle herd in 20 years

Source: ABS, MLA f orecasts95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15f 16f 17f 18f 19f 20f

20

22

24

26

28

30million head

f = f orecasts

Eastern Young Cattle Indicator (EYCI)

Eastern states cattle slaughter

Australian beef and veal exports

Source: DA, MLA f orecasts95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15f 16f 17f 18f 19f 20f

400

600

800

1,000

1,200'000 tonnes sw t

f = f orecasts

Chilled grassfed beef exports to the US

Source: DA Note: 2015 is Jan-Jun

What consumers think…

Take home messages

• Australian beef supplies are forecast to tighten considerably

• The herd rebuild will be a long and gradual process

• Keep an eye on production developments in the US

Before we start» Presentation is content rich – Charts and Figures.» Charts will be used to show trends and tell a story

– don’t get too caught up on the details.» Outlook remains bullish for cattle markets.

– ↓Supply - ↓ A$ - ↑ export demand - ↑rainfall– Has not yet been fully priced into cattle

markets. » Focus on key drivers, US vs AUS market dynamics

and price forecasts.» Relevant information for strategic long-term

decision making.

Export and US-centric outlook

22%

12%

35%

31%

JapanKoreaUSOther

Figure 2. Beef exports by region - 2014/15

US/Jap/Korea = 70% Source: DAFF

50%

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f20

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f

ExportsExports - % of prod. (rhs)

Figure 1. Beef exports as % of production'000 tonnes swt

Source: DAFF, MLA Projections

» 70% of our exports are still directly or indirectly affected by US beef prices

US import demand vs AUS herd liquidation

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Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2014 2015 5-year average

Figure 2. US Cow/Bull Slaughter'000 head

Source: USDA

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Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2014 2015 Average

Source: DAFF, ACU

Figure 3. Australian cow/heifer slaughter'000 head

Surge in exports to US

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Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

2014 2015 5-year average

'000 tonnes swt

Source: DAFF

Figure 1. Australian beef exports to the US

-30%-20%-10%0%10%20%30%40%50%60%70%80%90%

- 50

100 150 200 250 300 350 400 450 500 550 600

Japan Korea US Dev. Asia Other2014/15 2013/14 Change year-on-year (rhs)

Figure 2. 2014/15 vs 2013/14 Beef Exports - by Country'000 tonnes swt

Source: DAFF

US vs AUS cattle prices

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US live cattle QLD Heavy Steer

Source: USDA, MLA, ACU

Figure 1. US live cattle vs QLD Heavy SteerUS¢/kg lwt

R² = 0.9213

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attle

QLD Heavy Steer

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2013-14

2015

Source: USDA, MLA, ACU

Figure 2. US live steer vs QLD heavy steer - US¢/kg lwt

-70%

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-20%

-10%

0%

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2015

% discount to US

Source: USDA, MLA, ACU

Figure 3. QLD Heavy Steer discount to US live steer

US cattle cycle and price outlook

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US¢/kg lwt

Cattle Herd US Live CattleSource: USDA, MLA, ACU

Figure 1. US cattle cycle - US live cattle (Projections)million head

Finished cattle price outlook

» Scenario analysis– USDA long-term price forecast

(95%)– Exchange rate– Projected Discount to US price

» Conservative scenario:– AUD/USD: 80¢– Discount to US: 30%– Target ≈ 550¢

» Better-case scenario:– AUD/USD: 70¢– Discount to US: 25%– Target ≈ 650¢

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Forecast Range QLD Heavy Steer

Source: USDA, MLA, ACU

Figure 1. QLD heavy steer price forecastA¢/kg cwt

Domestic cattle bridging the gap

200250300350400450500550600650700750800

A¢/kg

EYCI 90CL (A$)

Source: MLA, Steiner

Figure 1. EYCI vs 90CL Frozen Cow

-400

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-50

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100A¢/kg

EYCI spread to 90CL

Source: MLA, Steiner

Figure 2. EYCI spread to 90CL Frozen Cow

Bullish outlook for export beef prices

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2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

90CL US 90CL AUS

Figure 1. 90CL US Domestic vs 90CL ExportUS¢/lb

Source: USDA, Steiner

-35%

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-15%

-10%

-5%

0%

5%

10%

15%

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Range 70%2015201410 Year Average

Source: MLA's NLRS, Steiner, ACU

Figure 2. 90CL Export (AUS) spread to 90CL US

EYCI model – return to fair value

200250300350400450500550600650700

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¢/kg cwtFigure 1. EYCI and EYCI price model

EYCIEYCI ModelProjection

Source: MLA, ASX, Steiner, ACU

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¢/kg cwt

Figure 2. Spread - EYCI to model

Source: MLA, ASX, Steiner, ACU

Drought

EYCI price outlook

» Scenario analysis– Estimated 90CL price based on

US live cattle forecast (70-80% premium)

– Spread to US Domestic 90CL to return to -5 to -10%.

– Grain prices to ease slightly from current levels

– AUD/USD: 70¢

» Forecast model - Caveat– Calculates fair value based on

export/grain fundamentals.– Underestimates EYCI potential

under positive rainfall scenario - by up to 5-10%.

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¢/kg cwt

EYCIEYCI ModelForecast

Source: MLA, ASX, USDA, Steiner, ACU

Figure 1. EYCI, price model and forecast

Store vs finished cattle prices

-15%

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Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Range 70% Average 2015 2011

Source: MLA's NLRS, ACU

Figure 1. EYCI restocker NSW spread to Heavy Steers

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Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Range 70% Average 2014 2015

Source: CME, ACU

Figure 2. US Feeder spread to Live Cattle

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Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Range 70% Average 2014 2015

Source: CEPEA/ESALQ, ACU

Figure 3. Brazilian Weaner spread to Live Cattle

Take home messages» MLA and USDA projections are the backbone for our price outlook» Move towards a more export-centric cattle/beef market» US cattle cycle and US import demand – major drivers of Aussie cattle

markets until 2020» Domestic cattle markets remain slightly undervalued» Heavy steer price outlook – 550-650¢/kg cwt» EYCI price outlook – 650¢ (fair value) +700¢/kg cwt (favourable

seasonal conditions)» Favourable export fundamentals finally starting to drive domestic

prices– Improved price transfer: Export-Processor-Producer

» Store cattle fundamentally undervalued – lacklustre restocker demand» Potential outperformers in the next years (cows/heifers? young cattle?)

More information & Survey

» More info - Jenianne Hall:– jhall@mecardo.com.au, 0438 624 154

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