LMC: Higher Prices Available as Numbers Tighten19 March 2013
UK - The strong deadweight cattle trade in NI in recent weeks has seen quotes from the plants for U-3 grade prime cattle reach new levels at 360-362p/kg. In the same week last year the quotes for U-3 grade prime cattle from the major plants were 324- 326p/kg. The additional 8p/kg bonus is also available for steers and heifers that kill out within spec.
The criteria for the 8p/kg bonus for in spec steers and heifers currently in place across the major plants are outlined in Table 1. This bonus was introduced in November 2009 as an incentive for producers to finish steers and heifers within the desired specification. This specification was based upon the requirements of some of the processors’ major customers.
However with the plants reporting a tightening in the supply of cattle there have been reports of significantly higher prices being available than these quotes would suggest, even when the 8p/kg bonus is considered. The prime cattle kill last week was 5,958 head, a reduction of 603 head on the previous week when 6,561 head were slaughtered. With reduced availability of prime cattle there has been strong competition between the plants for prime cattle, particularly inspec steers and heifers.
At present seven plants in Northern Ireland are legally obliged to price report with information on deadweight prices sent to LMC weekly for assembly, checking and reporting to the EU. With this information it is possible to establish the difference between the prices being quoted and the prices actually being paid.
Prime cattle are generally paid for on a pricing grid which uses the base quote of U-3 from the plants to work out the relative value of each individual grade. It should be noted however that the quotes, the pricing grid and the associated in spec bonuses/penalties is rather a notional arrangement and the prices paid are generally driven by factors around supply and demand.
For the purposes of this analysis we will use the price paid for 1704 R-3 steers over the last twelve weeks as this is the most commonly reported grade in NI. To ensure a like for like comparison in the prices being paid for prime cattle Aberdeen Angus, Hereford and Organic cattle have been removed from the data set as these attract additional bonuses which can distort the average price paid.
Figure 1 displays the range in the quotes from the plants for R-3 grade steers over the last twelve week period (blue band), the mid point R-3 steer quote plus the 8p/kg bonus (black line) and the average price paid for R-3 steers (red line). It is worth noting that quotes from the plants this week have risen significantly.
If the base quotes from the plants for prime cattle were a true indication of the prices being paid then the line displaying the average R-3 steer price over the last twelve weeks should fall somewhere between the shaded area indicating base quotes and the black line indicating the base quote plus the 8p/kg bonus.
Figure 1 however clearly shows that over the last twelve week period the (red line) has been higher than the base quotes from the plants plus the 8p/kg bonus for in spec cattle.
Average R-3 steer prices reported over the last twelve weeks would therefore indicate that R-3 grade steers were paid for at a price which included the 8p/kg and more. This is despite the latest slaughter mix report indicating that just over two thirds of R-3 steers killed during the twelve weeks in question fulfilled all the criteria for the bonus payment.
Increases in the quoted prices from the plants in recent weeks combined with the tightening in the availability of prime cattle resulted in an increase in the prices being paid to producers. The average price paid for R-3 steers increased to 360p/kg last week, an increase of 25p/kg from the average R- 3 price in the week ending the 23 December 2012 (335p/kg).
Table 1: Specification for 8p/kg Bonus on Steers and Heifers
As the prices paid have increased the gap between base quotes and the prices being paid has also widened. Last week the average quote from the plants for R-3 steers was 345p/kg and if the 8p/kg is included the quoted price was 353p/kg. However the actual price paid for R-3 steers last week was 360p/kg, 15p/kg higher than base quotes from the plants and 7p/kg higher than the base quote plus the 8p/kg bonus.
While average prices can be very useful in identifying trends in data it is also useful to consider the full range of prices paid. In a previous bulletin article (Issue 2235) we outlined that there is a significant range in the prices being paid to producers for individual grades within any given week. This range may be explained by some plants paying higher prices to producers relative to other plants. It is also worth considering that some producers have the leverage to negotiate significantly higher prices with the processors than quotes would suggest. This may be the case where a producer can guarantee a supply of in spec cattle to the processor.
Figure 1: Graph Plotting the Average Price paid for R-3 Steers Against Quoted Prices and Quoted Price +8p/kg Bonus for the 12 Weeks Ending 10/03/2013
This analysis should highlight to producers that higher prices are available than base quotes from the plants would suggest. The best advice to producers is to maximise returns by aiming to produce prime cattle within the processors specification and to shop around for the best possible deals when selling finished cattle.TheCattleSite News Desk