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A rare situation for the beef industry
This article explores the reasons behind recent record-high cattle prices as well as the thinning margins for lot feeders, processors, and exporters.
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A rare situation for the beef industry
In recent years Australian beef producers have enjoyed record prices and processors have been operating at capacity. However, drought and price-induced supplies of cattle for slaughter are drying up, and the national herd is nearing lows not seen for decades. Meanwhile, the global beef market is becoming more competitive, which has implications for the Australian cattle supply chain.
In this Agribusiness Bulletin we explore the reasons behind recent record-high cattle prices as well as the thinning margins for lot feeders, processors and exporters.
How did we get here?
After a very wet year in 2011, rainfall over the next four years was below average across much of eastern Australia. 2013 was particularly dry, with large parts of Queensland – which is home to around half the national beef cattle herd – experiencing well-below average rainfall.
Over this extended period of low rainfall many farmers de-stocked - significantly reducing herds from near record numbers as a result of abundant rainfall in 2011. The number of cattle slaughtered each month increased steadily from around 600,000 head per month in 2011 to between 700,000 and 800,000 head throughout most of 2014 and 2015. This can be clearly seen in the chart below.
The steady supply of cattle for slaughter placed downward pressure on farmgate prices until 2014, when prices began to stagger upwards. There was clear and significant upward trend from the end of 2014, which coincided with the peak of slaughter activity. From January 2015 to July 2016 monthly slaughter volume was down 20%, and the Eastern Young Cattle Indicator (EYCI) was up 40%.
Demand for Australian beef in key export markets was strong throughout 2014 and 2015. Many abattoirs were running at capacity throughput, while an upward revision of Indonesian live cattle import quotas in 2014 meant that live exporters also experienced favourable market conditions.
What is the current situation?
In recent months high rainfall across most of Australia has resulted in cattle supply tightening even further, with many farmers now experiencing conditions ideal for re-building depleted herd numbers. This is an incredibly expensive time to be re-building though, with the EYCI exceeding 700 cents per kilogram.
Scarce supplies and high prices are thinning feedlot margins. One commentator reflected that they are now effectively competing to purchase the same cattle as backgrounders, which under usual circumstances would prepare younger cattle for feedlots. The increased competition and higher cattle prices have led to declining lot feeding profitability. BeefCentral’s 100-day grainfed breakeven scenario analysis has declined from around $30 profit per head in late 2015 to firmly negative territory, to losses of around $100 per head.
Whereas many abattoirs were operating at capacity in 2014, meat processors along the eastern seaboard are now cutting back shifts and staff. Some processors are opting to move from a five-day to a four-day week, rather than reducing staff numbers, for example1. The Australian meat processing industry is feeling the pressure from both the reduced cattle supply and the changing export market landscape. Conditions in the global beef market are becoming tougher, as the battlegrounds for key value-added beef export destinations become more competitive:
- US slaughter rates are up, meaning there could be a slackening in demand from our biggest export market
- Brazil has re-entered Asian markets after years of being locked out
- China is potentially looking elsewhere for its beef.
With cooling demand for Australian beef, and the price of cattle at record levels, margins for export processors are thin.
The competitive landscape is also changing for live exporters. In a bid to bring down beef prices, the Indonesian Government has begun allowing shipments of frozen beef from India, which could potentially reduce demand for Australian cattle in its largest live export market and put downward pressure on live exporter margins2.
What does the future hold?
Making precise estimates about what will happen in the beef industry is a mug’s game, but for those readers interested in some crystal ball gazing, we set out the following scenarios based on industry and market commentary, coupled with our own analysis.
Firstly, slaughter volumes are likely to continue to slow down, particularly for female cattle as herds are actively rebuilt. ABARES has forecast a seven per cent year-on-year reduction in cattle slaughter in 2016-17, following a 13% decline in 2015-16. Despite slaughter numbers slowing, the national herd is still forecast to decline for the fourth consecutive year in 2016-17, reflecting significantly depleted breeder numbers.
Secondly, the processing industry may be in for more pain. A report recently commissioned by the Australian Meat Processing Corporation pointed out that “a continuation of current conditions will see the less cost-efficient processors go out of business”.
Finally, farmgate prices will not remain at these levels forever. We may see a small correction as we approach summer, as prices historically tend to come off later in the calendar year. However, herd rebuilding takes time, and with ABARES predicting cattle numbers to bottom-out in 2017, we may not see that larger correction for some time to come. Only time will tell.
1 ABC Rural, Cattle market under pressure from tight supply and high prices, 26 July 2016
2 ABC Rural, Indian buffalo meat en route to Indonesia, but what impact will it have on demand for Australian live cattle exports?, 19 July 2016