Strong domestic cattle market to counter global pandemic

Opposing forces will dominate the Australian cattle market in 2020, with limited supply and strong local demand driving prices, but tempered by the global COVID-19 disruption, according to Rabobank’s Australian Beef Cattle Seasonal Outlook.

The just-released report, titled The Battle of the Bulls versus Bears, outlined that despite the market being seriously tested by contracting global economic growth and COVID-19 containment measures, domestic forces would emerge victorious, keeping cattle prices high.

Rabobank senior animal proteins analyst Angus Gidley-Baird said widespread rain had buoyed local restocking motivation among producers, reducing cattle sales and adding buying competition in an already supply-constrained market, with Australia’s cattle inventory reportedly at a 30-year low.

“We estimate the Australian cattle slaughter will fall 14 per cent in 2020 to 7.29 million head, with a further decrease of two per cent in 2021,” he said.

Production was expected to drop to 2.1 million tonnes – among the lowest volumes seen in 15 years – with seasonally-driven increases in slaughter weights failing to offset reduced numbers. While price-positive for graziers looking to sell livestock, Gidley-Baird said low cattle availability would create challenges for producers, processors and feedlots, forced to manage their businesses with lower livestock numbers and high cattle prices.

Low slaughter numbers were also expected to contribute to a dramatic decline in Australian beef exports, forecast to drop 17 per cent in 2020 to one million tonnes. The significantly decreased cow slaughter – reducing Australia’s production of lean manufacturing beef – was also expected to result in a shift in volumes between export markets, Gidley-Baird said.

“The US is a large market for lean manufacturing beef – 62 per cent of exports to the US are manufacturing beef – and, all other things being equal, we expect exports to the US to drop in 2020,” he said.

Forecasts suggest a dramatic contraction in global economic growth in 2020 resulting from COVID-19 that will be worse than experienced in the global financial crisis (GFC) of 2009, with large economic declines expected in key Australian beef markets such as the US, China and Japan.

As a high-priced protein, Gidley-Baird said, beef would feel the impact of reduced consumer expenditure, with overall beef demand – particularly for premium products sold through full-service restaurants – expected to decline. Heavily reliant on foodservice trade, Australia’s beef exports would also be hit by COVID19-led social restrictions, particularly in China, where more beef was eaten out of home.

“This disruption to food service and slowing economic conditions is expected to place downward pressure on Australia’s beef export prices, creating a difficult price squeeze for those in the beef supply chain managing high cattle prices in a softer global market,” he said.

At the same time, Gidley-Baird said, a weaker Australian dollar, China’s reduced pork availability due to African swine fever, and the US-China trade deal were all positive offsetting factors.

Domestic price outlook Despite countering global and domestic forces at play, the report forecasts the average annual Eastern Young Cattle Indicator (EYCI) to increase by 30 per cent in 2020, to equal the annual average record set in 2016 at AUc632/kg. Based on the last reported EYCI price of AUc741/kg on March 19, this would mean prices were expected to ease but still remain strong over the remainder of the year.

However, given the forecast dramatic reduction in economic activity, uncertainty remained surrounding global beef price performance. Australian regional outlook With climatic conditions taking a toll on northern cattle herds in past seasons, breeding inventory across Queensland and Northern Territory was estimated at a 20-year low in late 2019.

Gidley-Baird said breeding numbers in some areas of southern Queensland were expected to be 75 per cent below normal, yet, despite tough conditions, well-priced sales had generated solid returns, placing producers in a strong position to start the recovery. As such, the report tipped Queensland would emerge as the “colosseum” of the Australian cattle recovery.

“Producers, feedlotters, processors and live exporters are all vying for a very small pool of cattle, and prices in Queensland may see some of the strongest gains across all states given this fierce competition,” Gidley-Baird said.

Breeding cattle numbers were also significantly down in central and northern New South Wales, while higher breeder numbers and calf availability out of the south of the state remained closer to normal.

He said Victorian producers remained well-positioned to capitalise on national restocking demand and higher prices, with most areas – east Gippsland excluded – maintaining close to normal breeding numbers.

In South Australia, producers could also look forward to a positive year, despite 2019’s dry conditions and reduced cattle inventory in the northern pastoral country.

“There may be slightly softer demand by local producers for replacement cattle, compared to NSW and Queensland, but these markets will still provide strong buyer interest for South Australian producers looking to sell cattle,” he said.

Dry conditions across much of Western Australia’s cattle-producing regions had driven increased slaughter rates, and would curb 2020 production, Gidley-Baird said, however upward price pressure would come from east coast demand. In Tasmania, current breeding cattle on-farm numbers were similar to early 2019, reflective of normal levels, yet increased competition from the mainland could see the movement of cattle out of the state.

Sydney team awarded $1m industry grant for new cattle vaccine

A team of scientists at the University of Sydney have been awarded a $1 million grant by Meat and Livestock Australia to fund new vaccine development for feedlot cattle.

Dr Kumudika de Silva, Dr Karren Plain and Dr Auriol Purdie from the Sydney School of Veterinary Science have been awarded a Meat and Livestock Australia  grant worth $1,084,942 for the research of alternatives to antimicrobials to keep livestock animals healthy.

“It’s wonderful to have our expertise acknowledged by industry in this way. Industry grants are very competitive, so we are very excited to have been awarded a grant of this magnitude,” said senior research fellow and project lead, de Silva.

Bovine respiratory disease
Funded in consultation with the Australian Lot Feeders’ Association, the project seeks to develop a novel vaccine to prevent against bovine respiratory disease – the most common cause of illness and death in Australian feedlot cattle.

“This grant will support research in both the development of a new vaccine and its potential application to a major disease that affects cattle and leads to reduced welfare and performance,” said Senior Research Fellow, Dr Karren Plain.

Cattle vaccine
Most vaccinations for livestock animals are currently given by injection, posing several challenges for feedlots, such as the need for refrigeration and the labour-intensive task of injecting each animal.

“We are hoping to develop a vaccine with properties that make it cheaper and easier to make, store and give to animals than most current vaccines,” said de Silva. “First, we need to understand how these animals will respond to a new vaccination method, but there is real potential for it to be used for many diseases that are important to the livestock industry.”

Working with industry on this project allows a two-way conversation in terms of the science and its application, said Dr Plain.

“We want to be able to make a difference to the health of animals in livestock production systems and also to assist producers in their efforts. It is a win-win.”

Elders to cease live exports of cattle and sheep

Agribusiness Elders will sell its subsidiary North Australian Cattle Company (NACC), and thus exit the live export business.

As the ABC reports, NACC currently ships cattle to Indonesia, Vietnam and Malaysia and flies cattle and sheep to China.

The move follows a comprehensive review of the company’s live export business and, according to CEO Mark Allison, does not reflect on the viability of the industry as a whole.

He said in a statement that the company remains supportive of the live export industry, and the business remains committed to the needs of its livestock producer clients.

“Our focus remains on increasing client access to a range of markets, including live export markets for their stock, and we will continue to work with industry live exporters to market our clients’ livestock,” Allison said.

He added that the export, logistics and shipping of live cattle to long haul destinations is no longer central to Elders’ strategy.

“Elders reported a loss of $2.9m from its Live Export businesses in the 6 months to 30 March 2016.  That poor result had included a loss of $3.8m attributable to the long haul business.  Since that report, margin performance in the long haul business has continued to be poor and we believe that margins are unlikely to recover in the near to medium term,” said Allison.

“In addition, we do not see that the China feeder and slaughter trade, which is yet to fully open, will deliver margins or a return on capital at levels that meets our, and our shareholders’, expectations.  As a result, we consider that the long haul of live cattle is best suited to specialist logistics operators.”

Elders expects an underlying EBIT for the full year to 30 September 2016 in the range of $54-57m.

This result reflects better than average retail activity due to seasonal conditions and strong livestock prices driving the agency result. Conversely, high cattle prices have impacted margins in the Feed and Processing businesses.

Upon finalisation of the Live Export exit, Elders’ will have circa $25m of working capital which can be redeployed in areas that meet return on capital expectations.

Image: The Advertiser

Rinehart rides the beef boom as conditions set for higher prices

Confidence in Australia’s rural sector, and investor interest in rural property markets are starting to surge, as evidenced by the recent purchase of the historic “Fossil Downs” cattle station by mining magnate Gina Rinehart. It is likely that foreign investors, including from China, are not far behind.

Perversely, the ongoing reluctance of Australian equity and superannuation funds to take major investments in agriculture because it is seen as too risky means the benefits of the “beef boom” will not be shared as widely as they could have been.

Drought, demand and the dollar are the trifecta driving Australian beef prices higher. Cattle prices in Australia have surged since 2014, breaking through the 400 cents/kg threshold of the Eastern Young Cattle Index in January 2015 and the 500 point level in June (see chart below). Some analysts are now predicting that the index will pass 600 points before the year end.

Beef is Australia’s second largest agricultural commodity, and prices are driven by supply and demand forces, both internationally and domestically. Essentially this is a story of two supply shocks that still take some time to wash through the beef supply chain.

The forces driving beef prices up

The first was the large drought in the United States in recent years that affected both pasture and corn production, resulting in the US cattle herd falling to its lowest level since the early 1950s and beef production falling to its lowest level since the early 1990s. The shortages of supply caused record beef prices in the US in 2014, which have increased further in 2015. The US is both a major importer and an exporter of beef, so the drought has pushed up global beef prices to record highs. The US also took more beef from Australia in 2014, up 84% on the previous year.

The effects took some time to be felt in Australia because of its own drought – the second supply shock. Major drought in 2013 and 2014, particularly in northern Australia, has seen a rapid turnoff of stock, increasing to nearly 10.5 million head for slaughter and live export in 2014, almost 2.5 million more than in either 2011 or 2012. Prices stayed low in 2014 because of the excess supply, while the Australian beef herd fell to its lowest level in two decades.

It takes between two and three years for cattle to grow to slaughter weight. When droughts break the dynamics of herd rebuilding mean that breeders hold females back to increase their breeding herd. This adds a fall in supply to the lag in production after a drought. These dynamics are now in play for both the US and Australian beef herds, and explain why supplies are now so tight as parts of each country recover from drought. In fact the Australian herd is expected to further decline in 2016 as a result of fewer calves coming into the system.

Of course, there are many other supply and demand forces at play in international markets. On the supply side there is limited ability of our key competitors to meet the supply gaps; for example while exports from Brazil are expected to increase in 2015, they have also been experiencing some supply tightening and record prices. On the demand side, our key markets such as Japan, South Korea and China remain strong, with the 2014 surge in demand from the US absorbing any additional supply Australia can produce.

The third part of the trifecta is the low Australian dollar, which essentially translates overseas demand into higher prices. The combination of higher global beef prices, short supply and a falling dollar underpin the surge in higher prices.

Beef prices will keep rising in shops

There are three key flow-on effects that are particularly worth noting. The first is that competition and substitution effects are going to affect domestic meat prices and consumption. Retail beef prices will continue to rise in Australia in 2015 and 2016 as a consequence of the market changes, and this will in turn reduce per-capita consumption of beef, particularly as consumers continue the shift to other protein sources.

The second is that higher incomes will flow into regional Australia, given the extent of the footprint that beef production has in the country, particularly in northern Australia where almost all of the agricultural land area is used for beef production (recognising that other commodities are more intensive). This is timely given the erosion in real incomes over the past decade; cattle prices in 2014 were almost unchanged from 15 years previously despite steadily increasing input costs.

The third is that higher incomes will provide the capital for farmers to invest in productivity improvements. Cattle production is becoming a sophisticated business with better genetics, new technology and improved infrastructure just some of the options to improve both productivity and total output. Improvements in real incomes will be followed by expenditure on supply inputs as producers catch up on maintenance and invest in efficiency gains.

How long higher prices will last is difficult to predict. Price spikes in agricultural commodities, like resources, are typically followed by supply increases after a lag period, so higher prices because of the recent droughts should not last beyond 2017. Yet demand drivers are also starting to emerge, underpinned by global population and wealth increases.

The most immediate effect will be through the new free trade agreements that will increase demand from our Asian partners. This means there is the potential for new demand drivers for Australian beef to replace the current supply shortages as the key factor underpinning higher beef prices.

The Conversation

John Rolfe is Deputy Dean of Research, School of Business and Law at Central Queensland University.

This article was originally published on The Conversation. Read the original article.