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Wednesday, March 25, 2015

Looming supply contraction will leave many markets wanting

By Tim McRae, Bangalla Consulting  |  Source: MLA, ABARES

Key points

  • An eventual significant contraction in beef production, accentuated by the lower A$, is expected to place massive pressure on all of Australia’s major beef markets.
  • The Australian market is expected to suffer the most from the shrinking beef production, with Australian consumers expected to pay more and consume less beef.
  • Strong returns for beef in the US will continue to attract large volumes of Australian beef, with the US again setting the benchmark for global manufacturing beef prices.

2015-03-26 Cattle Exports Outlook FIG 1

“It mightn’t happen overnight…but it will happen”. This is an apt summary of the looming contraction in the volume of beef produced by Australia – which will leave many export markets asking “where’s the beef”? As highlighted in Tuesday’s article, almost three years of record cattle turnoff has dramatically reduced the long term supply prospects for Australian beef.

Indeed, whether it is the conservative 200,000 tonnes cwt contraction in total beef production over the next two years as forecast by ABARES, or the larger 500,000 tonnes cwt drop between 2014 and 2016 outlined by MLA, one thing is certain. Many existing buyers of Australian beef are going to have to compete much harder for a much smaller “pot of beef”.  Helping to fuel this competition for Aussie beef over the next few years will be the very welcome lower A$ - which now heavily favours export markets, as the Australian market faces significant headwinds.

In summary, the huge drought-induced surge in beef production of the past three years has helped to fuel rapid growth in export markets for Australian beef, at a time when the A$ was “uncomfortably high” for almost all exporters. But what happens over the next few years now that the A$ has fallen back to “very nice levels” for exporters and total production could contract 8-19%?

As the largest market and most valuable market for Australian beef, it should be expected that the single largest hit to any market for beef will be on the homefront. As such, if the volume of beef consumed in Australia was unable to expand in the past two years – given record production and high A$ could get ugly in coming years with a low A$ and significantly less beef available.

Indeed, the most recent ABARES forecast points to this likely occurrence – with per head consumption falling 18% between 2013-14 and 2017-18, to just above 25kg/head. Ultimately, this means that Australian consumers will face much higher beef prices in the coming years, with lower consumption.

The resurgence of the US market for Australian beef, driven by record imported beef prices and the lower A$, will continue to see large volumes of beef headed to the US in coming years. While there has been a decline in the returns from the US in early 2015, prices are still well above the long term average – and are expected to be so throughout 2015. As at 19 March, Australian beef exports to the US so far in 2015 are just shy of 90,000 tonnes swt – putting it on track for another year in excess of 330,000 tonnes swt.

The “three FTA countries” – Japan, Korea and China - are all expected to have steady years in 2015, with the market access improvements very welcome but requiring some time to be fully felt in the market. So far in 2015, Japan has received 58,000 tonnes swt of Australian beef – putting it ahead of the same period last year.

The significant range of smaller markets globally that take Australian beef are all expected to feel the impact of the contraction in production in coming years – especially in the price sensitive markets that also take beef from the other major global exporters.

Note: This article is the third in a series of four cattle market outlook articles written by Tim McRae, Bangalla Consulting. 

Stay tuned for the final article, that will be published on Tuesday 31 March 2015, that examines what all this means for cattle prices.

Why not read the previous articles:

What does this mean?

Strong export demand, accentuated by the low A$, will help to underpin the long term price outlook for Australian beef, and in turn Australian cattle producers. Demand for heavy cows, for manufacturing beef to the US, will be robust, helping to underpin cow prices regardless of seasonal conditions. Trading conditions to Japan, Korea and China will improve because of the improved market access, helping to assist demand for grainfed cattle and, thus, suitable feeder cattle.

Mecardo information is provided to assist in your marketing decisions. It contains a range of data and views on the current market. It is not intended to constitute advice for a specific purpose. Before taking any action in relation to information contained within this report, you should seek advice from a qualified professional. The information is obtained from a variety of sources and neither Mecardo nor Ag Concepts Advisory will be held liable for any loss or damage whatsoever that may arise from the use of information or for any error or mis-statement contained in this report. 


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