By Augusto Semmelroth | Source: MLA's NLRS, ABS, USDA
Domestic cattle markets and retail beef prices reached record levels in the September quarter (Q3). While anecdotally higher saleyard cattle prices have placed enormous pressure further down the value chain, retailers have failed to pass the full increase in prices onto the consumer. This article will look at the long-term performance of cattle markets and retail beef, and assess the potential ramification for farmers and consumers.
Despite a period of stagnation, and minor down cycles, cattle and retail beef prices have trended upwards since 2000. As shown in figure 1, the saleyard (trade steer price) and retail indices (2000=100) had reached 132.9 and 156.5 points, respectively, by the end of 2014. Annualising the rate of growth during this period, cattle prices have increased by 2.2% per year while retail beef prices have grown by 3.75% per year.
It’s hard to pin down one specific reason why the rate of growth in cattle prices has lagged those of beef at retail over the last 15 years. However, as domestic cattle markets finally start to fully price the robust export fundamentals, dwindling supply and the lower A$ environment, prices have taken off to see cattle prices outperform retail beef substantially this year.
Looking at figure 1 again, the saleyard index has moved from 132.9 in the last quarter of 2014 to 218.6 points last quarter, which means trade steers are currently 118.6% above the levels seen in 2000. The retail index, on the other hand, has just moved incrementally from 156.5 in 2014 Q4 to 167.6 points in this year’s Q3.
As a result, the saleyard share of total retail value has also surged from 21.5% in 2014 Q4 to a record level of 33% in the September quarter (figure 1). That’s an astonishing 10 percentage points above the 2000-2014 average of 23% and may suggest saleyard markets have overheated and will need to pull back. The opposite may also be true, in that retail prices are set to continue climbing higher.
That said, there is little in terms of statistical analysis in our toolbox to perform a thorough assessment of these price relationships to see if the current levels are flagging a downturn for cattle markets. In contrast to the US with its domestic-centric cattle market and strong correlation between farm-gate and retail prices (figure 2), our saleyard prices have a fairly low correlation with retail beef prices (figure 3).
It’s difficult to draw any conclusive opinion about the current discrepancy in the domestic cattle and retail beef price rally in 2015 at this stage. In theory, consumers should start baulking at high prices, which will hamper demand for beef and could start to have a flow-on effect on cattle prices at some stage.
However, we need to remember we are currently exporting almost 75% of what we produce. For this reason, export demand and the A$ tend to have a greater impact on beef pricing than the domestic market. That view is supported by the weak relationship between saleyard cattle and retail beef prices. Therefore, it’s hard to gauge if the lagging rise in retail prices is flagging downside risk. It may not.
To conclude, one thing is certain. Processors, wholesaler and retailers are already feeling the squeeze. As cattle prices surge and price transfers down the value chain take longer to unfold, margins will invariably deteriorate. Another clear message from this analysis is that retail beef prices will most likely continue edging higher in the short to medium-term to test consumer demand for red meat.
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