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Wednesday, March 11, 2015

Cattle slaughter down in Queensland but unlikely to stay

By Angus Brown  |  Source: ABS, MLA's NLRS

Key points

  • Queensland slaughter has been running below last year’s levels for the last month, assisted by cyclone-induced closures.
  • Record slaughter levels in NSW, Victoria and SA in February and March as strong prices and a lack of feed draw cattle for slaughter.
  • If southern slaughter continues to trend similar to 2003, like it has so far, supply could get very tight in the winter and spring months.

2015-03-10 Cattle Slaughter Weakening In Qld FIG 1

2015-03-10 Cattle Slaughter Weakening In Qld FIG 2

2015-03-10 Cattle Slaughter Weakening In Qld FIG 3

Cattle slaughter in Queensland has taken a turn lower in recent weeks as cyclone Marcia disrupts processing at some plants. On the east coast in general, however, slaughter remains stubbornly high and continues to limit upside in cattle markets. The question now is when we can expect slaughter to wane, given that the rain that saw the market rally hasn’t yet impacted slaughter.

Figure 1 shows that Queensland cattle slaughter has dropped below last year’s levels. This was evident even before the cyclone saw closure of a couple of Rockhampton plants, causing a 7% decline in Queensland cattle slaughter. Last week, slaughter rebounded slightly but it’s still around 8% below the same time last year.  Normally, the first quarter of the year is the lowest slaughter period for Queensland, which means a ‘normal’ trend from here will see slaughter near 2014 levels from May onwards.

Despite the weaker supply and slaughter in Queensland in February and early March, slaughter at Victorian, NSW and SA plants has been running at levels higher than last year (figure 2). Moreover, the kill of the last six weeks is running 8% above 2014 levels. 

Strong prices, combined with declining pasture and hay supplies, appears to be drawing cattle out in the south.  Interestingly, the last time we saw Vic, NSW and SA cattle slaughter at these levels was in 2003, following a very dry 2002.  Figure 2 shows that, in 2003, the February / March period was the peak of southern supply for the year, with even November slaughter 13% below February levels.

In 2003, cattle slaughter declined even though prices rose rapidly (figure 3). The fall in slaughter was likely the driver of higher prices, with only a limited autumn break in March 2003.  In 2003, it was simply a case of cattle supply falling because of a lack of stock.

Unfortunately, it is difficult to use 2003-04 as a template for slaughter and price recovery from a period of record slaughter. This is because the discovery of BSE in Canada and the US during 2003 completely distorted the market.

What does this mean?

Continued strong cattle slaughter in the face of higher prices tells us a couple of things.  The first is that demand for cattle remains very strong. And, as we have pointed out before, there appears to be little pressure on processor margins, because slaughter would be waning if there was. 

The second point to make is that the lack of correction in cattle slaughter basically means it is still coming, with 2003 a good template for what could happen in southern markets. There is no template for Queensland, but it is reasonable to expect that slaughter won’t be any higher than 2014.

If a supply squeeze does occur, it will push cattle prices up to the break-even level for processors: where this is depends on beef markets.

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