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Thursday, February 16, 2017

Cattle take the profitability lead

By Angus Brown  |  Source: LFMP, ACA

Key points

  • High prices saw cattle producers reach record profitability levels in 2015-16.
  • Cattle gross margins outperformed sheep in Western Victoria by record levels, but for just the 11th time in 45 years.
  • Strong margins in cattle production will help push the cattle rebuild, and the market will correct in the medium term.

2017-02-16 Cattle Fig 1

2017-02-16 Cattle Fig 2

2017-02-16 Cattle Fig 3

The release of the Livestock Farm Monitor Project (LFMP) for the 2015-16 financial year confirms that cattle producers have ‘never had it so good’. Increased prices saw a record gross margin per hectare achieved and it has put cattle at the top of the tree in terms of livestock operations.

The LFMP has been running for over 40 years and runs financial analysis of farms across Victoria in order to gather information trends in farm production and profitability.  The longest dataset is for south west Victoria, and figure 1 shows that 2015-16 was not only the best year average sale price in real terms, but also the best year for real gross margins per hectare.

The average sale price of south west cattle producers in 2015-16 was $1,126/head.  Variable costs came in at an average of $288/ha, which was down considerably on 2014-15 levels of $368/ha. The result was a gross margin per hectare of $618/ha, up 49% on last year, and 6% in real terms on the previous record set in 2010/11.

Cattle price is obviously one of the major drivers of profitability in cattle enterprises.  Figure 2 shows a solid linear relationship between average sale price, and gross margin per hectare.  There is a very good chance 2016-17 will result in another record year for both price and gross margin per hectare.

Figure 3 shows how cattle gross margins compare to lamb and wool enterprises over the last 45 years.  Before 2015-16 cattle have been ahead of lamb 10 times.  The previous best result for cattle compared to lamb was $59 in 2000-01.  In 2015-16 cattle gross margin outperformed lamb by $121/ha, and wool enterprises by $408/ha.

What does this mean?

With cattle gross margins reaching records in 2015-16, and likely to surpass this in 2016-17, is should be no surprise that cattle producers are expanding the herd.  There is little doubt that cattle prices, and margins will correct, we have seen in the past that cattle producers will expand the herd at gross margins of $350/ha in today’s terms.

According to the trend in figure 2, average cattle prices can fall 33% and see cattle producers still turning a reasonable profit.

It seems unlikely cattle will take too much area off sheep, as figure 3 shows prime lamb operations are not far off cattle, while wool producers should enjoy somewhat of a resurgence this year.

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