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Wednesday, April 15, 2015

Hang in there, looming cattle shortfall only postponed

By Augusto Semmelroth  |  Source: MLA, ABS

Key points

  • Supply pendulum has not yet turned but is about to.
  • MLA revised cattle throughput higher from January estimates for 2015 and 2016.
  • Export demand for live cattle and beef is also firmer than previously expected, which bodes well for cattle prices when turnoff finally comes to a halt.
  • Short-term upside should be expected in southern markets under average rainfall conditions until June, but the real upside potential will only be unleashed later in the year.  

2015-04-15 Cattle Update MLA FIG 1

2015-04-15 Cattle Update MLA FIG 2

2015-04-15 Cattle Update MLA FIG 3

Meat and Livestock Australia (MLA) released its quarterly industry projections this Monday with some noteworthy upward revisions on January’s estimates for cattle slaughter, beef production and exports. Overall, MLA believes supply will be larger than expected in 2015 and 2016, yet still well below the levels seen in 2013 and 2014. Putting it differently, the looming supply shock has only been postponed.

For those regular readers, MLA’s upward revision in cattle slaughter and beef production for 2015 will come as no surprise. The stubbornly strong cattle turnoff levels seen since January have prompted MLA to increase slaughter levels for 2015 by 5% from January estimates to 8.2 million head (figure 1). Yet, it’s worth noting that this still represents an 11% contraction in slaughterings from 2014 (figure 2).

For 2016 and beyond, MLA has also made some minor adjustments on the January estimates for cattle supply. While cattle slaughter levels for 2016 were revised 2.7% higher to 7.5 million, the numbers for 2017 were lowered 2% to 7.1 million head (figure 1). If realised, this will be the lowest slaughter level since 1996 and 23% below the 2014 tally. In other words, cattle and beef output is expected to drop sharply over the next two years on the back of reduced female slaughter and lower availability of steers.

But what are the implications of this week’s updates for the short-term? Assuming just over 2.2 million head have been slaughtered in the first quarter, it’s expected there will only be roughly 6 million head left for the remainder of the year. Over the corresponding period in 2014, an excess of 7 million head of cattle were killed. This means that MLA assumes there will be a shortfall of around 1 million head, or 15%, in comparison to 2014 between April and December.

On the live export front, MLA has also made a major upward revision on their January projections. For 2015, total live exports were lifted 16.5% to 990,000 head on the back of improved trade conditions with Indonesia, particularly in Q2 with 250,000 head permits allocated. Numbers were also revised 12.5% higher to 900,000 head for 2016.

Interestingly, MLA has left its estimates for the herd unchanged at 26.8 million for 2015 and 26.5 million head for 2016. That’s a bit surprising given that the combined increase in cattle throughput (slaughter + live export) for both years are in the order of 840,000 head from January estimates. Either this will come from the anecdotal “phantom herd” or the herd will end up smaller than expected.    

What does this mean?

Despite the long-term nature of MLA’s forecasts (5 years or more), they play a critical role in short and medium-term decision making at the farm level. We welcome MLA introducing quarterly updates, as they will ensure the projections remain relevant.

In general terms, the key messages are almost the same from January with just a few tweaks here and there. The overall emphasis remains on the long-term supply scenario after the latest severe herd liquidation phase. As MLA previously stated, the “supply pendulum is about to swing back towards producers’ favour” when seasonal conditions improve.

Although we did not cover the MLA projections for exports, overseas demand is expected continue remarkably firm in 2015 and beyond, underpinned by US and Japan. As far as prices are concerned, the market recovery since this year has been driven by the looming prospects for tighter supplies rather than an actual reduction in numbers.

With that in mind, we remain optimistic about the outlook for prices when the “supply pendulum” really turns and is met by insatiable export demand. If southern markets receive decent rainfall in winter, prices should gain some solid ground over the coming months already. And that will set the scene for the real upside potential to come later in the year when the northern wet season gets started.          

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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