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Thursday, September 03, 2015

Major contraction in beef exports flags the start of herd rebuild

By Augusto Semmelroth  |  Source: DAFF, MLA

Key points

  • Australian beef exports fell 5% year-on-year to 106,010 tonnes swt on the back of a continued contraction in cattle slaughter rates.
  • Declining turnoff has been the major driver of the easing beef shipments while export demand remains favourable.
  • Despite processor efforts to maintain slaughter capacity high by lifting OTH prices, improving seasonal conditions are finally having a positive impact on producer’s turnoff decisions.
  • We expect beef exports to continue tracking below year-ago levels until the end of the year and beyond once northern markets receive a solid wet season break. 

2015-09-03 Beef Exports FIG 1

2015-09-03 Beef Exports FIG 2

2015-09-03 Beef Exports FIG 3

Australian beef exports have at last started to dwindle more substantially on the back of an ongoing contraction in eastern states cattle slaughter levels. Although monthly shipments remain historically strong, total volumes eased 5% year-on-year in August to 106,010 tonnes swt. In our view, those numbers signal the end of a prolonged period of record exports, and anecdotally, the commencement of a herd rebuild phase.

Despite the ongoing robust export demand, record beef prices and a favourable exchange environment, beef shipments are quickly unwinding as processors struggle to secure supply. After tracking between 170,000 and 180,000 head in the first half of the year, eastern states weekly cattle slaughter numbers have gradually eased towards a 150-155,000 head range in recent weeks, a 15% contraction in supply (figure 2).

It goes without saying that processors have tried hard to keep numbers flowing in recent weeks. Yet, despite the considerable increase in over-the-hooks (OTH) prices and strong bidding at the yards, processors have failed halt the inevitable reversal in supply dynamics. While the decline in beef production will occur gradually over the short to medium term, the start of the downtrend is now evident.

To put things into a perspective, figure 2 shows the year-on-year change in beef shipments since 2009. Over the last three years, export growth has been almost uninterrupted, with rates varying largely from 10-25% from the previous year. As such, this has not only been one of the lengthiest phases of growth in export volumes in history, but also one of the most notable in its intensity.

Before 2012, beef shipments were generally capped at around 80-85,000 tonnes swt per month, a level that was hardly broken. Since the drought started, monthly volumes have progressively risen before plateauing at around 120,000 tonnes swt in late 2014 and this year. This may well have proved to be the limit of the beef industry’s processing/exporting capacity, and a level that is unlikely to be reached in the foreseeable future. 

As they stand, the August figure of 106,010 tonnes swt remains historically high. However, this was the first time in over three years that beef shipments fell more than 5% from the corresponding period in the previous year (figure 3). Although 5% doesn’t sound much, it shows that the excess drought supply is slowly being depleted. As seasonal conditions continue to improve, coupled with unwinding concerns over spring rainfall, beef exports are expected to continue to track below year-ago levels until the end of the year.

What does this mean?

The impact of declining slaughter rates on the east coast has finally started to filter through export volumes over the last two months. And despite the strong effort from processors to maintain killing levels by lifting OTH rates across the board, turnoff continues to dwindle on the back of improved pasture conditions, lower grain prices and a rosier seasonal condition outlook.

Going forward, exporters will have to adapt to a new trading environment where product availability will be tight and meeting export demand will prove more challenging. That trend has already started, but it won’t really take off until the end of the year or early next year after Queensland receives a widespread wet season break.

On the demand front, the outlook for the key trading partners remains fairly positive despite concerns over the Chinese economic slowdown. The slump in the A$ to US70¢, coupled with tight global beef supplies and the chronic shortfall in lean beef output in the US, will remain conducive for export demand in the foreseeable future. With that in mind, we expect processors will have limited options but to continue to keep cattle prices attractive to ensure sufficient supply is secured to meet demand. 

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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