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Thursday, June 04, 2015

Record beef exports - a double-edged sword

By Augusto Semmelroth  |  Source: DAFF, MLA

Key points

  • Stubbornly strong cattle slaughter rates continue to be the main driver behind record beef exports in 2015.
  • Year-to-date beef shipments have surpassed the 525,000 tonnes swt already and are 33.5% above the 5-year average for the January-May period.
  • Key export markets continue to absorb unprecedented levels of Australian beef at record (or near record) prices, depending on the market.
  • The relentless pace of beef exports raises pertinent questions about how much further can the herd be liquidated and the potential impact on future beef production.   

2015-06-04 Beef Exports FIG 1

2015-06-04 Beef Exports FIG 2

2015-06-04 Beef Exports FIG 3

Despite the general talk that cattle numbers are starting to dwindle, the weekly slaughter stats from Meat and Livestock Australia (MLA) and export data from DAFF continue to show a divergent trend. That is, cattle slaughter and export levels continue to track above last year’s record levels, with year-to-date beef shipments amounting to 527,973 tonnes swt, 9.5% above the corresponding period in 2014.

Robust export demand, patchy seasonal conditions, a lower A$, and record cattle and beef prices continue to create the perfect storm for the ongoing herd liquidation and, consequently, unprecedented beef export volumes this year. While surpassing 2014 levels seemed unconceivable at the start of the year, the first five months of 2015 have defied industry and analyst expectations by a fair margin…again.

To put the relentless pace of Australian beef exports into perspective, figure 2 shows the monthly shipments and the 12-month rolling average. Up until 2013, there were rare occasions where monthly exports exceeded 90,000 tonnes swt mark, with the 12-month average moving around 80,000 tonnes swt. Since 2014, monthly shipments have rarely fallen below 100,000 tonnes swt, while the 12-month rolling average is now a notch above 110,000 tonnes swt.

At the export market level, the US remains the key driving force behind the surge in exports, with year-to-date volumes totalling 185,279 tonnes swt. That’s a 50% increase over the corresponding period in 2014 and a whopping 105% surge over the 5-year average for the January-May period. As a percentage of total shipments, the US now receives 35% of all Australian beef shipped overseas.

Although the US continues to steal the spotlight, there are also positive signals coming out of other key overseas markets. Year-to-date exports to Japan (now the second largest market) are at 117,262 tonnes swt, a 9.3% increase on 2014 levels. That’s despite a surge in beef prices, with the average price of the chilled grassfed fullset between January and May at 844¢/kg FAS, a 36.5% rise year-on-year.

Trade conditions with South Korea have also improved to see year-to-date shipments reaching 62,412 tonnes swt. This is a 4% increase on 2014 and 20% above the 5-year average for the period. As with Japan, higher prices have not yet significantly deterred Korean importers. As of May, the Chuck Roll imported from Australia was quoted at 10,050 won/kg, a record high and 32.5% above May 2014 price levels.    

What does this mean?

The stubbornly strong pace of beef exports continues to be a double-edged sword for the Australian beef industry. On the one hand, it confirms overseas demand is remarkably strong given the volumes and record export prices seen over the last 9-12 months. On the other, it just reaffirms that we continue to liquidate our herd at an alarming rate. This, of course, will have a profound impact on our future production capabilities in the medium to long-term (1-5 years).

The recent surge in saleyard cattle prices are a clear reflection of the robust export fundamentals, while domestic users and end consumers struggle with the stubbornly high beef prices. Yet, with more than 70% of our production heading overseas and expectations of a lower A$, export markets will continue to dictate the value of beef and the potential upside for cattle prices.

With that in mind, the inevitable contraction in supply when seasonal conditions turn for the better (perhaps only in early 2016) is expected to support even firmer cattle prices down the track unless export demand reverses completely by then. But that seems rather unlikely at this stage.         

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