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Thursday, September 17, 2015

Record grainfed cattle supply eclipsed by grassfed liquidation in 2014/15

By Augusto Semmelroth  |  Source: ABS, ABARES, MLA/ALFA, ACU

Key points

  • Record cattle slaughter rates in recent years mainly driven by a surge in grassfed turnoff.
  • Despite record cattle on feed numbers, grainfed cattle slaughter rates fell shy of the spike in grassfed throughput since 2011/12.
  • Grainfed beef production expected to represent a larger percentage of total output in coming years.
  • This will likely see grassfed cattle discounts to grainfed lines to shrink below the levels seen during the drought.

2015-09-17 Grainfed Vc Grassfed Article FIG 1

2015-09-17 Grainfed Vc Grassfed Article FIG 2

2015-09-17 Grainfed Vc Grassfed Article FIG 3

Grainfed cattle slaughter numbers have grown steadily since 2011/12 to reach a record level of 2.75 million head in 2014/15. However, despite the 12% increase in annual grainfed throughput from 2011/12 levels, the percentage of cattle finished on grain fell from 34% to 29% of the national slaughter tally in 2014/15. With the end of drought-induced turnoff looming, grainfed marketings will regain some market share going forward.

National adult cattle slaughter has skyrocketed over the last three financial years. After an intense but short-lived herd rebuild phase between 2010 and 2012, the herd was rapidly liquidated on the back of remarkably poor seasonal conditions in northern Australia and robust export demand. By 2016, the herd is expected to be reduced to its lowest level in 20 years, somewhere around 26-26.5 million head (figure 1).

While much has been said about record grassfed and grainfed cattle turnoff levels in isolation, the comparative magnitude of the surge in throughput is hardly gauged. Anecdotally, grassfed turnoff is king under a liquidation phase as females exit the herd and producers rapidly destock. However, given the strong increase in cattle on feed numbers since 2013, have grainfed marketings risen at a similar pace to their grassfed counterparts this time?

To put the recent surge in grainfed and grassfed killings into perspective, figure 2 shows an index portraying the growth in annual slaughter rates using 2011/12 as a base. The results are quite telling and give a better idea of the magnitude of the spike in grassfed killings compared to grainfed.

Despite the historically high feedlot utilisation rates and record grainfed marketings in 2014/15 with over 2.75 million head slaughtered, numbers were only 12% higher than they were in 2011/12. On the flipside, annual grassfed cattle turnoff has grown by extraordinary 40% in comparison to 2011/12 levels to reach 6.67 million head in 2014/15.

As grassfed cattle slaughter growth has outpaced the rise in the number of cattle finished on grain by a fair margin, grainfed turnoff as a percentage of total output has declined from around 34% in 2011/12 to 29% last financial year (figure 3). That’s the lowest level seen since 2007/08.

Yet, this scenario is expected to reverse quickly in 2015/16 and beyond to see grainfed turnoff move back towards 32-34% of total killings. This is a result of the combination of a sizeable contraction in grassfed slaughter rates and expected high cattle on feed numbers going forward.       

What does this mean?

This analysis helps us understand that, despite the ongoing increase in grainfed cattle production in recent years, grassfed supply has been the real driver behind the surge in beef output during the period. Much of it, of course, originated from an intense liquidation of breeding stock in northern Australia, which underpinned the drastic reduction in the herd size.

Feedlots are likely to face more challenging market conditions going forward, particularly around securing feeder cattle. However, as feed grain prices ease and robust export demand for grainfed cattle is expected to continue to support firm prices, cattle on feed numbers are expected to remain high in the foreseeable future. 

With grassfed throughput projected to decline sharply from 2016 onwards and grainfed cattle production to remain largely steady, grainfed output as a percentage of total beef production will increase. That’s good news for grassfed producers. As grassfed beef becomes relatively more scarce, discounts to grainfed are likely to remain at minimal levels.

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