By Augusto Semmelroth | Source: MLA
Meat and Livestock Australia (MLA) released its cattle industry projections (Q3 update) this week. While the key long-term supply and demand trends remain largely unchanged, major upward revisions on production and exports have been made to reflect current market conditions. Overall, the report paints a positive picture for producers, but less so for processors and, in particular, domestic consumers.
MLA has made its boldest upward revision on cattle slaughter rates ever to reflect the remarkable cattle turnoff rates seen since the start of the year. To put things into perspective, the first projection released in January pegged cattle slaughter for 2015 at 7.8 million head. The latest estimate is pegging it at 9 million head or, in other words, an additional 1.2 million head are expected to go to the hooks this year.
At any point in the past, this surge in slaughter rates would have flooded domestic markets to see cattle prices crushed. This time, markets have defied their usual supply/price dynamics with prices actually moving to all-time highs. And it goes without saying that robust export demand has played a pivotal role in absorbing this excess production to support firm cattle prices.
This renewed strength in export demand, and a more favourable exchange rate environment, were obviously factored into MLA’s estimates. As such, export estimates were revised from 1.15 million to 1.29 million tonnes swt for 2015, a 12.2% increase. If realised, this would also see total beef shipments surpass the record levels seen in 2014 by 2.3% (figure 3).
Looking beyond 2015, the supply/demand outlook and its implications are very clear. Cattle slaughter and beef production will inevitably plunge after the extended liquidation of the herd, while export markets will account for a larger share of the throughput pie. That, of course, will come at the expense of the domestic consumer who will have to reduce their beef intake and pay more for the “luxury” of eating beef.
Figure 1 and 2 help to put into context how intense the reduction in beef output will be in 2016 and beyond. Cattle slaughter is estimated to fall to 13.3% in 2016 to 7.8 million head followed by a further 11.5% drop in 2017 to 6.9 million head, a 20-year low. Figure 1 also shows the difficulty, and time required, to ramp up production.
To conclude, exports are projected to account to 77.5% of total beef production in 2015 before stabilising at around 75% until the end of the decade. That’s far removed from the historical export/domestic ratio of 65/35.
While the major slaughter/production and export upward revisions for 2015 came as no surprise, they do reinforce the relentless pace of the herd liquidation. On the flipside, they demonstrate the remarkable capacity of export markets to absorb unprecedented volumes of beef at record price levels.
We are finally reaching a tipping point where the supply pendulum will quickly turn in favour of producers, as far as prices are concerned. The current ‘high slaughter/high price’ environment just supports our view cattle market have not reached their full potential yet.
That view is backed by the fact that domestic cattle markets remain undervalued against global beef prices. Going forward, we also expect global beef markets will have an increasing weight of domestic cattle pricing given the larger share of total beef output sold through export channels. With that in mind, we firmly believe cattle prices will finally be able bridge the gap to export benchmarks once supply tightens in 2016 and 2017.
The good news is that export demand is unlikely to wane much in the medium-term, while the lower A$ will support higher beef values in our terms.
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