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Tuesday, March 24, 2015

Long-term shortage of slaughter cattle - what impact?

By Tim McRae, Bangalla Consulting  |  Source: MLA, ABARES

Key points

  • Australian herd still in rapid decline, fuelling the higher slaughter rates in early 2015
  • On current forecasts, the herd will fall to a historically low level by 2016, assuming an improvement in seasonal conditions, and possibly further if drought conditions continue.


2015-03-23 Cattle Long Term Supply Outlook FIG 1

Trying to forecast the exact level of the Australian cattle herd at any point in time can be difficult, to say the least! The combination of long-lagged ABS herd data, lengthier (compared to other enterprises) production payoffs following breeding decisions for cattle, varied seasonal impacts across the expanse of the continent and massive turnoff rates in recent years, all combine to make the task very challenging.

Recent herd forecasts by Meat and Livestock Australia (MLA) and the Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES) out to 2020 are very similar. This is largely expected, given both organisations use very similar data sets and methodologies. Both MLA and ABARES currently place the Australian herd at around 26.8-27 million head, with a further decline in the following year, bottoming out at 26.5 million head in mid-2016 (figure 1).

Herd growth is then forecast from 2017 onwards, with MLA a little more “bullish” on the herd growth through to 2020, reaching 27.9 million head. This compares to ABARES’ 27.3 million head towards the end of the decade.  However, regardless of who is making the forecast, it is blatantly evident that the Australian cattle herd will be operating with at least 2 million head per year less over the next five years – compared to the past few years. Indeed, the Australian cattle herd was forecast to have reached 29.3 million head in mid-2012 – the response to rapid herd rebuilding after the two wettest years on record in 2010 and 2011.

However, one major factor that cannot be considered in the above forecasts, but is widely subscribed to by many within the industry is the impact of the “phantom herd” within the turnoff rates each year.

The “phantom herd” refers to the widely held belief that the national herd has always been under-reported, possibly by 10-15%. Indeed, it can often be heard that in drought years, an additional 10% more cattle can enter the market - helping to explain the longer and higher turnoff rates through the drought periods of the past 2-3 years. The same “phantom” herd can also come into play when prices spike, with “cattle coming out of the woodwork” when the market is favourable for selling.

Thus, if drought and high prices can induce the “phantom” herd to enter the market, if both factors occur at the same period, huge numbers of cattle can be experienced – possibly explaining the fast start to slaughter levels in the first ten weeks of 2015.

The other very interesting point of the “phantom herd” is that is disappears upon the delivery of improved seasonal conditions, leaving many who account for it in both the dry and wet periods significantly short of cattle – as occurred in 2010 and 2011 (when annual slaughter was just above 7 million head).

So, given the massive turnoff since mid-2012 through to today, the Australian cattle herd continues to decline quickly. Thus, before any herd growth can be reported, which would be at least two years in the making (taking us out to 2017 at the earliest), the decline needs to first be halted…which is normally preceded by widespread rain and above average seasonal conditions. 

Note: This article is the second in a series of four cattle market outlook articles written by Tim McRae, Bangalla Consulting. Stay tuned for the next article examining export markets. The final article, looking at the outlook for price, will be published next Tuesday 31 March 2015.

Read previous article: Cattle supply outlook 2015: how long can the large turnoff rates be maintained?

What does this mean?

An Australian cattle herd that is in rapid decline, approaching 26-27 million head throughout 2015 is likely to create a long-term shortage of slaughter-ready cattle over the next 3-5 years. Therefore, those producers that are able to retain stock or even commence rebuilding earlier than the majority of the national herd, are likely to position themselves to take advantage of very good prices – especially for breeding cattle.

However, with history as an indicator, producers should also be aware of the “phantom herd” impact if sustained dry conditions prevail – as such, when things are hot and dry, more cattle will come forward, for longer than anticipated. The same goes for higher prices – with the larger offerings just taking the steam out of price increases earlier than expected.

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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