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Thursday, February 06, 2020

Strong finish and strong start to processor margins

By Matt Dalgleish  |  Source: MLA, Mecardo

Key points

  • Strong beef export prices in December 2019 saw the beef processor margin model hit a record high of $411 profit per animal processed.
  • January 2020 saw the margin ease 42% from the record peak, but still managed a healthy $237 profit.
  • The prospect of a more favourable autumn rainfall pattern could put pressure on processor margins given the expected tight supply of cattle forecast for 2020.

 

2020-02-06 Cattle 1

2020-02-06 Cattle 2

2020-02-06 Cattle 3

A peak in key beef export prices during December assisted processor’s bottom line as 2019 ended with monthly margins reaching record levels during December. The start of 2020 has seen margins ease as local cattle prices firm with the rain, but still demonstrate a healthy beginning level.

Regular Mecardo readers would be aware of the strong performance of the 90CL frozen cow beef export price to the USA throughout the latter half of 2019. December saw the monthly average 90CL peak at 867¢/kg CIF, well above the previous 2015 record high of 727¢/kg. However, it wasn’t just beef export prices to the USA that were booming. The Japanese Fullset also reached a historic peak in December, breaking above 1000¢/kg - Figure 1.

Strong export market prices flowed through to solid processor performance during December 2019 with the Mecardo beef industry margin model also hitting a historic peak at a profit per head of cattle processed at $411. The previous record high was set during November of 2014 at $385 – Figure 2.

The strong finish for processor margins in 2019 pushing the annual average processor margin to $213 profit. Despite the record December 2019 figure, on an annual basis the processor margin was unable to best the 2014 annual average of $255 profit per head of beast processed.

Welcome rainfall through January has seen both young cattle and cow prices respond favourably. Combined with easing beef export prices this has seen the processor margin model for January 2020 come in at a profit of $237, while this is 42% below the December 2019 record it is still well above the $97 recorded for January 2019 – Figure 3. Indeed, this is the strongest start of the season to processor margins since 2014, when they achieved an average January profit of $261 per head. 

What does this mean?

The low cattle supply expected this season is likely to see the processor margin ease as we head towards the middle of the year. Furthermore, the move to a more favourable climate outlook could see restockers become more active, but this will depend on how wet the southern autumn break becomes.

It is a bit too early to get a confident rainfall forecast from the BOM for autumn. However, assuming a wetter season we could see processor margins tighten through the year in a similar fashion to the trend displayed during the 2015/2016 seasons as robust restocker activity began to compete for supply with processors pushing up the price for young cattle and cows.

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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