January 18, 2016
Australian beef cattle begin their long uphill climb
An eFeedLink Hot Topic
  • High prices caused a sharp upturn in cattle retention, the lowest slaughter rates since 1989
  • Beef production is falling to its lowest level since 2003
  • Falling domestic consumption, fewer live exports, higher finishing weights kept exports from falling further than they otherwise would have
  • Amid recovering inventories and downtrending cattle returns, slaughter, beef production, exports should rebound from 2018 onwards
For Australian beef cattle, the worst is over but a substantial recovery is still two years away. Previously, an ongoing recovery in US cattle numbers coincided with a drought-induced culling of Australian herds. From a peak of 29.3 million head at the start of 2014, Australia's cattle herd fell 6.5%, totaling 27.4 million at the start of 2016.
Beef cattle numbers fell an even sharper 8.3% from 13.66 million to 12.50 million head over this time. The good news is that drought conditions have eased and healthy rainfall has been restoring parched pasture land for the last six months. The bad news is that while cattle numbers have stabilized, their long growth period means that it will take some time before this translates into significantly higher beef output.
At first, the culling's record slaughter boosted beef production by nearly 20% over two years, from 2.13 million tonnes in 2012 into the 2.50 to 2.60 million tonne range during the 2015-16 peak culling period. Thereafter, beef production fell by 20% over two years, slumping to 2.075 million tonnes in 2016, far more than the actual drop in cattle inventories over this time.
That occurred due to last year's sustained period of exceptionally high cattle prices, which encouraged cattle retention, particularly of cows and heifers. This trend is extending itself into this year. 2018 is expected to open with cattle inventories up 4.4% in two years. Even so, a 22.1% fall in cattle slaughter rates over this same period means that beef production will defy the inventory rise and drop another 2.9% in 2017.
After staying in the 9.0 to 9.9 million range during the 2013-15 drought culling years, cattle slaughter totaled 7.8 million head in 2016, significantly lower than the ten-year average of 8.3 million head for the years 2007 through 2016 inclusive. With cattle retention momentum still strong, the USDA forecasts slaughter to fall again this year. At 7.53 million head, it is the fewest number of cattle slaughtered since 1989's 7.49 million head.
The 2.015 million tonnes of beef Australia will produce this year is its lowest production volume in the since the approximately 2.0 million tonnes produced in 2003. Interestingly, at 8.9 million head, 2003's slaughter was higher than this year's but produced less beef.
The reason is cattle beef carcass yields. They rose from a low of 224kg in 2003 to between 260kg and 270kg range by 2010. They have fluctuated in this range ever since. For 2017, high returns and a shortage of cattle are causing farms to again boost finishing weights. At 268kg, the resulting beef carcass yield of 268kg equals the all-time high set in 2011.
Even so, the radical reduction in both inventories and slaughter cannot be offset by higher finishing weights. With domestic consumption a near constant, the reduced output is denting Australian beef's trade position. Consequently, the Lucky Country went from exporting a record 1.85 million tonnes in 2014 and 2015 when mass culling peaked to 1.385 million tonnes in 2016.
This is 25% below their 2014-15 peak and significantly less than the 1.53 million tonnes the USDA had predicted for last year. The damage is greatest in Australia's most lucrative export markets. In the first ten months of 2016, export volumes to America and China fell 44% and 36% respectively. The allowed re-entry of US beef into China, an ongoing recovery in US domestic production played minor roles. Growth in smaller markets like South Korea (+4%) could not undo such a steep drop off in shipments to two of the world's largest beef importers. Even so, the biggest reason was a shortage of exportable Australian beef itself.
This drastic fall in beef exports is also putting Australia's world beef market position at stake. Two years ago, Australia exported 826,000 tonnes more beef than the United States and was the world's top beef exporter. In 2017, Australia will be the 3rd ranked beef exporter and only sell 132,000 tonnes more than fourth ranked America.
The trade performance would have been even gloomier had falling domestic consumption not freed up approximately 100,000 tonnes for export over the last four years. At 717,000 tonnes, domestic consumption came in better than expected. It fell 2.5% from a USDA estimated 735,000 tonnes in 2015. This was significantly less than the 685,000 tonnes initially projected. Even so, 2017 beef consumption is projected to fall yet another 1.7%, to 705,000 tonnes.
This will be the lowest beef consumption level this century, some 12.8% below its 806,000 tonne peak set in 2013. Over those 12 years, per capita consumption has fallen from 39.9kg in 2004 to 29.4kg this year. In all however, consumption will have fallen by 85,000 tonnes since exports peaked in mid-decade.
Exportable beef supplies have also been sustained by falling live cattle exports, which are mostly shipped to Indonesia and to a lesser extent, China. They have declined by 23%, from 1.3 million head in 2014-15 peak years to an estimated 1.0 million head today. Based on beef carcass yields, the drop in live cattle shipments augmented exportable beef supplies by approximately 80,000 tonnes.
Ironically, the additional 165,000 tonnes of beef exports that falling consumption and fewer live cattle shipments made possible have preserved Australia's world market standing. Without them, instead of exporting 132,000 tonnes more beef than America in 2017, it would have fallen behind the US in beef export rankings.
Going forward, the US cattle herd is expected to expand by at least 200,000 head more in 2017 than Australia's. It may even expand more than Australia's cattle herd in 2018, but it does not appear that Australia will be overtaken in beef exports by America.
The US dollar 's recent rise against its Australian equivalent looks to persist for at least several years. That means that in many markets, buyers will prefer Australian beef over its US equivalent whenever possible. It's just a matter of Australian world market supplies rebounding, which will occur as today's cattle herd additions mature.
At the same time, Australian cattle prices appear to have peaked in Q4 2016. With the herd expanding and a bountiful long-term rainfall forecast promising good finishing weights, rising supplies should make cattle prices undergo a longterm fall into 2018 and beyond. That in turn should boost slaughter rates just in time for today's additions to the national cattle inventory to mature.
In sum, Australia's cattle inventory cycle has already turned upwards but its supply and export volumes lag by up to two years. With its industry cycle currently bottoming out, 2017 1.325 million tonne of beef exports are the lowest volume since 2003's 1.24 million tonnes. From 2018 onwards, rising supplies and a cheap currency should power an Australian beef export rebound to 1.5 million tonnes and beyond through the end of the decade.

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