June 20, 2016
Australian beef: Not enough cows
An eFeedLink Hot Topic
  • A combination of high cattle prices, low dairy prices and drought pushed slaughter rates and beef production to historic highs in 2014-15
  • With both herds and beef inventories depleted, output and exports are falling steeply, by several hundred thousand tonnes this year
  • Rising cattle retention rates, good rainfall is encouraging a rebuilding of cattle herds, but beef output will not rise for at least another year
From 2013 through 2015, three years of arid, dry weather coincided with high cattle prices and a record setting dairy price crash. Although feed crop costs fell significantly over this time, this was not good news for Australian beef cattle farmers, as they are dependent on pastureland rearing to a much greater extent than cattle in North America.
These circumstances motivated Australian farmers to lock in high returns by selling off older beef cattle and excess dairy producing animals and before losses related to high feed costs or low dairy prices could be incurred.
From a peak of 29.29 million in 2013, total cattle inventories fell by 5.7% in 2013 and 5.8% in 2015, to 26.04 million. However, amid dwindling herds and falling cattle prices, both the economic incentive to cull and supply of available animals is falling sharply. 2016 has seen a continuation of longterm drought, particularly in northern beef cattle producing regions. With significantly fewer cattle left to slaughter, the resulting high feed costs will cause Australia's closing 2016 to again fall, though by a much smaller 1.5%, to 25.64 million head.
What is interesting is that while drought and high cattle prices play lead roles, most of the cattle culled for turning into beef are released from the dairy sector: Even though the total cattle herd is declining by 12.5% or 3.65 million head over three years, only 24.6% or 0.90 million of the culled animals are beef cattle. In fact, after falling 6.5% or from 13.9 to 13.0 million head in 2014, the number of beef cattle stayed unchanged entered this year unchanged.

In fact, despite dry conditions, with meat returns exceeding those from milk, the beef cattle herd looks set to expand by at least 500,000 this year. With rainfall returning to drought afflicted Queensland and New South Wales but dairy prices staying low, these states will lead a gradual rebuilding of beef cattle herds.
However, because much of the culling was driven by low dairy prices, a high proportion of female cattle were slaughtered. The shortage of fertile female cattle and rising cattle retention means that herd rebuilding will take more time than usual.
Moreover, when the Eastern Young Cattle Indicator hit a record price A$6.06/kg in February implied, the USDA noted that, "Industry experts have pointed to this price signal as firm evidence of herd rebuilding becoming a greater priority for the Australian industry." In fact, from the time the mass culling commenced through early 2016, the price of young cattle more than doubled, from under A$3.00/kg to over A$6.00/kg. All this implies that many young cattle are being retained for herd expansion -and therefore cannot induce a recovery in beef supplies for at least another year.
This is now being reflected in cattle slaughter rates: 2014 saw 9.91 million cattle slaughtered and 2015 2015 saw 9.70 million sent to market. These were the highest number of Australian cattle slaughtered since the late 1970s –when herds were nearly 25% larger than they are today. Analysts such as Rabobank project this year's slaughter numbers to fall by 15% to 20%, possibly totaling less than 8 million head. With the number of cattle being released to beef processors falling so steeply, neither Australian beef's output nor exports can be maintained.
On one hand, the excessive culling initially caused Australian beef production to rise by 10% for two consecutive years, with output rising from 2.15 million tonnes in 2012 to a peak of 2.60 million tonnes in 2014. On the other hand, with total cattle numbers at their lowest level since the turn of the decade, beef production is now on a downtrend that is being felt in world markets.
After peaking in the 2.55 to 2.60 million tonne range during 2014 and 2015, this year will see beef production of only 2.18 million tonnes. This translates into 16% less beef than two years ago and 14.4% less than what was produced in 2015. With 2/3rd of output exported, it means that the world will get 18% or 329,000 tonnes less beef than what it bought from Australia a year earlier.
Of course, when an export-oriented producer's output falls, its exports fall even faster. Hence, from a record 1.854 million tonnes in 2014, 2016's USDA projected 1.525 million tonnes of beef shipments is a 17.7% drop in volume over two years. Most of this drop will be accounted for by a low end meat line and the US market.
Australia shipped 420,000 tonnes or 22.6% of its 2015 beef exports to America, but nearly 300,000 tonnes of this amount is accounted for by ground beef. Amid falling Australian beef supplies and rising US production, hamburger-hungry America is expected to source over 100,000 tonnes of the ground beef it usually buys from Australia from either Latin America or rising domestic production.
After rising 30% in 2015, exports to South Korea look set fall, as that country cuts tariffs on US beef faster than on its Australian competition. From 182,000 tonnes in 2015, Australia's beef exports to South Korea may fall back to the 140,000 to 160,000 tonne range it fluctuated in from 2010 to 2014.
Elsewhere, the world is getting hungrier for beef and Australia does not have enough of it to satisfy everyone. From pure self-interest, it will direct most of its smaller stock of exportable beef to Japan, the world's largest market and China, its fastest growing customer, preferring that export volumes to the rest of the world fall rather than those to its top import markets.
Moreover, even that is made possible by running down inventories. From the average 80,000 tonne range seen in the years 2000 through 2013 inclusive, closing beef inventories fell from 90,000 tonnes in 2013 to 55,000 tonnes in 2014, 56,000 tonnes in 2015 and are expected to finish 2016 at a razor-thin 12,000 tonnes. Clearly, even if world beef demand rises to new heights, there is no way Australia can take full advantage of it, at least not for a few more years.
The good news is that despite such low inventory levels, Australian beef farmers now enjoy the same historically high beef prices that kick-started America's own cattle herd expansion a few years ago. Even better, with meteorologists forecasting La Nina condition in H2 2016, its parched pastureland should continue to recover and become greener well into 2017. The bad news is that La Ninas have come and gone over the past decade -and Australian beef cattle need several years of above average rainfall, rather than the next six months.
Nevertheless, should mother nature smile rain clouds upon the Lucky Country, by the end of this decade, the global economy should recover and with it, both Australian beef production, and the world's hunger for it.

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