Australia’s depleted cattle herd may be showing early signs of rebuilding, with beef production and export volumes posting an increase in recent months, according to Rabobank’s latest Beef Quarterly report.
After nearly two years of decline, the agribusiness banking specialist’s report says, the increase in production and exports suggests Australia’s beef sector is ‘on the road to recovery’, but questions how long it will take for Australia to increase production to rebuild its presence and competitiveness in global markets.
Unlike recent herd-rebuilding efforts in the US – where beef cattle numbers have increased by over nine per cent in the past three years to return to more normal levels – the report says the dry seasonal conditions prevailing across much of Australia will limit the country’s ability to rapidly increase production, and a more gradual increase into global markets is expected.
Nonetheless, report lead author, Rabobank senior animal proteins analyst Angus Gidley-Baird says the recent lift in production and exports is an “encouraging sign” for Australia’s beef sector, with volumes returning to levels more in line with the longer-term average.
“During Australia’s beef cattle herd liquidation that took place between 2013 and mid-2016, more than four million head of additional cattle were taken out of the system, driving up domestic beef production to record levels of around 2.5 million tonnes per year,” he says.
“Since then, beef production has fallen for 22 consecutive months, right up until June of this year – when production posted an increase of 11 per cent year-on-year, followed by a 20 per cent rise in July.”
Mr Gidley-Baird says Australian beef production is expected to come in around 2.1 million tonnes in 2017 and – while this is a big drop from the volumes produced in 2013, 2014 and 2015 – it is a “return to more normal levels” seen in 2008 to 2013.
“In line with the recent lift in production, beef exports have followed suit,” he says, “with exports also staging a recovery since June to post a significant 22 per cent increase in August.”
Recovery or growth?
The report says with beef production and export volumes expected to return to the long-term average in 2017, it “may be one of those instances where recovery (to the longer-term average) is very quick”.
With production now at levels closer to the longer-term average, despite the national beef herd contracting to 26 million head, the question now facing the industry is how fast, and by how much, can the Australian beef herd grow, asks Mr Gidley-Baird.
Much of this, he says, will be determined by the productivity of the Australian beef cattle herd.
“With the Australian cattle herd down by 10 per cent, there is again the opportunity to grow the herd and replace culled cattle with more productive ones,” he says.
“By bringing in younger, fertile animals into the mix, there is the potential to increase the productivity of the herd, but this is currently being put on hold, to a large degree, by the dry seasonal conditions.
“The financial incentives to replace lost breeding cattle are also not really there at the moment, with the high cattle prices encouraging producers to turn over stock to make the most of the market – particularly in Queensland, where some producers haven’t had the opportunity to capitalise on the high prices.”
Based on current productivity levels, Mr Gidley-Baird says, it could take five years for the Australian herd to return to 29 million head and this timeframe could be pushed out further, depending on when seasonal conditions improve.
Where to for Australian exports?
In the medium term, the report says, a more normal production and export schedule, and declining Australian cattle prices, are expected to see Australia firm up its main export markets of Japan and South Korea.
“However with the US cattle herd growing, competition is expected to intensify in these two markets, and Australia really needs to watch the US as a key competitor,” Mr Gidley-Baird says.
“This is anticipated to be an increasingly important issue over the next five years as Australia rebuilds its herd, because if export volumes reach very high levels it could spark volatility in the market, particularly if there is a trigger such as drought or a change to trade regulations.”
Longer term, Mr Gidley-Baird says, Japan, the US, South Korea and China are all set to remain strong destinations for Australian beef, albeit growth of the Chinese market is forecast to be tempered by competition from the growing presence of the US and South American countries.
“In this competitive landscape, South East Asia may well be the biggest opportunity for Australian beef,” he says, “not only from a geographical perspective but also the relatively small size of the individual countries within this region may mean it is not as attractive for the US and Brazil who favour large volume markets.”
Have prices levelled out?
Mr Gidley-Baird says the current dry seasonal conditions have muted restocker demand and seen cattle and beef prices ease as a result, however “they haven’t fallen over a cliff as they appear to have managed themselves down”.
“While prices are certainly down from their lofty highs, they are a hell of a lot better than when we were last in a ‘normal operating environment’ back in 2012,” he says.
“And given we don’t have the cattle in the system to see another major herd liquidation in the short term, there isn’t much to trigger a further drop off in Australian beef prices, so it is likely prices could start to level out around current levels.”
Mr Gidley-Baird says Australian beef producers should use this “return to more normal market conditions” to consider where they want to be placed in the market.
“It is now a critical time for producers to be considering how they might improve their operations, whether that be improving genetics or forming supply chain partnerships,” he says.
Share Ag News Via