Farm Tender

Mecardo Analysis - Processor margins ease, but only slightly

This article is bought to you by Elmore Compost.

By Matt Dalgleish | Source: MLA, Steiner, USDA, ABS, AMPC, Trade, Mecardo

Processor margins remain at extremely profitable levels this month with meat works enjoying the benefits of robust beef export prices and a falling Australian dollar, which is helping to lift demand and prices for most categories of beef co-products.

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The Mecardo/AMPC processor margin model eased slightly during June to see a $274 benefit recorded per cattle processed, compared to $285 for May 2019. This places the annual average margin for 2019 at $205, significantly higher than the annual average of $36 achieved during the 2018 season (Figure 1).

The last time processor margins were this strong was during 2014. By comparing these two seasons, we can see that the half yearly average margins aren’t too dissimilar. Indeed, the January to June average margin in 2014 was a profit of $202, only $3 off the January to June margin for 2019.

Interestingly, the big gains in processor margins during the 2014 period came in the second half of the year, with the monthly margin peaking just shy of $400 during November of 2014 (Figure 2). The usual pattern for processor margins is for a tightening during the May to September period, as outlined by the ten-year average margin trend (dashed line on Figures 1 and 2). The trend has started to narrow this month, but we will have to wait and see what transpires as we head toward September this season.

2019-07-02 Cattle 1 2019-07-02 Cattle 2

Analysis of the annual female slaughter volumes and the annual processor margin demonstrate that there is a reasonably strong correlation. However, the processor margins currently being achieved are higher than what the normal relationship would suggest for 2019 based on an annual female cattle slaughter of around 4.25 million head (Figure 3).

2019-07-02 Cattle 3

*Note: The Mecardo/AMPC processor margin model is designed to reflect the general trend in meat works profitability and should be viewed as a reflection of an average industry participant. Input data used in the model can be revised post reporting each month as updated data becomes available. These amendments to can sometimes see previous figures revised to factor in data changes.


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Key points
   * The June 2019 processor margin came in at $274, a 4% easing from the updated May figure of $285.
   * Year to date, the annual average margin is at $205, which is $3 above the average margin achieved from January to June in 2014.
   * Late winter/early spring usually sees the margin narrow and the historic correlation between average annual margins and female slaughter volumes suggest that margins are likely to tighten in the latter half of the season

What does this mean?
Meat and Livestock Australia are forecasting annual cattle slaughter to reach 7.7 million head during 2019 and with the annual female slaughter ratio currently at 55.3% this equates to around 4.25 million female cattle slated to be sent to the abattoirs this season.

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It is likely that over the coming months the female slaughter ratio will begin to ease and will probably finish the 2019 season at around the 53-54% level. This suggests an annual cull of around 4.1 million female cattle come the end of the year and should put the annual average processor margin for 2019 at about $130-$150 per head of beast processed.