By Matt Dalgleish - Mecardo Blog.
In this series of blog articles, we’re taking a look back at the year that was for agricultural commodities and provide our insight for the year ahead.
This installment highlights 2018’s key movements in the cattle market and what to keep your eye on in 2019.
The 2018 season saw tough trading conditions for cattle farmers with a drier than average rainfall pattern impacting across the entire continent from April to September, which saw restocker activity curtailed and prices for store/young cattle ease.
The climate impact put a halt to the herd rebuild with the female slaughter ratio climbing rapidly during the first quarter of 2018 as the dry conditions intensified. Since April 2018 the female slaughter ratio extended beyond levels experienced during the last significant reduction in the cattle herd, during the 2014/15 drought, and with an annual average female slaughter ratio for 2018 above 50% demonstrates that the herd liquidation remains well entrenched.
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The 2018 drought saw feed grain prices surge placing pressure on feedlot margins. However, falling feeder values and firm finished grainfed cattle prices allowed enough margin to encourage an increase in cattle on feed to record levels beyond 1.1 million head.
What to keep an eye on in 2019
Climate
Global forecast models continue to suggest an El Nino is likely early in the 2019 season with warmer and drier conditions to persist for much of the country. A late start to the northern monsoon season appears likely which will continue to limit northern producer’s appetite to restock.
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If the 2019 season brings another failed autumn break to the south restockers here will remain on the sidelines and will continue to pressure young/store cattle prices. However, a return to more favourable conditions will see restockers encouraged back into the market with a vengeance.
USA moving to herd liquidation
The USA is our main beef competitor into the key Asian markets of Japan and South Korea, and it is also a key export destination for Australian beef, holding the second spot in annual beef export trade volumes behind Japan, so what happens in the USA can influence our cattle markets.
The USA is on the verge of entering a liquidation phase for their cattle herd during the 2019 season, which will mean additional supply will flow into the global market. Demand for beef from Asia remains strong and should be able to soak up some of the increased US production if they move into destocking phase. However, any hiccup in Asian demand could see global beef prices come under pressure and flow through to Australian markets.
China
The swine flu epidemic in China will impact upon their local pork production and Chinese consumers will have to source pork elsewhere. Ongoing trade tensions between the USA and China and tariff increases during the 2018 season will mean that the US pork industry may not be a viable solution to satisfy the gap in Chinese pork supply. This could see demand for meat protein in China transition toward increased consumption of chicken, beef and mutton during the 2019 season. An increased appetite for beef from China will be a positive for Australian beef producers.
Nevertheless, concern remains regarding a looming debt crisis within China. A financial shock in the form of debt induced drop in economic growth could see Chinese wealth and consumption levels take a hit, including the consumption of beef.
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The contagion of a Chinese debt crisis into Asian neighbouring countries and potentially spreading to the rest of the world could set off a second global financial crisis which would have disastrous consequences for Australia, beyond the beef industry. In terms of boxed beef product China takes around 10% of our export volumes. However, Australia is heavily tied to China across a range of export commodities and they are our top trading partner, so we need to keep a close eye on developments in China during the 2019 season.
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