1. Australian cattle industry projections - overview
It is often instructive to look for clues to near term prospects in the most recent past, and this appears particularly pertinent for Australian cattle and beef prices. In 2011, cattle prices rose significantly (6-12% above the previous year) for the second successive year, despite a record A$, demand downturn in Japan, global economic turmoil, increased competition from US beef in export markets and disruptions to live exports.
These significant negative demand shifts were more than offset by the supply side factors of a global contraction in beef supplies, a second successive favourable season for Australian cattle producers, and growing demand for Australian beef from a coalition of smaller export markets.
The fall in global supplies led to around a 20% rise in both US and South American cattle prices (in US$ terms) in 2011 – which goes a long way towards explaining the jump in Australian prices.
For 2012, all of the above factors will continue to influence the market. The overall balance is anticipated to favour the Australian industry and producers (with US prices tipped to rise again), but with several caution signs posted along the way.
With the run of favourable seasons across key cattle producing regions in Australia forecast to continue into a third consecutive year, there remains significant momentum behind a rebuilding of the national herd. Joined by southern WA during the second half of 2011, the retention of breeding stock and demand for young cattle has been pronounced. The Australian cattle herd enters 2012 at its highest level in over 30 years. The influence of higher marking rates since 2010 will be reflected in cattle turnoff and beef production in coming years.
Supply is expected to increase in 2012, but still remain relatively tight compared to drought years throughout the past decade, with total adult cattle slaughter forecast to increase 3.1%, to 7.55 million head. Another favourable year (assumed) for feed is expected to see herd rebuilding continue to constrain female turnoff, while producers compete keenly for young cattle for finishing.
With the increased turnoff of cattle, total Australian beef and veal production for 2012 is forecast to reach a record 2.197 million tonnes cwt, up 2.3%. Assisting the growth in Australian beef production will be continued heavier average carcase weights – one tangible factor from the run of better seasonal conditions.
While the forecast for additional Australian cattle and beef to be produced in 2012 may start to ring warning bells in regards to cattle prices, demand for beef is expected to be maintained, if not strengthen over the short to medium term. Indeed, Australia is among only a handful of major beef producing countries forecast to expand its beef production in 2012. This comes at a time when global demand for beef is expected to grow (principally in Asia, South America and the Middle East), with global beef prices tracking at historically high levels.
On the back of higher Australian beef production and reduced global supplies, Australian beef and veal exports for 2012 are forecast to reach a record 975,000 tonnes swt. This 2.8% growth is anticipated to be underpinned by a recovery in exports to the US, which faces a year of lower production and higher beef prices – helping to attract additional Australian product.
Exports are also forecast to expand to Russia, the Middle East and most southern Asian markets – continuing the diversion of Australian beef exports away from the larger traditional markets.
However, any year in which beef exports to the first (Japan), third (Korea) and fifth (Indonesia) largest beef exports markets decline should also be highlighted and watched very closely. Australian beef exports to Japan and Korea are expected to decline in 2012, largely due to an increased US presence, as the US takes advantage of improved market access conditions in both markets. For Indonesia, Australia’s fifth largest beef export market in 2011, shipments in 2012 will be constrained by the reduced allocation of import permits for boxed beef.
Weighing negatively upon these forecasts to export markets in 2012 is the influence of the A$. Assumed to remain at historically high levels during 2012 and possibly beyond, it will continue to act as a major headwind for Australian exporters. This is accentuated by the flip-side of the currency equation, with the US expected to continue to make the most of their weak currency when trading into Japan and Korea.
However, 2011 did demonstrate that provided competition for Australian beef in the global market is healthy, the influence of the higher A$ for Australian exporters can be offset. That said, even with the improvement in global beef prices, the high A$ continues to be one of the major impediments to improved financial viability for the entire industry.
The ongoing economic and financial uncertainty across key advanced economies will continue to influence beef demand, both through consumer reactions in individual markets and its impact on currency markets. While the main concerns are focussed upon the EU and the US, it is possible for these markets to drag other economies down.
After a tumultuous 2011, the prospects for Australia’s live cattle industry will continue to be framed by the trading environment with Indonesia. With the Indonesian Government announcing that it will limit the allocation of live cattle import permits in 2012 to 283,000 head, Australian producers may again face the challenge of finding other markets for cattle that do not make the Indonesian trade. While some Middle Eastern markets may be able to take some additional cattle in 2012, there is no live export market that will be able to accommodate the additional cattle that would have otherwise have gone to Indonesia.
The most likely outcome, as occurred in 2011, is for the additional cattle that do not make the livestock export trade to migrate slowly towards beef processors. Given the very high transport costs of moving cattle from northern Australia to eastern and southern feeder and slaughter markets, the displacement of ‘previous live export’ cattle will impact on the viability of northern cattle producers in 2012.
Given all of the factors, both positive and negative, expected to influence Australian and global beef and cattle markets in 2012, cattle prices for the year ahead are expected to consolidate the gains of the past two years, averaging stable to a little higher, provided seasonal conditions remain favourable.
Average saleyard cattle prices increased 13-20% over the past two years, and to average higher again in 2012 could be seen as an optimistic outlook. However, it reflects the expectation of further contraction in global beef supplies, price rises in the US (USDA predicts 4-7%) and South America, a further rise in demand from smaller markets and some improvement in Australian beef demand.
These factors will be at least partially offset by a continued high A$, increased US presence in Japan and Korea and a 2.3% rise in Australian beef production.
The consolidation of prices is expected to translate to another improvement in farm incomes in 2012, with high prices, additional cattle sales and lower operating costs all contributing. However, this equation is much more clouded for northern Australian producers solely dependent upon the live cattle trade.
In summary, 2012 should see most cattle producers (with the possible exception of those focussed on livestock exports) take a step forward financially, and make further inroads into the increased debts that most producers were forced to incur through the run of drought years prior to 2010. However, for sectors of the industry that rely upon purchasing cattle, including the lotfeeding and processing sectors, 2012 is shaping up as another difficult year.
As was evident in 2011, unexpected events can always occur. For 2012, maybe it’s a case of hoping that 2011 used up more than its fair share of “events” and there will be less volatility in the coming year?
Key assumptions
As part of MLA’s annual projections, a series of “key assumptions” need to be outlined. While many of these assumptions are outside the immediate expertise of MLA, they are key factors that must be considered in the delivery of the 2012 Industry Projections. Assumptions are compiled from a range of sources; each recognised experts in their respective area.
Seasonal conditions in 2012 to remain favourable across the majority of Australia’s cattle producing regions, with the potential for wetter than average conditions during the first three months of the year for large areas of northern Australia. For 2013 and beyond, average seasonal conditions have been assumed.
The A$ for 2012 to trade between 95-110US¢. For 2011, the A$ averaged 103US¢, and traded between 95US¢ and 110.5US¢. Given volatility in global currency markets since the Global Financial Crisis (GFC) in 2008, it has proved very difficult to assess and predict what the A$ will do. However, it should be noted that, in many instances, a volatile A$ can be just as destructive to Australia’s export beef trade as a high A$.
The trade restrictions facing US beef into both Japan and Korea to ease in 2012, accentuating the impact of the weak US currency. Japanese imports of US beef for 2012 have been assumed at 150,000 tonnes swt, up 25% on 2011. For Korea, factoring in the influence of the US/Korea FTA, along with the weak US$, Korean imports for 2012 are assumed to reach 140,000 tonnes swt – up 22% on the previous year.
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