Tuesday, April 9, 2013

COLLAPSE OF AUSTRALIAN CATTLE PRICES

Australian real cattle prices have crashed to unsustainable levels while overseas producers are enjoying record highs.


40% Decline Over Last 12 Years
A recent article [View Here] in Beef Central by Ian McLean and David Counsell reports a 40% decline in real terms since 2001 for Queensland beef prices, including a 17% fall in real terms since January 2012. The trend is largely due to a combination of factors in the domestic and export markets, including the continuing heatwave, the falling demand for high-value chilled cuts compared to cheaper frozen meat, and the high Australian dollar restricting global competitiveness.


The Meat and Livestock Association (‘MLA’) and Australian Bureau of Agricultural and Resource Economics (‘ABARE’) predict the trend to continue. MLA has released official figures [View Here] that report a national average of a 14% decline in trade cattle for the first half of 2013 compared to the corresponding period in 2012, while ABARE has forecast [View Here] a further 10% drop in cattle prices by the middle of 2014, including a drop of 7% by as early as July 2013.


The Eastern Cattle Young Indicator (EYCI) is the general benchmark of Australian cattle prices. As of 5 April 2013, the EYCI sat at 325.75 cents/kg. This represents a 22% decline since 5 April 2011 when the EYCI was 419.25 cents/kg.


To add to the hardship cause by market forces, a Beef Central article by Jon Condon [View Here] reports that Australian boxed and frozen exports to Indonesia are also predicted to crash by 32% in 2012-13 to 26,000t, and a further 23% in 2013-14 to 20,000t, due to the Indonesian Government’s decision to reduce beef import permits. Reduction in live cattle import permits will also reduce the number of live cattle exported to Indonesia to 267,000 head in 2013, compared with 283,000 head in 2012 and 500,000 in 2011.


Current Beef Industry Profits Unsustainable
The article in Beef Central emphasises that the profit margin for beef producers is dictated by the differential between cattle prices and production prices.


The Australian Meat Processor Corporation details [see the AMPC fact sheet linked at Hunt Partners] the causes of decreasing prices and notes that the decline in profit margins will impact on the ability of the meat industry to invest in new technologies that enhance global competitiveness.

Australia's largest meat processor, JBS Australia, published figures disclosing a $39 million loss in 2011 and Australia's third largest meat processor, Nippon Meat Packers Australia, showed a $5.9 million loss in 2012.

The world's largest beef producer, Australian Agricultural Co, has also reported an $8.4 million loss in 2012, down from a $10.5 million profit in 2011.

A 2010 report of the Northern Beef Situation Analysis found that producers had been spending more than they earned in 6 of the previous 7 years, and that the industry was at its worst since the crisis of 1970.



Australian Industry Unable to Compete Globally
Meanwhile, US cattle prices have soared to record highs and are forecast to jump 20% by next year [View Here].


Australia faces stiff competition from the US in the Japanese market due to the relaxation of import restrictions for US beef and the stubbornly high Australian dollar. Australian beef and veal exports to Japan are expected to fall 6% in 2013 and a further 5% in 2014. The US will also gain a keen advantage over Australia in the Korean market due to the ratification of the US-Korean Fair Trade Agreement, while the Australian government drags their feet on our own FTA [View Here]. Fears for competition in key emerging markets such as China rise as South American beef exports show signs of recovery rising by 14% in 2012 [View Here].


At the current rate of decline, the Australian beef industry will barely be able to maintain a status quo, let alone compete in an increasingly cut-throat global market.


Domestic Market Struggles
Australia’s inability to compete in the global market begins at home with the domestic decline of the beef industry. Despite the increase of 9 million in Australian population since 1977, the level of domestic beef consumption has dramatically fallen from 986,000t in the 1907s to 739,000t in 2011 [see John Carter's article linked at Hunt Partners]. This intense drop in domestic consumption has partly been driven by excessive mark-ups from the supermarket duopoly of Woolworths and Coles.


If there were more demand in the domestic market, less beef would be exported, resulting in higher demand for quality Australian beef and a rise in price for the producer. Australian producers’ share of the retail beef price rests at a dismal 36% compared to the world average share of 40% and our main competitor, the US, of 52% [see Brad Bellinger's article linked at Hunt Partners].


While the domestic market remains stagnant, Australia will never be able to truly compete globally, and cattle prices will continue to crash.


Lack of Assistance from MLA R&D
In light of the problems facing the Australian beef industry which have developed over the past few years, serious questions have to be asked as to the cost benefit received from the $1 billion plus levy payer investment in R&D for the beef industry by Meat and Livestock Australia Ltd since its incorporation in 1998. Action is needed to reverse the falling levels of profitability in the Beef Industry and the current system of paying an organisation which fails to understand the fundamental problems facing the industry needs to be scrapped.

Please see the following blog post - BEEF 2015 & BEYOND - CATTLE COUNCIL STRUCTURAL BEEF REFORM - for a discussion of potential solutions to the current structural problems facing the Australian Beef Industry.

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