Monday, May 6, 2013

The Current Australian Cattle Price Crash is of 1974 Proportions

The Problem

Southern Highlands activist beef producer John Carter describes the current state of the Australian Beef Industry as the worst he has seen in his fifty-seven years in the industry.

John, who was a strong activist in the Cattleman’s Union, chairman of the NSW Meat Industry Authority, former chairman of the ABA and is a respected cattle breeder from Lake Edward Crookwell in New South Wales:

• refers to the rising level of cattle producer debt which led to the recent Federal Government Rural Debt Rescue Package, and

• points out that EU and US cattle prices are at record highs whilst he and other cattle producers are now receiving less in real terms for their progeny and cast for age calves in 2013 then they received in 1974 or 1976.

John Carter advises that the average price that he received for his progeny and cast for age cows in 1974 was $157 compared to $458 in 1996 and a little under $600 in 2013.

The ABS Consumer Price Index Inflation Calculation has valued the purchasing value of AU $157 in March 1974 at:

• $799.49 in March 1996; and

• $1,236.57 in March 2013

So in real terms John Carter’s 1996 cattle price of $458 per head and his 2013 price of $600 per head were both much worse than the $157 he received in 1974.

John says that the situation actually got much worse after 1974 and in 1976 he averaged $50 per head for his progeny and cast for age cows and averaged $55 per head in 1977.

The comparative prices in real terms for well finished cattle between 1974 and now also does not take into account the significant increase in the average carcass weight for cattle and calves which have risen from about 171 kilograms a head in the 1950’s to an average high of 259 kilograms per head in 2011 to around 254 kilograms per head in 2012 which represents a 50% gain in average carcass weight in the last 60 years. Kilogram for kilogram the crash in well finished cattle prices in 2013 is far, far greater than 1974.

The Australian Weekend newspaper on 4 May 2013 reported that stock with visible bony ribs sold for $20 per head on Wednesday 1 May 2013 at the Longreach cattle sale and that it was the lowest meat price record, equivalent to just 10c per kilogram, since the 1974 beef crash.

The Australian Weekend newspaper on 4 May 2013 also reported that a mob of poor quality cattle sold for $48 per head at Deneliquin in Southern New South Wales during the week.

The Cause

Interestingly MLA figures suggest that the Australian cattle herd reached 28.5M last year and predicted it would reach 30M this year and both ABARE and the USDA Gain reports in March 2013 predicted that the Australian cattle herd would reach 29.8M by the middle of this year and plateau at about 30.8M by the end of 2013.

MLA report that the Australian cattle herd reached 29.8M just prior to the 1974 crash peaking at about 31M in 1976 because producers enjoyed a flush season in 1974 and many were able to hang on to their cattle when prices crashed. Both the USDA Post and ABARE reports suggest the Australian cattle inventory got to a high of 32.65 million head in 1975.

So the current Australian cattle herd of around 30M is the highest number achieved since just before the 1974 crash.

Whilst the current crash in Australian Cattle Prices is largely attributable to the current drought in Northern and Southern Australia exacerbated by the cut back in live cattle exports and the high Australian Dollar, the impact of the drought has only hit in the last month or two. So unless there is an early break in the season cattle prices may yet go lower than John Carter’s average price of under $600 as received thus far.

Conversely, 1974 was a legendary rainfall year with wide spread floods and a massive season Australia wide hence a lot of producers were able to hang onto their cattle when the price crash first struck.

In 1976, the then fixed Australian Dollar traded at $1.20 to the US Dollar but in 1996 the floating Australian Dollar was worth $0.77 US and today is of course at $1.03 US Dollars.

In 1974, the US had 130 million head of cattle compared to their current herd of 92 million.

The 1974 cattle price crash was largely the result of America ceasing to import beef from Australia. This year Australia has not yet filled its US beef quota.

Comparisons Between 1974 and 2013

In summary, in 1974 Australia had a record cattle herd of almost 30 million, a flush season, a dollar trading at $1.20 to the US Dollar and were faced with a record herd of 130 million in the United States which led to a crash in US cattle prices and a denial of export access to the US with few alternative export markets.

In 2013, Australia has a near record cattle herd and is experiencing a wide spread devastating drought but with a dollar which, whilst high, is still lower in comparison to the US Dollar than it was in 1974, and has an unfulfilled US beef quota, and there is strong worldwide demand for beef.

In 1974, the US was in recession and Australia was facing an economic slowdown. In 2013 the US is coming out of recession and Australia has been enjoying economic growth which, whilst slower than the early part of the century, remains the envy of the world.

The Predictions for 2013

In September 2012, MLA said that producers should not be concerned that the cattle herd will build to 30M within two years. Scott Hanson said the global demand would prevent prices from crashing as they had in 1974 the last time the herd reached these sort of numbers and sighted growth and demand from South East Asia, China, Russia and the Middle East to support his belief that overseas markets would continue to grow to take up the extra Australian Cattle numbers.

ABARE predicted a modest 3% fall in the price of cattle this year.

With the benefit of hindsight it would seem that the industry organisation predictions were somewhat misplaced.

The Solution?

Given that we have a global economy and there are record prices being paid for cattle in US and EU there appears to be something wrong with the structure of the Australian Beef Industry and our government policies.

Certainly the cattle producers don’t appear to have gained a lot from the $1 billion plus payments that they have made to MLA since it’s inception in 1998.

Perhaps the time has come for a rethink of the beef industry organizational structures and government policies needed to drive the cattle industry forward over the next decade.

See the ABS statistics here and cattle inventory figures here.

1 comment:

  1. Good information Norman.
    I would welcome your views and critique of what we are trying to do here-

    Especially since you have vast experience in this field.