Markets

Why the next decent wet will herald the end of beef history as we know it

Dr Ross Ainsworth, 12/08/2014

northern-cattle-generic-webSteve Kay writes in his August 7th Beef Central article “Amazing US price bubble” that  “no one remotely forecast what has happened in the young cattle and fed cattle markets this year”.

This is a very reasonable statement in the context that trying to predict the specific timing and the speed of price rises in an individual beef market is virtually impossible.

However, it should not be any surprise that the history of the global beef market, as we know it –the last 40 years – is currently changing forever, so rapidly rising prices should be entirely expected.

Put simply, the world has experienced an oversupply of beef since the early 70’s which has resulted in constantly deteriorating returns for beef producers. Australia has suffered more than any other significant producer country because we rely on the global export market for about 70 percent of our annual production.

After generations of depressing returns from beef production, supply is finally unable to match demand because world production is roughly static while world consumption continues to grow quickly, led by China. Prices are not defying logic, on the contrary, they are following it beautifully, and in fact, are about to follow it a lot more by making the current flush of US prices look modest.

What has not happened yet to any great extent is the “Ostrich Factor” which is the term I use to describe the classic market situation where the species in question is grossly under-supplied while the end product is predicted to be quite valuable. Most people would remember the days when ostriches were worth $20,000 a pair and more because the chicks produced were also in demand for $20,000 per breeding pair as many more generations were needed before the final product – birds for slaughter for hides and meat – would be plentiful enough to satisfy predicted demand.

In the case of ostriches and Boer goats etc this scenario began with an extremely small breeding nucleus which could only be imported at great cost and in small numbers. What we have today is a global beef-breeding herd which is about to be pushed into the realm of the ostrich factor.

As Steve Kay has pointed out, the prices for the end products are at exceptionally high levels at the same time as the breeding herd in the US is at a 50 year low.

The prices of breeding females in the US have doubled in the last 12 months and will continue to rise along the logical principles of the ostrich factor. First, the price of feeder and slaughter cattle goes up following a reduction in supplies due to the decimation of the US herd which has finally been finished off by a very savage drought. As slaughter cattle become more valuable, rising prices for breeders follow. When breeders suddenly become more valuable, even more females are withdrawn from the feeder/slaughter market. This causes the feeder/slaughter price to rise even further which causes more females to be retained for herd rebuilding and so up the spiral goes.

The first important difference between the ostrich industry (and all the other fad animals) and the beef industry is that the beef industry is built on reality whereas the ostrich industry was largely built on spin. The annual volume of beef traded internationally is more than 6 million tons and rising.

The second important difference is the bovine generational length. Ostriches and goats and almost every other creature on earth can be multiplied at a fantastic rate because their generational length is short and most are capable of multiple births. Cattle are so slow and inefficient in terms of reproduction compared to the fad animals that the price spike resulting from the withdrawal of females from the feeder and slaughter markets will last for a much longer period. This again drives the cycle of yet higher prices, as the pace of beef consumption is not slowing down so the prices continue to rise and the breeding female value will logically follow the same trajectory.

The question with beef supplies is will we ever get to a point where the beef supply is once again greater than demand and the price collapses just as spectacularly? Efficient production of beef breeders generally requires large areas of grass growing on land that cannot be used for any other more profitable purpose. Globally, the land area which fits this category is actually shrinking fast so the chances of a major increase in the global beef herd in response to higher prices is not very likely and certainly wont result in cheap beef.

So will consumers reduce spending on beef in response to dramatically higher prices? If you live in the west with the traditional style of beef consumption and follow recent market trends then the answer is probably yes, at least in the short term.  The price of beef in the west is actually unreasonably low and has been that way for decades. All that will happen is that it will rise to a more sustainable level providing producers with a fair return which consumers will readjust to over time.

What may not be quite so obvious is the insatiable demand from Asia in general and China in particular. Today, live slaughter cattle in southern China are worth $5 per kg live weight and close to $4 in other parts of South East Asia. At these price levels, demand in the region continues to rise. Population increases, improving incomes and food preparation styles would suggest that Asian consumption increases are only just getting started with the primary restriction on beef consumption being global supplies not price.

Although Australian cattle prices continue to disappoint producers, anyone close to the industry knows that this has largely been driven by the current seasonal pressures in northeastern Australia. For the last 20 years or so, the oversupply of heifers in northern Australia has meant that all surplus females have been valued at about 5-10pc less than steers i.e. purely on their meat producing potential.

Once favourable seasonal conditions return and the liquidation of the female herd ceases then the ostrich factor will kick in and heifers suitable for replacement breeders will be withdrawn from the feeder market and up and up she will go.

Given that the Australian industry has been severely depressed for so long, the price correction is likely to be even more dramatic than that seen in the US. The only thing we will never be able to predict, as Steve Kay says, is, exactly when, how far and how fast. So, the next decent wet season in Queensland should herald the end of Australian beef history, as we know it.

See more articles from Dr Ross Ainsworth on his South East Asia Beef Report blog here

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Comments

  1. Mike Buchanan, 20/08/2014

    Even if it’s wrong, it still made this afternoon feel a whole lot better

  2. Tim Buckley, 15/08/2014

    In the USA producers see about 4 times the return of the final dollar than we do. Unless that changes we are in a less than desirable position, especially when JBS (USA) has such a dominant processing position here!!!

  3. Brice Stokes, 14/08/2014

    The weather forecast looks good for the drought regions of Queensland and NSW, with rain on the way. China and other Asian markets look set to remain strong and expand. Rural people live in hope, so with a break in the drought, our returns may increase.??

  4. Sam, 14/08/2014

    Lets hope this prediction is correct as the producers return per kg has changed little in more than 25 years unlike the cost of production so we are well overdue for a huge correction…..maybe with the increased demand and return to profitability pastoral land will again compete with marginal agricultural land thus allowing greater production capabilities.

  5. Steve, 13/08/2014

    Processing plants with export certification are currently making money faster than they can buy cattle. There raw product is half to a third cheaper than end markets leaving massive margins to pay imported labour to process and cover shipping. Shipping which in fact actually improves the quality of the product. No wonder Australian grass fed Angus out tastes in blind tests anything else on the shelf. 45 days wet aged beef is always going to be petty damn good.

  6. Tom, 13/08/2014

    I think the old, supply and demand, market place, will still dictate the prices for a long time into the future, as it has in the past.
    I don’t think you can compare the ostrich industry with the beef industry at all, as the ostrich industry was built on here say.

  7. Frank Bell, 13/08/2014

    Believe it when it is in the bank-How often has this been promised before ?
    The drought of 1979-1983 was every bit as bad as this one and there was going to be a bonanza when it broke. One might see the processing industry perk up a bit , but will it trickle down to the producers ?…… Let me know…. won’t you . The cost of maintaining a breeder is at least double in real terms now as it was then, and recent prices since the Indonesian live cattle debacle are no better than the 1980’s

  8. Peter Honnef, 13/08/2014

    Historical cattle prices and grazing property sales data shows a correlation that every 10 c/kg lightweight cattle price change tends to alter grazing property prices by an average of $15 per hectare with about a six month lag. Therefore if the articles predictions are correct, expect a rise in property values.

  9. Kay Borland, 12/08/2014

    Can’t wait. Years of low prices is crippling to say the least. Still I do it because I love the cattle industry.

  10. Richard Triggs, 12/08/2014

    beef producers would enjoy a lift in beef prices , but I am concerned about too to few players at the big end of town who maybe happy to see prices remain where they are , not to mention where the aust $ may head.

  11. Bernadette, 12/08/2014

    I hope so hard that this is correct . . .but I don’t think I will be able to see it happen . . .because the next wet will be too late to save us.

  12. Ben Williams, 12/08/2014

    I hope you are correct Ross, regional Australia needs a sustained economical lift.

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