DOMESTIC grainfed forward contracts have shot to unprecedented levels this month, as supermarket groups like Coles and Woolworths battle to maintain beef supply in a dynamic and rapidly evolving 2020 cattle market.

Contract-holders supplying either retailers’ northern supply chains currently hold contracts for 70-day grainfed steers for early May delivery at 670-680c/kg this week. Compare this with contract rates seen back in October, for late-January delivery, of around 620c.

MSA grainfed slaughter heifers

Forward contract offers from both companies are often similar in value. While Coles’ has a no-HGP requirement, Woolworths’ cattle spec is tighter, more-or-less cancelling each other out, Beef Central was told.

The two major retailers are facing an unprecedented red meat supply challenge this year, as cattle prices skyrocket after extensive rain over the past month, and the national beef herd sinking to 30-year lows after two years of drought.

Both supermarket chains use a network of dedicated feedlot contract-holders across the eastern states to provide the bulk of their beef requirements.

Supermarket contracts behind spot market

Supermarket forward contracts normally trade at a significant premium over spot commodity grainfed slaughter cattle prices, but such is the fluid nature of the cattle market at present that they currently lag well behind.

This week’s processor spot price for generic grainfed cattle are well above, supermarket forward contracts, with one company’s Queensland spot grids this week at 645c/kg for two-tooth HGP steer (100-day) and 635c/kg (70-day). Compare that with 60/70-day supermarket forward-contracted cattle bought back in December, closing-out this week for Woolworths and Coles, being sold at around 625c/kg.

While this situation is not unprecedented (it happened last during the sharp rise in cattle prices in 2016, apparently), it is extremely rare, nonetheless, and reflects the extraordinary state the cattle market is currently in.

Retail prices lag behind cattle market

At the other end of the supply chain, retail beef prices in supermarket chilled cabinets have not yet shown signs of increase, despite dramatic cattle price movements since mid-January. That is inevitably applying a ‘margin squeeze’ on supermarket retailers, Beef Central was told by a trade source, but with Coles and Woolworths locked in a deadly battle for customer traffic, neither has been prepared to lift retail price, to this point. Collectively, the companies account for more than half of Australian consumers’ weekly spend on fresh meat.

Woolworths this week has everyday sliced rump on special at the equivalent of $19/kg (down from $20/kg), porterhouse at $27/kg and lean mince at the equivalent of $15/kg – much the same as pre-Christmas prices.

While there is inevitably a lag phase between feeder and finished cattle prices and prices in the retail cabinet, it’s inevitable that supermarket retail prices will rise to reflect that trend, a trade source told Beef Central this morning.

“There’s not a lot of fun in domestic retailing, full stop, at the moment,” he said.

“Go out say 80 days from now – May/June delivery – and a contract holder will need around 400c/kg liveweight to buy a Woolies type flatback feeder steer, in the current market,” one large grainfed supply chain manager said.

“Feed costs are unlikely to change much for some months, so supermarket contract-holders are going to need a 700c/kg carcase weight forward price to make the sums add up,” he said.

“Numbers less than that, and contract holders may start adjusting numbers on feed, and will certainly drop additional cattle fed outside the contract.”

“But it’s hard to see either Woolies or Coles sustaining that price level, unless there is an upwards movement in retail meat prices to support it.”

“Meat will just get so expensive, it runs the risk of becoming a luxury item in the domestic market, rather than a food staple.”