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Australian beef recovery underway, but unlikely to reach full potential, Rabobank

Beef Central, 06/05/2022

Angus Gidley-Baird

AUSTRALIA’S cattle availability will increase this year as the national herd continues to rebuild, but supply chain limitations will impede sector growth, according to agribusiness banking specialist Rabobank.

The bank this week put out its Australian Beef Seasonal Outlook for 2022 which predicted that supply chain issues will continue to burden the industry.

In the report, titled ‘Recovery well underway but the process will be slow’, Rabobank says as cattle numbers start to lift, they will create additional pressures in the already-constrained supply chain and have implications for sales and prices.

“Increased cattle numbers will see some of the urgency leave the cattle-buying market, so prices will drift down. But domestic consumption and export markets are favourable, and we don’t believe there will be any rapid price drops,” the report says.

“As cattle numbers increase, buyers will become more discerning. If people are going to continue to pay high prices, they will choose the better-quality cattle.”

Report author and Rabobank senior animal proteins analyst Angus Gidley-Baird said he expected heavier discounting for “poorer cattle and those that don’t meet specifications”.

“Additional cattle will also load up the supply chain. And existing constraints like freight costs, container access, port congestion and labour availability at processing plants will come under further pressure,” he said.

“These constraints will limit the ability to expand capacity to meet the increase in cattle numbers and may lead to some delays in processing cattle and to additional downward pressure on prices.”

Domestic cattle outlook

Mr Gidley-Baird said domestic beef production is set to rise in the year ahead – but less than its potential.

“As a result of herd rebuilding over the past two years, the availability of slaughter-weight cattle will increase in 2022. Based on Rabobank modelling, cattle slaughter numbers could rise seven percent, to 6.4 million head, with a corresponding nine per cent rise in production to just over two million tonnes in 2022, he said.

“We have already seen evidence of this increased cattle supply, with Q3 and Q4 2021 male slaughter numbers up seven per cent and one per cent respectively year on year – some of the largest increases in five years.”

Rabobank estimates cattle slaughter weights will lift two per cent, to an average 318 kilograms.

But severe constraints in meat-processing labour – due to COVID disruptions and lack of skilled workers – plus ongoing freight challenges will limit the production increase, the report says.

The lift in Australian cattle production will lead to increased beef exports in the year ahead, the report says, while domestic beef consumption is expected to decline.

“The production increase will mainly benefit export markets,” Mr Gidley-Baird said “We expect domestic per capita beef consumption to drop by two per cent in 2022, to an estimated average 21.6 kilograms per person. This drop is smaller than in previous years where consumers were confronted with higher retail prices.”

Given the slow population growth rate, total domestic beef consumption is expected to drop one percent in the year ahead, the Rabobank report said.

Feedlots

Numbers of cattle on feed will rise in the coming season, the report says, but warns there will be more selective buying from feedlots.

“We expect grain-fed beef production to increase at a slower rate in 2022,” Mr Gidley-Baird said.

“After declining through 2020, cattle on feed numbers grew throughout 2021 – Q4 2021 numbers were up 11 per cent year on year at 1.16 million head.”

However, the report notes, feeder cattle prices are likely to track downwards. And with expensive feeder cattle currently in the system, feedlot margins are expected to be under pressure for some time yet.

Global trade

Global beef markets are bright, Mr Gidley Baird said, but there are shadows looming as strong consumer demand may be challenged by cost increases.

“Phenomenal consumer demand across many markets and an inability for supply to keep up spurred retail beef prices to rise to record levels in 2021,” he said.

The report says US retail beef prices in 2021 were 26 per cent higher than the five-year average. Similarly, Chinese retail beef prices were 25 per cent higher. While there are some signs of consumer resistance to these higher prices, overall, Rabobank believes they are being accommodated, and demand remains strong.

However, Mr Gidley-Baird said challenges in the form of inflationary pressures leading to increased cost of living for consumers and slowing economies may yet result in a weakening of demand.

Domestic price outlook

The report says following an “extraordinary 2021” – when limited supplies and strong producer demand drove cattle prices “even higher” – prices, particularly for young cattle, will “drift down” through 2022.

“While the strong fundamentals of high global prices, strong consumer demand, and limited global supplies still support cattle prices, we feel the urgency that drove local producers’ restocking efforts will subside, and as a result, the heat will be taken out of the market,” Mr Gidley-Baird said.

“We believe that by the end of the year young weaner cattle prices could be about 25 per cent lower than where they started the year,” he said.

“But even with a drop of that size we will still be at historically high cattle prices and in reality our forecast is only taking us back to the price levels we saw at the beginning of 2021.”

Regional outlook

Bank analysis of regional conditions around Australia – undertaken for the report – showed southern Australia leads the way on herd recovery, but most production areas are close to normal.

In terms of total cattle numbers, most eastern states and the Northern Territory still indicate they are up to 25 per cent below their normal capacity, the exception being parts of Victoria where they are at normal or above-normal capacity.

Mr Gidley-Baird said a large portion of the expected herd growth in 2022 is expected to be driven from producers retaining stock.

“The preference for purchasing, or indeed trading, breeding cattle appears lower than that of breeding and growing cattle on property,” he said.

“After another year of rebuilding the herd, and given where cattle prices currently are, it is more believable that producers will adopt a ‘grow your own’ strategy now.

“The ongoing limited cattle numbers will still mean there is producer interest in going to the market, but we suspect buyers will be much more discerning and looking to purchase quality cattle or cattle that will fit into their traditional production system.”

Source: Rabobank

 

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