AFTER spiking briefly late last year when cattle prices went into free-fall around October, beef processor profit margins are again back within the normal range, a recent calculation shows.

Analyst, Episode 3’s Beef Processor Profitability Index (BPPI) was last calculated back in October, when it noted that the margin index was improving strongly in favour of processors (see graph above).

October 2023 saw the index peak at 1.99 – it’s highest point since the data set started back in 2000 – as Australian cattle prices bottomed out due to concerns over another summer drought event, based on BOM forecasts.

Export beef at the time was strong, thanks to tight US supplies, Episode3’s Matt Dalgleish notes. The final quarter of 2023 saw the BPPI ease from it’s peak, finishing the year at 0.86 in December 2023.

For the first few months of 2024 the BPPI has returned back into the normal range posting an index figure of 0.39 for January and a 0.44 for February. The grey shaded 70pc range denotes what is relatively normal behaviour for the BPPI as it represents where the index spends 70pc of the time based on historical monthly fluctuations since 2000.

Mr Dalgleish said it was important to note that the BPPI calculation is based on a theoretical processor margin model, and is a simple representation of the Australian beef processing sector. A BPPI in negative territory does not suggest that all processors are losing money, similarly a BPPI in positive territory doesn’t suggest that all processors are making money, he said.

“A more useful reading of the BPPI would be that a negative index suggests a tougher processor trading environment, versus a positive BPPI which is reflective of a more beneficial processor trading environment,” Mr Dalgleish said.

The chart below outlines how the BPPI has fared on a monthly basis since 2000. The 2022/23 seasons were a picture of the extreme volatility seen in the cattle market in recent years with the BPPI swinging from the worst result on record to the best result on record within a 16 month period.

Analysis of the annual average BPPI each year since 2000 shows that 2023 was a good season for beef processors with the annual average coming in at 0.83, rivaling the previous best year in 2014 when the BPPI scored 0.82 as an annual average. So far in 2024 the annual average BPPI sits at 0.42.

However, an assessment of the last 10 years shows that the index has fluctuated wildly between profit and loss. Indeed the ten-year average index sits at 0.00, which highlights how tough the beef processing game has become over the last decade. The long term average BPPI sits at just 0.14 suggesting that deep pockets and a long term approach is the best strategy for this sector.

The projection of increased annual cattle slaughter heading toward the middle of the decade should continue to assist with positive annual average margins for beef processors, Mr Dalgleish said.

The historic correlation between annual slaughter versus the annual average BPPI shows that an index of 0.21 is anticipated for 2024 and 0.38 for 2025 based on current Meat & Livestock Australia slaughter projections.

Source: Episode 3