Independent analyst Simon Quilty examines the impact that record global beef demand is likely to have on Australian cattle prices next year
THERE is no doubt to me that Australia’s current drought is the worst on record in terms of Australia’s livestock industry and the massive female liquidation we have seen.
What has been different about this drought is that during the worst period of 2018 and 2019, cattle prices have remained at levels that were only dreamed-of 20 years ago. The reason for this has been strong global meat prices that have underpinned the value of cattle, not only within Australia but globally.
As cattle supply numbers start to tighten in Australia and strong global beef prices remain (and go higher), I am confident we will see cattle prices move significantly higher, to levels that have never been seen before and for a sustained period. That’s thanks to the perfect storm of a future extreme tight cattle supply and sustained long-term strong global beef demand.
Given the role Australia has in supplying FMD free beef globally I expect the demand for Australian beef will be further enhanced by this expected shortage.
When will global beef prices be reflected in our cattle prices? This one of the more complex questions in today’s global beef market and the simple answer is, when rain comes. Australian cattle supply will tighten as the cattle slaughter slows down dramatically and the females are retained for breeding and herd rebuilding commences in earnest.
Rain often brings the start of the next cattle price cycle, but not always. Our current cycle and the previous cycle in 2014 both began before rain came. Each cattle price cycle normally lasts for four years, where cow prices move up first, followed by steers, and keep rising until a full rebuild is complete.
Back in 2014 when Australia was still firmly entrenched in the drought, the next cattle price cycle started well before the drought broke. This was driven by the fact that Australian cow inventory numbers had reached a critical low against rising global beef prices that led to an exceptional demand for cows and rising domestic cow prices in Australia. The drought did not break until mid-2015, six months later, and the same is now occurring in 2019.
I see history repeating itself in 2019 whereby even with this severe drought, the current cattle price cycle started back in May this year, with cows prices today 30pc higher and likely to continue to rise for another 18 months, with or without rain. As we saw back in 2014 where global beef demand and prices jumped and cow supply was critically low, the same is happening again.
Impact on cattle prices
In comments below I look at the likely impact of high global beef prices on Australian cattle prices over the next 3-5 years. In brief the key points are:
- In 2019 Australia has experienced record liquidation of females, with the female kill averaging 57.3pc of the total kill in the last seven months, highlighting the seriousness of this liquidation.
- Australia’s herd size is expected by mid-2020 to be at 24.5 million head – a 30 year low.
- I am forecasting the female kill to fall by almost half (46pc) between 2019 and 2021, and for steers to fall only 8pc in the same period with a net 30pc fall in kills over that two-year period.
- Such dramatic falls in kills will see meatworks closures in Australia, possibly not permanent but at least until livestock numbers rebuild to a profitable level for processors.
- Strong similarities exist between 2014 and 2019. In 2014 while in drought, Australia entered into the next cattle price cycle with cow prices rising six months before the drought broke. In 2019 the cattle price cycle started in May this year, with severe dry conditions and little sign of the drought breaking, once again cow prices are rising.
- In 2014 global lean beef prices rallied 45pc over a four-month window, similarly in 2019 we have had a 40pc price rise in global lean beef prices over four months between August and November.
- Starting in 2014 Australian cow prices moved 90pc higher, taking 34 months to reach record high prices. If history was to repeat itself, then current cow prices would peak in 2021 at A390c/kg liveweight (and average 365c/kg that year). These prices seem almost unfathomable in today’s market but are do-able due to the ‘perfect storm’ with Australia’s record level of female liquidation and an unprecedented global protein shortfall due to African Swine Fever.
- With expected strong cow prices in 2021 this is likely to see also strong steer values with prices lifting 60-80pc across all steer categories.
- When isolating countries like Australia and the US who are foot-and-mouth disease free – I believe there will be a genuine shortage in particular of this type of beef in 2020 and beyond due to China’s demand – this will provide an underlying strength to Australia’s cattle markets for at least 3-5 years.
Record liquidation of females has occurred during drought
In the last seven months we have seen Australia’s female kill reach record levels averaging 57.3pc of total slaughterings, no previous drought had exceeded 55.3pc let alone having seven months continuously exceed this level of kill. The impact on the Australian herd has been dramatic with the herd size expected to be at 24.5 million head in mid-2020, a 30-year low. This will take years to recover from and I think result in unprecedented falls in female kills over the next 2-3 years.
It should be noted that historically a female kill of 47pc is when the herd is in equilibrium, below this percentage will see herd rebuilding and above this percentage will see liquidation.
As stated, the high female kill is likely to see a dramatic fall in the female kill over the next 2 years which I am estimating to be close to 46pc and a steer kill to fall 8pc. The net effect is a 30pc decline in kill overall. Such dramatic falls in kill is likely to see meatworks closures in Australia.
Between 2014 to 2017 the fall in female kill was not as dramatic due to much a lower female liquidation rate. As stated earlier, cow prices started to improve in late 2014 well before the rain came and kills did not start to fall until mid-2015. I see a similar occurrence in 2019/20 where a fall in kills is expected sometime next year.
Is history repeating itself?
Not only is there the similarity with 2014 in Australia on the next cattle price cycle starting before the rain has come, but like 2014, during October and November we have seen global lean meat prices hit record levels, with imported 90 CL prices jumping 40pc in four months. In 2014 global lean beef prices jumped 45pc in also a similar four month period.
Similarities between 2014 and 2019:
At the time of each price rise, record levels were reached, in 2014 it was US305c/lb FOB and in 2019 prices reached US315c/lb FOB.
Australia in both instances was in the middle of a severe drought and that the benefits of record lean meat prices were not felt by farmers for many months after.
The market rallied in 2014 by 45pc and took 14 weeks. In 2019, the rally was 40pc and took 16 weeks.
How did the two rallies differ?
- Global currencies were stronger in 2014 with the A$ at US90c compared to today, where it is at US68.5c. This has resulted in imported 90CL prices trading at 36pc higher in value or A265c/kg more. Other suppliers such as Brazil, Uruguay and Argentina have been enjoying similar, if not greater gains due to more favourable currencies this year which has been well publicised lately.
- By the end of 2015 imported 90’s were 40pc lower and trading below US200c/lb. What drove the market that year was historical low cattle inventories – in 2014 US feedlots took advantage of lower feed costs and held cattle back which drove prices even higher, and by 2015 a larger US herd inventory was occurring and heavier carcase weights which ultimately saw falling cattle and meat prices later that year.
- Conversely, in 2019 the market drivers are quite different which has led to these new record highs being achieved – namely, strong global beef demand in particular, by China and the need to fill its enormous protein deficit due to African Swine Fever and the expected yearly 15-20 million tonne deficit in protein for the next 3-5 years. This demand driven market I believe looks sustainable for many years to come, unlike 2014 which saw a correction within a year of the peak in pricing.
How does this translate into cattle prices in Australia?
When looking at the correlation between Australia’s cow value and imported 90 CL, I converted both into US$ to ensure I was comparing apples with apples. The findings show a strong correlation of 94pc between 2000 and 2013. This trend comes back into line between 2016-2018, though not as strong.
Both drought and rising global prices saw in both 2014 and 2019 the price relationship move apart as imported 90 CL prices went higher and cow prices in Australia struggled to move at the same pace.
There is no doubt processing returns were good during this period, but as we know many of these profits were handed back in 2016. I have outlined two possible scenarios below on what Australian cow prices levels might be achieved – firstly, by looking at history and assuming it might repeat itself like 2014 and secondly, the impact of elevated global 90 CL grinding meat prices for the next 3-5 years and how that could impact Australian cow prices. Both scenarios result in significantly higher cow prices – the second lasts for much longer and potentially goes to much higher pricing levels.
Scenario 1/ Should history repeat itself –
In 2014 cow prices moved up by 90pc over a 34-month window which saw Australian cow prices peaking at US184c/kg or in Aussie dollar terms, at A248 c/kg LW (515 ac/kg CW). If this same 90pc movement were to reoccur over the next 34 months, it would see cow prices get to US217c/kg or A317c/kg (660 ac/kg CW) in Q1 of 2022. This peak lasted briefly before the herd had reached its rebuilding capacity and prices started to retreat.
Scenario 2/ China’s protein deficit to last 3-5 years –
The following scenario is based on 2020-2023 seeing sustained imported 90 CL prices which could look to trade over the three years in a 270-340c price range (monthly averages) and given the propensity for cow prices to fall in line with imported 90 CL prices this could see a sustained value in cow prices.
It’s the 15-20 million tonnes of protein shortfall in China per year that will drive this sustained pricing of imported 90 CL that will drag cow prices to record levels and remain at these unprecedented levels. It’s a unique situation that is due to African Swine Fever that is unlikely to be repeated in my lifetime.
With such strong cow prices expected over the next three to five years, I see this being translated into strong steer prices as well due to the belief I stated earlier of a global protein deficit in China of 15-20 million tonnes per year impacts all global proteins. These benefits in Australia, I believe will be seen across all cattle categories with steer price increases to be in the range of 60-80pc over the next 3-5 years.
Global FMD-Free balance sheet for 2020
One of the key concerns for 2020 is the availability next year of foot-and-mouth disease free (FMD free) meat globally. When assessing both importing and exporting FMD-free countries and assessing whether 2020 will see an oversupply or under-supply of FMD-free beef, I looked at what domestic production across all countries would be and what they would either need as a net exporter or importer to meet there additional needs.
Interestingly, the overall FMD-free beef production in 2020 is only up slightly by 0.2pc, the overall extra beef exports available is up also only mildly higher by 1.3pc but the key concern is that global demand is likely to be up dramatically by 7-20pc. The key difference will be China and depending on your assessment of its beef needs for 2020, will result in how big a global deficit there is. I had China’s 2020 import beef needs at 3.7 million tonnes (CW) and USDA had this figure at 2.9 million tonnes (CW).
My estimate is based on the accelerated use of beef imports as an important protein substitute for pork within China.
When assessing the FMD-free beef balance sheet, several points should be noted. Firstly, that countries like the US are both and importer and an exporter, secondly, that FMD free meat competes globally in non-FMD free countries like Indonesia, Philippines and the Middle East – so leakage occurs.
The market forces will work and I can foresee that more and more FMD-free meat being diverted away from the non-FMD free markets like Indonesia and the Middle East and into China, resulting in the price spread between Australia, US and Brazil beef widening against Indian buffalo in 2020 (and beyond).
FMD-free beef will move higher in price due its global shortfall in 2020. The extent of this shortfall I believe will depend on China, if China imports the 3.7 million tonnes I have forecast then a global shortfall of exportable FMD-free beef will be close to 20pc compared to 2019 beef exports, and the lift in 2020 prices is likely to be strong.
Conversely, if USDA numbers for 2020 with China beef imports totalling 2.9 million tonnes is correct, then the FMD-free global shortfall would be closer to 7pc, and a much milder lift in global FMD-free beef prices would occur. Either way, FMD-free prices will go higher next year – it’s just by how much is the crucial question.