Kay’s Cuts: Making hay while the sun shines

Beef Central, 10/04/2014


A monthly column written exclusively for Beef Central by US Cattle Buyers' Weekly editor, Steve Kay


SUMMER was always an exciting time on the Kay farm back in New Zealand.

Cows had to be milked, calves hand-fed, lambs weaned, sheep shorn, pigs fed and beef cattle rounded up. There was also fruit and produce from our orchards and gardens to be picked and bottled or frozen to last through the winter. Then there was hay to be cut, raked, baled and brought into the shed before it rained. My Dad listened to every weather forecast on the radio, as he knew that you had to make hay while the sun shines.

That’s exactly what Australia’s beef processors did as drought forced larger than normal numbers of slaughter cattle to market. As I wrote last month, large processor profits have given way to calls for everything from more federal government oversight to the establishment of mandatory price reporting (MPR) by processors.

Before I address MPR, I want to emphasise that there is nothing wrong with processors maximising their profit margins. It’s also important that Australia has a strong, profitable processing industry.

Processors turn cattle into beef and then have to sell it as quickly as possible. That can be challenging, especially if the Australian dollar is moving against other currencies, if countries like Russia slap on nefarious bans on Australian beef or if exporters have to comply with onerous testing for E. coli.

Contrary to what some think, being a beef processor is far from having a license to print money. On the contrary, the business involves a huge amount of capital, a large amount of risk and having to deal with events out of one’s control that can turn millions of dollars of profits into losses very quickly.

Just ask US fed beef processors what they’ve had to deal with this year. Historically tight supplies of market-ready cattle meant they paid record high prices for fed steers and heifers more than half the 13 weeks of the first quarter.

What they got for the beef set records more weeks than not as well. But the price spread between cattle and the beef was still volatile and largely negative. Their operating margins during the quarter varied from a positive US$104.76 per head to a negative US$115.29. Consulting firm calculates that margins were negative by US$30 per head in the quarter. That’s a quarterly loss of US$150 million or more.

No one is crying for the processors and neither should they. Processors usually lose money in the first quarter and make it up in the second and third. Yet there’s no guarantee of that this year, as processors might still have to pay much higher prices, compared to last year, for cattle and face strong resistance from beef buyers.

Retailers have seen their beef margins erode and have told processors they must lower their prices if they expect to sell much beef. It’s important to remember that in Australia, as in the US, retailers hold the ultimate power over the market.

It’s also important to put the profits made by Australian processors into perspective. There will come a time, and it might be now, when the welcome rains across much of Australian cattle country significantly reduce the supply of cattle coming to market. Last week saw the first signs of this, as Beef Central covered in detail.

Processing margins could easily turn ugly. Companies know this, so they have simply been making hay when the sun shines, knowing a downpour could ruin their harvest.

As for mandatory price reporting (MPR), the industry will have to examine whether such a move is necessary in light of the level of price reporting now done on a voluntary basis. US producers and cattle feeders pressed for MPR throughout the 1990s, with some believing that MPR would magically uncover secret deals between feeders and processors.

Producers eventually persuaded Congress in 1999 to pass the Livestock Mandatory Reporting Act and USDA’s Agricultural Marketing Service implemented the LMR program two years later.

The purpose of the Act, says AMS, was to: establish a program of information regarding the marketing of cattle, swine, lambs, and the products of such livestock that provides information that can be readily understood by producers; improve the price and supply reporting services of the Department of Agriculture; encourage competition in the marketplace for livestock and livestock products.

The act has been revised and re-authorised several times and is up for re-authorisation again on September 30 next year.

The program from the start contained confidentiality guidelines that remain to this day. The 3/70/20 confidentiality guideline requires the following three conditions: at least three reporting entities need to provide data at least 50pc of the time over the most recent 60-day time period; no single reporting entity may provide more than 70pc of the data for a report over that same time period; no single reporting entity may be the sole reporting entity for an individual report more than 20pc of the time over that time period.

As noted, MPR applies to cattle, swine and lambs. Participants in all three sectors agree that MPR has benefitted the entire livestock industry. As for secret deals, not one has been uncovered. The US cattle industry’s far bigger issue today regarding fed cattle is the diminishing cash market.

JBS Australia had a strong 2013 and first quarter of this year because it saw more cattle and was able to sell much more beef to China.

JBS Australia performed above expectations, says parent company JBS SA. It continued to deliver solid and consistent results, influenced by strong demand from Asian countries, especially China.

China imported from JBS Australia 59pc more beef in 2013 compared to the previous year. JBS Australia processed just over 2 million head in 2013, versus slightly less than seven million in the US and about one million in Canada.

That’s a lot of cattle to make money on. But it’s also a lot to lose money on.




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