IT MIGHT seem counter-intuitive, but record high export beef trimmings values being seen at present do not necessarily spell hefty profits on slaughter cows for Australian export processors.
Australian lean (90CL) trimmings into the US last week were quoted at a new record high of A$11.78c/kg FAS. That figure may well go higher, given Saturday’s developments around tariff adjustments into the US, and the wide tariff gap that continues to exist between Australian and Brazilian manufacturing meat.
Until a year or so ago, Australian export trimmings prices had never gone above $10/kg, and a year before that, much above $8.50.
So given the extraordinary strength of the current export manufacturing meat market, how do processor margins look on manufacturing cows?
Northern grids trend higher
Before we get onto that topic, a quick update on direct consignment slaughter cattle prices this week.
Some solid rainfall across parts of Queensland over the past seven days (Roma Races were cancelled on Saturday, much to the chagrin of local punters) has further tightened supply in the north, forcing Queensland export processors to lift rates again – typically by another 20c/kg.
It’s taken competitive grid offers in southern parts of the state this week to 750c/kg on heavy cows, and 830c/kg on heavy grass steers (840c available for no HGP in some sheds). The same cows this time last week were making 710-730c/kg.
Central Queensland plants are 10-20c/kg behind those rates.
The local rain impact was clearly seen at Roma store sale this morning, where only about 3600 were yarded, down 2500 on last week. See BOM’s weekly rainfall wrap in today’s Beef Central output.
Further south, where good slaughter cattle remain scarce, there is less evidence of grid changes this week, but quality cows are still making 800c/kg and grass four-tooth ox 860c in eastern regions of South Australian and southern NSW. However there have been reports of 810c/kg around for good cows, with rain about.
A good offering of heavy cows at Forbes sale yesterday averaged 402c liveweight and sold to 417c/kg, with plainer types selling to 389c.
Slaughter cow margins
So given the above figures, how do processor margins look currently on slaughter cows?
With the help of an experienced processor contact, we’ve come up with some representative northern and southern numbers, below (broad figures only, as circumstances obviously vary from plant-to-plant). The results might surprise some readers.
While lean trimmings into the US at $11.67/kg are indeed easily record high in local currency terms, the question about profitability depends on what the processor is paying for the animal.
As a basis, we’ve assumed a good quality beef-breed cow producing a 300kg carcase, and a conservative meat sale price prior to last week of A$11.30/kg,
For a southern Australian processor paying 800c/kg carcase weight for that 300kg cow carcase last week, the procurement cost per head was $2400.
Typical processing cost (kill, bone, pack) ranges from $500 to $600, which might be towards the upper end of that scale for northern cattle shipped south for fabrication.
That gives a total figure of $3000 that the processor has to recover.
A 300kg heavy cow carcase at 73pc yield will deliver around 220kg of boneless beef. Multiply that entire 220kg by the 90CL price of $11.30/kg gives a value of $2486/head. Add to that the revenue from bone, off-cuts, offals etc (hides have little value in the current market) at say, $200 a head, plus a mark-up for a few sweet cuts not put into the trim pack (tenderloins, cube rolls etc perhaps sold as budget muscle meat), apportioned another (generous) $150 a head, gives a total revenue of $2836.
Given the raw material and processing cost of $3000, that gives a southern processor loss, on recent trading terms of $164 a head. A more efficient southern plant where processing cost is at the lower end of the range $500-$600, or where there is no heavy transport cost involved might be closer to $64 loss.
Northern scenario
A Northern scenario where the same cow is bought over the hooks by a Queensland processor at say, 720c/kg (and assuming a more efficient fabrication cost of say $500 a head) would produce a raw material cost of $2160, plus $500 processing cost, for a total of $2660. A less efficient northern plant with processing costs of $600/head would be $2760.
Given the same sales revenue (220kg of boneless beef x $11.30 plus additionals, for a total of $2836/head, would deliver a profit of $76-$176/head, depending on plant efficiency.
All of those margin outcomes – north and south – are a lot less than what many beef producers watching the meteoric rise of the 90CL price might have assumed.
And numbers can only get worse from that. A fatter cow delivering only 85CL trim would see those results worsen. Lighter, poorer yielding dairy types the same. Yield loss and additional transport cost on longer distance transport is also not taken into account – and there’s been plenty of Central and Far North Queensland cows sold into Victorian and southern NSW processing this year.
For that reason we have used over-the-hooks pricing as the basis.
On the upside, those processors with a special US supply contract into a big customer like Burger King or McDonalds, might have got an extra 10-20c/kg over the commodity rate.
But the bottom line remains: there are no ‘colossal processor profits’ in cow slaughter currently, despite record meat price levels. Processing industry contacts suggested a figure of $150 a head represented only a ‘decent cut’ for export abattoir operations, in the current market environment.
“Much less than that, and it hardly warrants being in business,” one contact said.
Where to from here?
So what happens between now and Christmas for cows slaughter? Will southern processors, particularly, be prepared to continue to lose money on cows, even if it is to protect jobs and maintain higher levels of plant throughput?
The biggest unknown is the impact on the market (not yet clearly evident) from of Trump’s weekend announcements about tariff changes. If Brazilian tariffs on beef remain as high as they currently are, it may in fact push demand, and price, for Australian manufacturing meat even higher.
One US Senator made statements overnight that he thought retail ground beef in the US could next year hit US$10/lb. That’s the equivalent of US$22/kg, or in Aussie dollar terms, $33.80/kg. For hamburger beef.
If that occurs, hold on to your hats. But if the opposite occurs and US consumers abandon ever higher-priced beef in favour of chicken or pork, the reverse might apply.
But if local cow prices remain as high as they currently are, there’s expectation in some circles that some processors will become less aggressive, sit back, and be prepared to drop a few shifts between now and Christmas shut-down.