ARE export processors still making money, despite the sharp rise in cattle prices experienced during the first five weeks of the new year?
It’s a question which is now coming into focus, as export processors wave goodbye to a 2014 slaughter season which saw historically-high profit margins for much of the year due to the combination of drought-fuelled oversupply of cattle, and powerful international demand.
Exactly how much more is it costing export processors to put a kill together at the moment?
As Beef Central has noted in earlier weekly kill articles, it’s currently costing processors in the nation’s most heavily focussed area of southeast Queensland an additional $150-200 a head to secure many grassfed slaughter cattle, compared with best prices seen last year.
Here’s some simple math: At an average Eastern States kill rate of 153,500 head for the past four weeks, and a very conservative rise in price of $160/head, processors are currently forking-out close to $25 million extra each week to producers to secure their kill, compared with the very best money seen last year.
Given that export meat pricing has not changed that much since December (if anything it’s moved downwards a little – see our home-page 90CL US imported beef graph), that’s coming straight off processors’ bottom lines.
We’re not attempting, for a moment, to arouse any sympathy here for the financial plight of processors – especially after the “Rivers of Gold” they enjoyed in 2014 – but simply to put current circumstances into some context.
Beef Central originally did the above sums to illustrate pricing trends for our TV interview with ABC Landline’s markets reporter Kerry Lonergan on Sunday (click here to access a short video clip of that discussion), but unfortunately time did not allow for their inclusion.
On the subject of profitability, Beef Central has asked around some trusted processor contacts this week, and has come up with the following:
- Processor profit on grainfed export steer is now described as marginal, at best. Grainfeds on the spot market currently range from 480c to +500c/kg, and out to 510c/kg for forward contract.
- Margins on grassfed export steer are still in positive territory for processors, despite price rises of +50c/kg on late last year, but are nowhere near as profitable as last year.
- Best returns to export processors currently are on the cow, which is clearly reflected in current livestock pricing. Several large Southeast Queensland processors currently have heavy cows just 10c/kg carcase weight less than four-tooth grassfed heavy-steer (see grid summary below).
It makes a mockery of the broader industry’s ‘objective’ of producing heavy, well-finished, good-eating young steers when older heavy cows return just 10c/kg less at the meatworks. It barely covers the meat yield consideration.
But that pricing signal is not some arbitrary decision made by processors. It reflects just one thing: international demand trends. The global demand for manufacturing beef that took off this time last year continues, albeit not quite as strong at its peak around mid-2014.
Kill rosters starting to fill, some grids ease
Southeast Queensland’s large export processors are reporting solid direct consignment bookings at present, as producers respond to current price signals, and rain seems to have come to an end – for the timebeing at least.
While large parts of Queensland and northern NSW have now had an extremely promising start to the year, it’s still far from season-making. Circumstances could again change rapidly if the tap is turned off now.
Plants in both Central and Southern Queensland, and northern NSW, have booked a lot of cattle since Friday. At least one very large processor now has remaining February kills more or less covered, and is taking bookings only from March, week-one in some areas.
Several processors have re-introduced Saturday boning shifts to cope with current numbers, which include good flows of saleyards and weight and grade cattle bought out of the south, at cheaper prices.
Some producers evidently have picked it as the top of the market, and want to move before prices show any further sign of softening. Already one of the ‘big three’ SEQ processors has lowered its grids by 5-10c/kg this week, in response to the current flow of cattle. There was also some evidence of softening in some saleyards market segments yesterday and Friday.
“People are saying, I want a bit of this, before it goes off,” one livestock buyer said this morning.
“People are taking a position at present,” he said. “They’re looking at their paddocks and saying, I’d better take a bit of space out in front, as insurance in case things turn dry again.”
At least some of the large kills being seen at present are cows that were put onto grain-assist diets during December for 50-60 days, now beginning to empty out.
Bigger flows of cattle through March-May – perhaps a month earlier than normal – could see some further pressure emerge on slaughter cattle price.
Best SEQ public grid offers seen this week include four-tooth grassfed heavy steer 435c-450c, milk and two-tooth steer 445-455c, and best heavy cows for late February/March kill at anywhere from 425-435c. Some processors offer +5c on those rates for no HGP cattle.
Compared with the best prices seen late last year, cow rates are now up to 65c higher, dressed weight; and four-tooth heavy grassfed ox 50c higher. PCAS-eligible steer is now quoted at 510c/kg, with Certified Organic grassfed steer this week at 570c/kg.
Kill numbers returns to ‘normal’
This week’s Eastern States beef kill returned to normal after a public holiday-shortened week the previous cycle.
The five eastern states posted a kill of 174,170 head to Saturday, a 24pc rise on the previous seven-day cycle.
All states showed big double-digit rises, as expected. Queensland’s kill reached 83,274 head, up 30pc on the previous week, and still 2pc higher than this time last year. Comparisons with last year’s kills are likely to go into negative territory over the next couple of months, as the impact of last year’s drought starts to be seen in relative figures.
The NSW kill last week reached 42,752 head, up 25pc on the previous shortened week, and +9pc on a year ago. Victoria accounted for 33,160 head, +15pc on the previous week, while Tasmania was +22pc at 4954 head. South Australia’s kill remained much the same at 10,030 head.
Just the facts that both JBS and Teys started from a single Butcher Shop a few decades ago tell a story about the profitability of the Beef Processing Sector.
The challenge is still there for Grass Fed Cattle Producers to get their slice of a very large cake and lets start by demanding that the Honorable MP Barnaby Joyce implement changes that will give these Producers complete control over the levies that they have contributed, most times with quite a bit of hardship.
Has the $AUS been taken into consideration with your calculations, it is dropping and this can only be helpful to those in the processing sector?
The 2014 profits for the processing sector were huge. This appears to be a normal cycle where Supply and Demand once again dominates what the farmers receive, I am pretty sure supply is not going to change that quickly.
Hello Sam. Processors calculate their margins on different cattle on an almost daily basis, and currency is definitely factored into that. The A$ has certainly moved sharply in Australian beef exporters’ favour over the past four months. It helps make Australian beef more competitive on the world stage, but not all of that currency advantage falls into processors coffers. Depending on both supply and demand circumstances, it is not uncommon for importers to try to ‘share in the spoils’ when Australian currency moves in our favour. Essentially, they try to extract a lower price for beef, to reflect at least part of the higher return (in A$ terms) to Australian exporters. Would make a good topic for a more detailed examination on BC one day. – Editor
Well, well, well, after taking advantage of producers without any degree of conscience over the past 18 months, the processers are feeling what it is like to do it a bit tough. I have no sympathy at all for them, it is good that every dog has his day.