The swings and roundabouts of the cattle market had processors feeling the price pinch this winter and there is little relief for them on the horizon. The last time we looked at this model, we predicted processor margins would tighten if favourable seasonal conditions played out and restockers entered the market. And so they have.
Mecardo’s processor margin model was -$132.14 for August, its lowest point since January 2017 – the last time Australian cattle prices were hitting record highs. This is a 127 per cent drop from the start of the year, and so far this year the model has processors averaging a loss of $18.17 a head. While this year’s average is a long way off the average $60-$80 losses experienced in 2016-2017; if this rate continues, it will quickly catch up to it.
A glance at some of our regular market figures and it’s pretty easy to see why the processing end of the supply chain is losing money. The Eastern Young Cattle Indicator finished last week at 775¢/kg, an improvement of 59 per cent year-on-year, while the national cow price sits at 501¢/kg, up 29% on the same time last year. On the other end of the equation, the export price (90CL) is down 11% compared to the same time last year, at 662.5¢/kg. Team this with a stronger AUD and plummeting slaughter rates, and you have the perfect storm for processor losses.
The latest figures showed Australian beef exports hit an 18-month low in August, mainly due to tight supply, with 300,000 less cattle processed in Australia for the year to June. While limited supply has gone someway to offset higher domestic prices so far this year, the latest report from Steiner Consulting Group for Meat and Livestock Australia points to more downward pressure on US lean beef values, as demand for grilling products slow as they enter winter, in addition to their own cow slaughter seasonal increases, usually beginning in October and November.
What does it mean?
The processing sector will continue to feel the brunt of an Australian cattle market being out-of-whack with international markets in addition to the Covid-19 impacts on capacity and export demand. The ban of several export plants sending beef to China is also still playing out. And with the forecast La Niña expected to bring high rainfall and keep restockers active in the market, there will be little relief on the domestic front for processors in the short term.
Key Points
- Sky high domestic cattle prices and easing US lean beef prices pinching profits for processors.
- Processor margins have spent most of 2020 in the red, averaging a loss of $18.71 for the year to August.
- Profits dipped a further 11c/kg last month, to negative $132.14.
Click on graph to expand
Click on graph to expand
Data sources: MLA, Mecardo
