With the Australian cattle herd at a 20-year low, this year’s beef market will be heavily influenced by seasonal conditions, with strong upside if seasons improve, according to a new industry report.
In its recently-released Australian 2019 Beef Cattle Seasonal Outlook, agribusiness banking specialist Rabobank says limited cattle inventory will make the market very sensitive to any changes in demand and exaggerate any price upside as a result of increased rain and better conditions across the country.
“Any meaningful rain, particularly in Queensland and New South Wales, would see beef producers – in addition to feedlots and processers – jump back into the market to buy cattle from what is a very limited pool,” says report author, Rabobank senior animal proteins analyst Angus Gidley-Baird. “This could see prices rise by more than 20 per cent.”
However, should the season remain drier than normal, Mr Gidley-Baird says, prices would ease and remain below 2018 levels – with Rabobank modelling predicting an Eastern Young Cattle Indicator (EYCI) of between $4.00/kg and $4.50/kg throughout 2019.
“While dry conditions would force additional sales and reduce producer demand, there is still much more upside potential for prices, rather than downside,” he says. “It just all hangs on how much falls out of the sky.”
Mr Gidley-Baird says Australian cattle slaughter numbers are forecast to contract by five per cent in 2019 – assuming drier than average seasonal conditions though an improvement on last year.
“With this contraction driven by lower female slaughter rates – as producers hold onto more female stock – any improvement in the season would see slaughter numbers fall back further,” he says.
Mr Gidley-Baird says seasonal conditions in Queensland and New South Wales will have the greatest bearing on the domestic cattle outlook, with current dry conditions potentially forcing producers to offload more stock throughout 2019.
“With many areas, particularly in Queensland, reporting lower breeder numbers, calf numbers will be down this year and this will continue to limit production prospects,” he says.
Mr Gidley-Baird says the drop in production has been compounded by the Queensland floods – affecting a vast area accounting for approximately 17 per cent of the Queensland herd (around one million head).
“While the precise numbers of stock lost will not be known until musters are completed, there is the real possibility for losses to amount to 500,000 head,” he says.
“In the northern areas of the flood zone, which is generally considered breeding country, the loss of breeding cattle will have a bearing on calf production not only this year, but in years to come. While in the southern areas – representing more growing and fattening – will see a reduction in the number of finished cattle available for slaughter over the next 12 months.”
At the same time, Mr Gidley-Baird says, large areas of Queensland continue to experience very dry conditions.
“Rabobank estimates Queensland cattle numbers could be down by 20 per cent on ‘normal’, with some areas down by up to 70 per cent,” he says. “And with the number of female cattle, in particular, being down – this will prolong any rebuild process.
“But should we get a turnaround in the season, there will be a strong appetite to begin rebuilding herds.”
Australia’s key export markets are expected to remain strong, Mr Gidley-Baird says, with trade flows increasingly focused on Asia.
“Last year, Japan, South Korea and China took 58 per cent of Australia’s beef exports,” he says, “representing the equal highest proportion in over three decades.”
While Australian exports to Japan and South Korea grew by eight and 15 per cent, respectively, Mr Gidley-Baird says China accounted for the biggest increase, at 48 per cent.
“The growing demand for protein in China, extenuated by the shortage in pork production due to African Swine Fever, has seen China increase its share in global beef markets,” he says.
“The shift in focus to Asia has big implications for the Australian cattle market, as what happens in their markets will now have as much bearing as the US, which has traditionally been the price setter in the market.”
Mr Gidley-Baird says while the demand fundamentals in Asia are expected to remain strong, there will be increased competition in these markets from the US.
“The US also increased their beef exports to Japan and South Korea,” he says, “with a further increase expected this year, as the US grows its beef production by a further two per cent.”
“This will not only see Australia compete head-to-head with the US, particularly in South Korea, it will also limit the upside for Australia’s import volumes into the US.”
On balance, while global markets are expected to provide a positive influence on Australian beef prices, Mr Gidley-Baird warns there is “heightened uncertainty surrounding global protein trade in 2019”, given the ongoing US/China trade dispute and uncertainty around Brexit and European trade arrangements.
Mr Gidley-Baird says while the bank’s modelling suggests cattle prices could track below 2018 levels, limited cattle supplies will make prices very sensitive to any improvement in the season and there is large potential for strong upside.
“Our modelling has been based on the assumption seasonal conditions will remain drier than average, driving down slaughter numbers and yarding volumes, by five and two per cent, respectively,” he says. “If this scenario eventuates, an average EYCI of $4.28/kg is forecast, a 16 per cent drop on last year.”
That said, the prices of heavier cattle classes are expected to remain firm, he says, underpinned by limited supplies of heavy cattle.
“While the model suggests prices will head lower this year, any rain that allows producers to hold onto their cattle or come back into the market to buy cattle, will see prices head one way – and that way is up,” he says.
“There is simply not enough cattle in the system and, coupled with strong export fundamentals, there is much upside for prices.”