By Simon Quilty, MLX Ltd
As the drought has intensified in the last few months I have been asked a number of questions on what impact this drought will have on various parts of Australia’s cow market both in the saleyard as well as on our export markets.
The following outline is my response in a question answer format as I try to answer these difficult questions.
In brief the questions asked were:
1/ What is the likely cost for a breeder to buy back cows once the drought has broken?
2/ Is the Australian drought going to see cheaper cow meat go to the US market?
3/ Have cow markets been impacted by the global trade war?
Summary of response:
- Cow prices have fallen twice as much as steer prices since early 2017 with cow saleyard prices 140 ac/kg lower compared to heavy steer price fall of 66 ac/kg.
- National cow prices after the 2013-2014 drought doubled in the following 2 years, cow prices averaged 272 ac/kg CW in the drought and jumped once rain came to 540-555 ac/kg range in the June to August period in both 2015 and 2016.
- Prior to the post 2013-2014 drought meteoric cow price rise – previous droughts when broken had seen only 15%-40% increases in cow prices during the following herd rebuilding years
- I attribute the dramatic cow price rise post 2013/14 drought to two reasons; firstly, the 62% increase in global beef prices that had occurred since 2010 that had not been built into Australia’s livestock prices at that stage and secondly, the dramatic liquidation of the national herd which saw over 2 million head shed from the herd.
- I believe that due to the liquidation of such a young herd in Australia today and the potential increase in global prices in the next 3-5 years, that these two factors will add another 10% to the traditional post drought cow price improvement range – putting my estimate on where cow prices could go to 25%-50% higher from today’s drought affected cow price of 380 ac/kg to potentially 475 ac/kg-570 ac/kg CW when the drought breaks.
- Recent lower prices into the US grinding meat market is more to do with Q3 being traditionally a slow time of year for demand rather than the impact of the Australian drought. This weakness is because the market is in-between two key demand periods, Chinese New Year buying which is likely to start in October and the finish of the Northern Hemisphere summer demand period whereby we are seeing beef inventories being wound down and demand is slow.
- The Australian drought is not driving Australia’s imported 90 CL price to a discount to US domestic fresh 90’s instead we are in a regular seasonal price movement that is likely to see Australian 90’s move to a premium to domestic 90’s within 3 months.
- Australian cow cuts exports are 15% higher and cow grinding meat is only 5% higher in Q2 – in other words the additional drought driven cow cuts are no longer being slashed and downgraded into the grinding meat pack but are remaining intact due to other markets paying a premium over the US for these items, in particular China – this trend is unlikely to change.
- The greatest impact on Australian beef exports due to the global trade war has not been the impact of tariffs or pork duties but it has been currencies – more importantly the currencies of our supply competitors and our key demand countries. Duties on other meat products such as pork and beef will have some affect but this may not be felt for at least 6-12 months whereas currency influences are immediate.
- Australian cow cuts due to currency uncertainty within key demand and supply countries are much more vulnerable on both the buy and sell side of the market much more so than Australian steer meat.
- The most dramatic currency impacted has been Brazil which has fallen 18.5% since March 23rd this year – the Indian Rupee has fallen 8.3% – in both instances each country competes into key cow meat export markets such as Indonesia, China, Hong Kong and Vietnam and in lesser cow markets such as Kuwait and Qatar – where the cheaper currency means they are far more competitive.
- Thankfully neither Brazil or India compete into US, Japan and South Korea for beef and this has seen both Australia’s steer meat exports and cow meat cuts be competitive against US meat due to the appreciation of the USD by 6.7%.
Please note the price forecasts within this paper are my own personal views and I would always advise you to seek further advice when making decisions to buy and sell whether its cattle or meat.