August 25, 2015
The Australian beef industry is on the cusp of great things, according to specialist agricultural lender, Rabobank.
Key fundamentals for a strong Australian beef sector – consisting of strong international demand, constrained global supply, a depreciating dollar and trade agreements – are falling into place.
In a recently-released report titled, ‘The Australian beef industry – on the cusp of great things’, Rabobank says an improvement in the weather and drought-breaking rains through many cattle-producing regions would provide that necessary relief for many producers and allow the herd rebuilding process to begin.
Report author, Rabobank senior animal proteins analyst Angus Gidley-Baird says the Australian beef industry has long been exposed to the supply and demand fluctuations experienced by global drivers and local seasonal conditions.
“While depressed prices have been driven by short-term high domestic supply, the Australian industry is now in a position to capitalise on strong global demand, providing an opportunity to develop an industry with a premium, value-added product,” he says.
“This would ensure a more stable, long-term environment for the Australian beef industry.”
Record slaughter numbers have enabled the industry to tap into growing and lucrative export markets; however, production at this rate – given the herd size – is not sustainable.
The Rabobank report indicates that Australian slaughter rates above eight million head and live exports over one million head cannot continue, given estimated herd numbers.
“The Australian breeding herd is not being replaced, and this will lead to an increasingly rapid reduction in cattle inventory and future production capacity,” Mr Gidley-Baird says.
Mr Gidley-Baird says China exploded onto the Australian beef export scene in 2013, and while the same growth has not been evident in 2014 and into the start of 2015, over the longer term, it has the potential to become one of Australia’s top two beef trading partners, ahead of Japan and Korea.
“Indeed, increased beef consumption and food safety are both being promoted in the Chinese food and nutrition development programme out to 2020 – with low, but growing per capita consumption, strong economic growth and increasing wealth, coupled with a huge population – even small increments in consumption can shift the needle in total demand for beef,” he says.
Chinese sales of beef and veal are currently experiencing the strongest growth of any meat, at 4.8 percent (CAGR from 1996 to 2014). Rabobank expects the growth in consumption to decline slightly, to 2.2 percent (CAGR over the next decade), due to a slowing of the economy, although it is still expected to grow faster than other meats.
Adding to the prospects for the Chinese market of becoming Australia’s most important trade destination is the FTA waiting in the wings, Mr Gidley-Baird says.
Live exports – alive and well
The Indonesian market is set to remain the primary market for live cattle exports, with a medium-term export volume of 700,000 head to 800,000 head per year expected to be the level that meets their consumption demands; however, political influences will be the major impediment to faster development in the trade.
Mr Gidley-Baird says Vietnam is showing promise of becoming the next strong live export market, however, the pace of development will need to be managed to accommodate requirements for animal welfare and short-term supply constraints.
“While the US may provide a short-term market opportunity with current market conditions, China provides a much bigger opportunity longer-term, although it will require infrastructure investment to accommodate such a trade,” he says.
Cattle prices – where to from here?
Based on the strength in global markets, Rabobank forecasts that Australian Eastern Young Cattle Indicator (EYCI) price is expected to trade in a range of AUD 5/kg to AUD 6/kg cwt range for the next 12 to 24 months.
“Australia has the ability to capitalise on potential value-added characteristics and gain greater access to more markets in a supply-constrained environment in order to support ongoing export demand and higher prices,” Mr Gidley-Baird says.
“With slaughter rates tracking 3.8 percent higher in the first five months of 2015 than the same period in 2014, we have not seen the initially-expected reduction in supply, with prices fuelled by a particularly strong US market.”
US cattle prices – as the major driver of current domestic prices – are a good indicator of what the near-term future price for Australia might be, Mr Gidley-Baird says.
“With Australian cattle prices continuing to rise and US prices stabilising, they are set to meet again and return to a more normal relationship within the AUD 5/kg and AUD 6/kg cwt range,” he says.
“And, with large price increases already accommodated within the market, it is not expected that further price increases fuelled by restocker demand will be as dramatic as in previous seasons.”
Rabobank Australia & New Zealand is a part of the international Rabobank Group, the world's leading specialist in food and agribusiness banking. Rabobank has more than 115 years' experience providing customised banking and finance solutions to businesses involved in all aspects of food and agribusiness. Rabobank is structured as a cooperative and operates in 41 countries, servicing the needs of approximately 10 million clients worldwide through a network of more than 1600 offices and branches. Rabobank Australia & New Zealand is one of Australasia's leading rural lenders and a significant provider of business and corporate banking and financial services to the region's food and agribusiness sector. The bank has 94 branches throughout Australia and New Zealand.
Rabobank Australia & New Zealand
Phone: 02 8115 2744 or 0439 603 525
Rabobank Australia & New Zealand
Phone: 07 3115 1832 or 0418 216 103