Australian cattle producers are being cautioned to “look beyond the price peak” by a new industry report, with current record-high prices unlikely to be sustained in the medium to longer term.
In its latest beef research report, Australian and New Zealand beef industry – looking beyond the price peak, agribusiness banking specialist Rabobank says while Australian cattle prices are likely to remain high for the next six to 12 months, they will then come under pressure as global beef production, and indeed total animal protein production, increases.
This will likely see prices ease, albeit to trade in a higher-than average range out to 2020, the report says, identifying six key developments that will influence cattle farmgate prices in coming years.
In light of this outlook, the Rabobank report says Australian beef producers need to be looking beyond the current high-priced environment and take a cautious, yet optimistic, approach – particularly those producers purchasing stock, looking to rebuild or expand production.
“Australian farmgate cattle prices are now the highest of all key producing countries in the world,” says report author Rabobank animal protein analyst Matthew Costello, “and in our view this record pricing cannot be sustained in the medium to longer-term.”
Mr Costello says current prices are beginning to challenge the purchasing decisions of consumers, with the average quarterly Australian beef retail price rising by 23 per cent between 2013 and June 2016, compared with a five per cent drop in the retail price for poultry.
“The US, where beef cattle prices have fallen by 42 per cent from their late-2014 peak, provides an interesting case study in this regard, highlighting the push-back from domestic consumers in response to high beef prices,” he says.
“While we don’t believe the Australian industry will show the same outlook as that of the US – in terms of the speed and degree in which farmgate prices declined – it does highlight how quickly unsustainable pricing can place pressure right along the supply chain,” he says.
Mr Costello says while Rabobank forecasts Australian farmgate prices to decline, it expects the fall to be less severe than that of the US, or seen previously in Australia.
“One key point of difference is the outlook for ongoing limited domestic supply – given the reduction in the female breeding base – as well as the diversification of export markets, with demand continuing to grow, particularly in China,” he says.
“And this should see prices settle in a higher-than-average price range out to 2020, in comparison to historical averages.”
The key six
The Rabobank report identifies six key developments that will influence farmgate prices in coming years – lower domestic production, record global beef production, increased competition from cheaper proteins, China’s role in global trade, market access and currency movements.
“On balance, these developments underpin a positive outlook for the Australian cattle industry,” Mr Costello says, “however, there are likely to be some headwinds from increasing global beef production, which is set to reach record levels by 2020, and competition from cheaper animal proteins.”
Mr Costello says lower domestic supply is the most positive driver to underpin Australian cattle prices out to 2020.
“While domestic production is set to recover, it will remain below the drought-induced near-record levels we saw in 2013 to 2015, with the Australian herd now at a 20-year low,” he says.
It is a different story globally, however, with the report forecasting record global beef production by 2020.
“We are expecting an additional five million tonnes of beef to be produced by 2020, compared to the global level of production reported in 2015,” he says, “mainly driven by the US and Brazil, and increasingly Argentina.”
However, not all of this will hit global trade, he says. The Rabobank report forecasts around 1.5 million tonnes of this increased global production will be exported, with most of the product expected to go to non-traditional or emerging beef markets such as China.
“China is fast becoming – if it isn’t already – the most important cog in the world beef complex,” Mr Costello says. “And with Rabobank expecting Chinese demand to outstrip their domestic production by around 1.5 to two million tonnes over the next five to 10 years, China has the potential to absorb all the exported beef that is forecast to hit the market in coming years.”
Competition will also increase from other animal protein sources, Mr Costello says, with record production across all major animal proteins set to ensure competitive prices for consumers, making the substitution from beef to cheaper proteins increasingly appealing.
The report also highlights the importance of “staying ahead of the competition” through free trade agreements (FTA) and removal of technical trade barriers, with Australia’s FTAs with its four largest export markets expected to derive great benefits out to 2020.
Supply chain collaboration and integration
Mr Costello says while “future price fluctuations are inevitable”, driven by the six key factors influencing global beef markets, the Australian industry’s exposure to these swings could be better managed by greater collaboration across the supply chain.
“This may take the form of increasing the value and usage of co-products, further differentiating Australian beef from that of its competitors, identifying new consumers in both traditional and emerging markets or developing more risk management solutions such as forward contracts,” he says.
“This will help extract more value along the supply chain and reduce volatility in what is a typically ‘boom/bust environment’, which inherently increases risk and uncertainty for all participants along the supply chain.
“And we are currently seeing this in the processing sector, with margins squeezed by the significant disparity between high procurement and weak export prices – a complete reversal to the abnormally high margins of 2014 and 2015.”
Rabobank Australia & New Zealand Group 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 40 countries, servicing the needs of approximately 8.6 million clients worldwide through a network of more than 1000 offices and branches. Rabobank Australia & New Zealand Group 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.
Head of Media Relations
Rabobank Australia & New Zealand
Phone: 02 8115 2744 or 0439 603 525
Media Relations Manager
Rabobank Australia & New Zealand
Phone: 02 4855 1111 or 0418 216 103