Once-in-generation opportunity to shape future of Australian beef industry – Rabobank seasonal outlook
Australia's beef industry has a once-in-a-generation opportunity to shape its future as the country's historically-low breeding cattle numbers slowly recover in the year ahead, Rabobank says in its newly-released Beef Seasonal Outlook for 2021.
In the report, titled Green Grass and Empty Pens, the agribusiness banking specialist says with Australia's breeding cattle inventory beginning to recover from the lowest levels seen in more than 30 years on the back of much-improved seasonal conditions, the industry is now in a "unique position" to reassess and pursue its future direction.
"A number of challenges currently confront the Australian beef industry," the report says, "including high cattle prices for those trying to build stocks, low supplies and China trade access.
"Australia's position in the global protein world needs to be considered in rebuilding the herd. Are we going to be a supplier into high-quality niche markets, a commodity supplier of lean beef to global trade, an exporter of live cattle or exporter of value-added beef to trade markets?"
Report author, Rabobank senior animal proteins analyst Angus Gidley-Baird said "decisions taken this year are not just about whether to restock at high prices, but also about which genetics, productions system attributes, feeding regimes, supply chains and end customers are needed to build a sustainable basis for the business in the future".
Outlook
Overall, the outlook for the year ahead, the report says, will be characterised by very limited cattle supplies. This will provide strong support for cattle prices, but also mean ongoing scarcity for restocking and fattening as well as challenge capital efficiency, with many plants and feedlots running below capacity.
Extremely low breeding stocks will severely limit Australian cattle slaughter, which in 2021 is forecast to be down six per cent on last year.
The nation's beef exports are expected to drop five per cent, with live export numbers also forecast to decline by the same percentage due to low availability of cattle.
Global beef markets are set to remain finely balanced, with improved economic conditions and a recovering food service sector expected to create a more positive market for beef demand. Although COVID, African swine fever, freight issues and trade tensions remain risks which could disrupt the market.
Domestic cattle prices are forecast to remain very strong in 2020, though easing as producer demand dissipates.
Domestic market
"While limited cattle supplies and favourable seasons are expected to provide a strong foundation for cattle prices, we do believe they will ease through 2021 as some of the urgency of producer restocking demand recedes," the report says. "Based on Rabobank modelling, young weaner cattle prices (as measured by the Eastern Young Cattle Indicator) are expected to drop to 700c/kg by the end of 2021."
Australian cattle slaughter for 2021 is forecast to be 6.7 million head – representing a drop of six per cent from 2020. Production levels, however, will be somewhat supported by high carcase weights.
Mr Gidley-Baird said male cattle slaughter in 2020 (at 3.4 million head) had been the lowest in more than 35 years – an indication of the extremely low breeder numbers in the system in 2018 (when those cattle were born).
"Further compounding this – taking even more breeders out of the system – was the highest female slaughter (4.75 million) in 40 years in 2019," he said.
"Such a chain of events has led to, we believe, some of our lowest breeder numbers in decades and, as a result, low slaughter numbers this year and a big rebuild process over the coming years."
Good seasonal conditions had seen average carcase weights rise six per cent through 2020 to reach 305 kilograms – the highest on record.
"We believe average weights will remain at this level through 2021 and, as a result, the drop in beef production will be five per cent, to two million tonnes," Mr Gidley-Baird said.
Domestic consumption of beef is forecast to remain relatively steady in 2021, after a decline in per capita beef consumption of 12 per cent over the past two years – impacted by high retail prices (increasing 17 per cent over that period) and the ongoing trend toward lower protein consumption.
Static domestic beef consumption will not be enough though to offset lower production volumes. "As a result, we expect export volumes to drop five per cent in 2021," Mr Gidley-Baird said.
This will see a slight shift in the market towards local consumption compared with the previous year with the domestic market expected to account for 29 per cent of Australian beef production in 2021.
Exports
Australia beef faces challenges on the global stage, the report says, with low supplies, higher prices, an appreciating dollar and reduced access to the China market all creating headwinds.
Export volumes to China – impacted by high Australian beef prices, low supplies and trade tensions – are likely to see a larger decline than the more stable and established markets of Japan, South Korea and the United States.
"Japanese and South Korean markets have remained relatively steady through 2020 and these long-standing markets are expected to maintain import volumes of Australian beef in 2021, although we will face strong competition from the US, which is anticipated to increase exports through the course of 2021," Mr Gidley-Baird said.
"High US cow slaughter is expected to continue in 2021, but strong domestic beef demand and good quick service restaurant (QSR) sales there are set to support prices for lean Australian manufacturing beef into the US."
In such a challenging global climate, the report says, Australian exporters will need to make tough decisions to accommodate short-term commitments, but also foster longer-term opportunities and trade relationships for when Australian beef volumes recover.
Live export
Live cattle exports will also be constrained by reduced cattle availability and higher prices in 2021, the Rabobank seasonal outlook says.
Export numbers to Indonesia – which fell 31 per cent in 2020 – are however expected to recover slightly in the year ahead.
"Meanwhile, we believe volumes to Vietnam will decline from the large numbers seen in 2021, which were up 11 per cent on the previous year on the back of the domestic shortage of protein there due to African swine fever," Mr Gidley-Baird said.
"As Vietnam recovers from ASF and domestic pork production increases, this will reduce their protein shortage. However, we believe Vietnam will continue to play a significant role as a live export destination for Australia."
High Australian cattle prices are testing Indonesian live cattle importers, the report says. The spread between Indonesian slaughter cattle prices and Australian live export prices narrowed to some of the lowest levels in the past 10 years during 2020.
Encouragingly, Mr Gidley-Baird said, the Indonesian slaughter steer price had lifted late last year, alleviating some of this pressure, however the spread remains low.
Feedlots
For Australian feedlots, the report says, fed-cattle prices will need to hold up to support high feeder (cattle) prices. And, positively, this is forecast by the bank.
"As global economic conditions improve and food service trade opens up, we hold a positive view on demand for grain-fed beef," Mr Gidley-Baird said.
"This should support fed-cattle prices and accommodate the higher feed prices while Australian supplies are limited."
However, the report notes, it will remain challenging for Australian live exports with high prices, an appreciating dollar and the US grain-fed beef sector looking to increase exports into the key Australian markets of Japan, South Korea and China.
Around the paddocks
Bank analysis of regional conditions around Australia – undertaken for the report – showed rebuilding of herds and restocking of properties underway, but not consistent across the country, with parts of Queensland and northern Australia having been unable to increase breeder numbers through the course of 2020.
And low intentions to sell breeding cattle suggest breeding replacements is the preferred option for producers across Australia.
This would prolong the re-build phase, Mr Gidley-Baird said, with limited opportunity to purchase breeding stock from other areas of the country.
