arket update: April 2020
(Originally published by MLA)
- Prospect of the national herd entering rebuild has emerged
- Annual adult cattle slaughter revised lower on the back of improved conditions
- COVID-19 adds uncertainty to already complex global protein trade environment
Stifled by unrelenting drought and compounded by the national bushfire crisis, Australian cattle producers endured an extremely difficult start to 2020. However, for many, the outlook has changed dramatically on the back of widespread and consistent rainfall since February.
These vastly improved conditions, combined with a positive rainfall outlook, have led to a forecast adult cattle slaughter in 2020 of 6.9 million head, a drop of 19% on 2019. From a cattle supply perspective, the impact of improved conditions on producer intentions is anticipated to see cattle turnoff decline to the lowest point since the mid-90s and remain at historically low levels for the next two years. For the first time since 2017, many producers are now in a position to seriously consider rebuilding depleted herds, in particular for those across southern Queensland and New South Wales.
National beef production is forecast to decline 16% to 2.05 million tonnes carcase weight (cwt), with increasing carcase weights offsetting some of the decline in slaughter. Greater feed availability, low stocking rates and historically high cattle prices, should all combine to place producers in a position to feed for longer and to finish to heavier weights. However, the intense competition for store cattle will challenge the lot feeding sector and the number of cattle on feed is anticipated to ease, limiting the upside potential for average carcase weight gains.
In terms of the global protein trade, the emphasis for the start of 2020 was on the protein deficit in China, created by the impact of African Swine Fever on pork production. This remains a critical issue for markets to contend with, however, its disappearance from headlines came as the unprecedented impact of COVID-19 emerged. The impact on the meat industry from COVID-19 is impossible to predict, but is likely to include an Australian and global recession, a temporary collapse in foodservice demand, reduced demand for higher value meat cuts and some disruptions to supply chains and trade.
Critically, China appears to be emerging from their COVID-19 shutdown, with strong meat import demand beginning to return. However, the crisis is escalating in the rest of the world and will continue to disrupt the consumption of Australian red meat domestically and internationally in the coming months. Balancing the uncertainty of COVID-19 with other key factors, such as African Swine Fever and US-China Phase-One Agreement, will be critical for the performance of Australian red meat in 2020.
Australian cattle prices surged to record levels across all categories in March. Young cattle and breeding stock have seen demand rise significantly on the back of improved seasonal conditions, as restockers, feeders and processors compete over a reduced pool of livestock. Finished cattle prices found support and reached historically high levels, however, global demand uncertainty has applied downward pressure to prices in recent weeks.
Looking ahead, driven by limited supply availability, domestic conditions continue to be a key factor influencing Australian cattle prices. However, developments in local and global markets, specifically foodservice demand and on- going economic conditions, will continue to pressure prices.
Average to above-average seasonal conditions have been assumed for the majority of Australia's cattle producing regions for the remainder of the year.
The latest three-month outlook from the Bureau of Meteorology (Figure 1) forecasts that May through July will see above average rainfall across all main cattle regions. Pockets in northern and eastern Australia, along with southern Tasmania, have roughly an equal chance of wetter or drier conditions. May to July days are likely to be warmer than average across northern and eastern Australia, but cooler across much of the southern mainland.
Critically, the positive outlook builds on higher-than-average rainfall for much of Australia in the first three months of 2020. Soil moisture deficiencies improved greatly, supporting pasture growth. However, despite February and March being wet over large areas of eastern and western Australia, the influence of very low rainfall over the last twelve months is still evident. This highlights the importance of sustained average to above-average seasonal conditions over the coming months.
Cattle herd and slaughter
With a renewed sense of optimism in the cattle market and improved seasonal conditions, the prospect of the national herd entering an expansion phase has emerged. The national herd is estimated to have contracted by almost 12% over the extended drought period. Although devastating to many communities, the recent national bushfire crises did not see any material cattle losses in the context of the national herd and impacted less than 1% of Australia's grazing country.
This year, beef producers will be weighing up the attraction of selling stock at historically high prices, the need for cash flow, debt reduction and balancing concerns regarding COVID-19 against the available feed, low stocking rates and a desire to rebuild depleted breeding herds.
Critically, the above-average rainfall across large areas of the eastern states has provided an abundance of good feed, replenished dry dams and seen water restrictions eased. In response, producers have commenced holding back cattle to assess rebuild opportunities or initially retracted processor contracts to add additional weight, given the remarkable price rises in February and March.
In March, the National Livestock Reporting Service (NLRS) reported an 18% decline for eastern states cattle slaughter compared to 2019 levels.
More indicative of the shift towards a rebuild is the decline in female slaughter levels, which achieved record highs in 2019. In February, the female portion of total slaughter reached 52%, the lowest level since January 2019. On a 12- month rolling average basis, it will take time to achieve the 47% required to signal the national herd is expanding, given the extent of breeding stock turnoff in 2019. However, the prospect of this occurring in the second half of the year has increased significantly, supported by a favourable three-month rainfall outlook and a sharp contraction in forecast national slaughter.
The national herd is forecast to have declined 5.2% year- on-year by the end of June 2020, to 24.8 million head. In line with improved conditions and the transition towards an expansion phase, the national herd is anticipated to rebuild at a quicker pace out to the end of the current projections period than earlier forecasts anticipated.
Underpinned by a significantly reduced cattle herd, and facilitated by the wetter start to 2020 and bullish three- month rainfall outlook, Australian adult cattle slaughter for 2020 is forecast to decline 19% on the previous year, to 6.9 million head. At this level, processor throughput will be at the lowest level since the mid-90s and current forecasts indicate back-to-back years of historically low turnoff - under the assumption of sustained average seasonal conditions.
On the back of consecutive drought years, excess turnoff and substantially lower branding rates, there was a limited availability of steers for finishing last year, as the female potion of total slaughter was the driving force of turnoff increases. Based on the aforementioned adult cattle slaughter estimates, male slaughter is anticipated to fall a further 4% in 2020 compared to year ago levels, while female slaughter will see close to a 30% decline.
After a sharp drop in adult cattle slaughter due to recent rainfall, elevated cattle numbers resurfaced towards the end of March, in response to record prices. However, as the year progresses adult cattle slaughter is anticipated to track well below year-ago levels. The available feed should carry producers through the winter and provide them with confidence to retain or increase stocking rates.
Domestic and international markets
COVID-19 has had a rapid and overbearing influence upon global markets and, given the unpredictability of the outbreak and the fluid nature of its impact, it is very difficult to gauge the complete range and scale of impact it will have on the Australian red meat industry. The outbreak of COVID-19 is an event the modern world has not previously experienced and, as such, has created a new level of uncertainty around the global marketplace.
The global economy, and most of Australia's key red meat markets, are facing a significant slowdown or outright recession as a result of the COVID-19 outbreak. While the impact from COVID-19 on Australian red meat demand may 60 be more severe than any economic downturn in recent history, the industry will be more sheltered than most sectors.
People still need to eat and swelling retail demand for red meat across Australia and in many key export markets 10 reflects this appetite. However, any significant and 0 widespread impact on disposable incomes could encourage greater consumption of lower-priced substitutes. Already the softening global environment has moderated the fierce buying competition that existed late in 2019 for beef, which
led to some record prices.
One positive for exports, has been the softening Australian dollar, which crashed to its lowest level in 18 years, before recovering to 64US cents. A softer Australian dollar will help mitigate the price impact and provide support to Australian red meat exports.
The impact of COVID-19 on each country's red meat market will be shaped by many factors including its dependence on imports, level of disposable income, the prominence of red meat in consumer diets, as well as many evolving factors, such as the level of restrictions imposed by governments.
Foodservice and retail
It is estimated that around two-thirds of Australian beef exports are ultimately consumed through foodservice channels. However, across many markets, shopping and consumption behaviour have changed rapidly and the typical balance of demand for Australian beef has shifted.
As foodservice channels slow and, in some cases, grind to a halt, demand for meat through retail, particularly online, has lifted significantly. While flourishing retail demand is a positive and has helped to partially offset the lack of demand from the foodservice sector, a number of issues have emerged from this shift. Typically, higher value loin cuts make their way into foodservice, balancing out the overall value of the carcase for processors.
With most markets facing a concurrent decline in foodservice demand, carcase balance has become a major challenge, as profit margins on manufacturing meat and secondary cuts are much smaller and the sale of high-value cuts are necessary to maintain profitability.
The impact of COVID-19 restrictions will be different across markets, depending on the weighting of consumption between retail and foodservice, as well as the ability for supply chains to shift product and adapt to the changes in demand. However, if this lopsided demand remains, and the premium injection from foodservice is forgone, it will likely impact processor purchasing power for cattle.
COVID-19 difficulties have been compounded by logistical and operational barriers, such as port bottlenecks, refrigerated container availability, disruptions to air freight, labour shortages and slow customs clearance. These factors have all complicated the red meat supply chain, and have caused disruptions across markets. While it may be optimistic to suggest that the majority of key markets have now pushed through the 'shock and reaction' phase, adapting to these difficulties and considering how to function with as much normality and consistency as possible will ensure that Australian red meat is well positioned to continue to meet demand, particularly from markets that rely on imports for national food security.
China and ASF
Competition within Australia's top export market China, is expected to heighten following the recent US-China Phase- One trade deal. Scenario modelling completed by the Centre for International Economics indicates that US beef exports to China (and Hong Kong) could grow to 190,000 to 250,000 tonnes swt by 2023 however much uncertainty surrounds the US-China trade relationship. For example, if the US economy were to fall into a deep recession and foodservice remained closed for an extended period, the US beef industry may find it has significant 'excess' volumes of loin cuts it can push into Asian markets, including China, creating more competition for Australian grainfed beef.
Meanwhile, African Swine Fever remains a critical issue for global protein markets to grapple with. While it has disappeared from headlines, it continues to spread across South East Asia (most recently into PNG) and the massive pork gap it has created in China will continue to bolster global protein markets over the next few years. China's total imports of beef are forecast to increase by 15% from record levels seen last year, which should lend price support to Australian red meat exports and buoy demand during the months of uncertainty ahead. The success of the battle against African Swine Fever will continue to weigh heavily on global meat markets and trade in years to come.
Shifting consumer needs
The multi-layered impact of COVID-19 has prompted some significant shifts in usual purchasing behaviour, but also in consumer perceptions. MLA recently commissioned some consumer research in China which highlights that consumers in a crisis gravitate to brands they trust. Australia's strong credibility, with high safety and quality standards, gained in many markets over decades of combined industry efforts, will continue to underpin strong consumer demand for Australian red meat.