Revolution

Get ready for a 5 year revolution of the northern Australian beef production model

On the 1^st of March Beef Central presented an article in which ABARES predicted further rises in beef prices for 2016/17 followed by a slow herd rebuilding process that by 2020 would more or less take the industry back to where it started before the current drought inflicted its savage and relentless attack.

Since late 2015, the majority of the Australian beef industry finds itself in a new business environment where numbers are down while real prices are at the giddy heights last seen in 1973.  This unique situation provides many producers, especially those in the north, with a once in a lifetime opportunity to review the way they conduct their business and potentially restructure their enterprises for a much more sustainable future.  BTEC and live exports changed the production system for the northern beef industry in the 70s and early 80s, now the drought and the new demand juggernaut of China is presenting a new opportunity to shift it again to a much more sound and profitable model as it enters the 2020’s.

As Phil Holmes says, producers must grow kilograms of beef and if you sell your cattle at light weights then you miss out on the best part of the profit.   Up until now, many northern producers had to sell small feeders because that was effectively their only market and they didn’t have the luxury to change the way they operated because they were on such a financial knife-edge, they had to run faster and faster on the treadmill just to stay afloat.

Here is a scenario that could develop over the next 5 years that has the capacity to take the industry to a totally different place with a smaller breeder herd producing much greater returns.

• The national beef herd declines to 23 million late 2017 (ABARES)
• Prices continue to rise steadily or at least stay high while costs rise at a slower rate providing improved margins for the next 5 years at least
• China enters the live cattle market late 2016 taking slaughter cattle only
• By 2018/19 China takes 500,000 fat steers per year primarily from NSW and Victoria – working up to 1 million head in 2020
• These live export slaughter cattle create a large gap for the southern processing sector and are “replaced” by slaughter cattle from central and southern Queensland.
• A significant proportion of producers in north Queensland and the NT will once again have the luxury of growing young cattle on to slaughter weights because they will be able to financially survive the transition and have a strong market for their end product. Holding young cattle longer means less breeders and lower operating costs.  With less breeders on the farm and greater net income from growing out more of their own cattle, producers will be able to allocate more resources to improving productivity without going broke in the process. When improved productivity leads to improved profitability, the enterprise has the potential to develop a virtuous cycle of continuous improvement in both production and returns.

Justification

Prices will continue to rise as the world is short of beef, pure and simple.  Yes, Brazil is producing more at very low prices but the impact won’t be nearly as harsh as predicted because China was/is already buying massive quantities of Brazilian product through the back door via Hong Kong.  All that is happening now is product is being diverted to enter legally through the front door where the Chinese government gets to collect the import taxes and exercises control on product flows preventing the smugglers from get all the juicy margins.

Australian production is going to continue to fall for quite a few years until the herd rebuilds.  Prices in Australia have gone through the roof during a massive drought and local oversupply so there is little chance of a pull back in prices when the future volumes of beef are seriously reduced.  I also predict that the recovery in the breeder herd will be slower than expected as producers continue to sell females for feeding and slaughter in order to generate cash flow for their enterprise in favour of rebuilding their herds at the maximum speed.  There will also be a strong demand for young breeders for live export to Asia that will offer handsome returns while further reducing the speed of herd recovery.

China has been very slow to commence live imports but as we know from other industries, once they get started they have the capacity to get very big, very quickly.  In terms of numbers, our live cattle will never do any more than provide a small niche for a limited number of processors to add value through low cost local slaughter and more efficient use of bi-products.  China kills about 30 to 40 million head of cattle per year from its own herd so 1 million from Australia is barely significant in the context of their annual throughput. Only slaughter cattle make sense for Chinese imports because their own ruminant feed resources are already totally utilized feeding their large domestic beef and dairy herds.

Bluetongue is a viral disease of sheep transmitted by biting insects in the tropics.  Unfortunately for northern Australian producers, evidence of the virus is carried in the blood of cattle in many parts of tropical Australia (but causes no disease) and this prevents them from being exported China under the current health protocol.  The result is that the easiest place to export live cattle to China will be from large areas of NSW and Victoria where the virus is absent.  Should such a large number of slaughter cattle disappear from the southern markets it is likely that they will be replaced by similar stock from central and southern Queensland while the gap from stock leaving Queensland will logically be replaced by animals from north Queensland and the Northern Territory.

Australia (and New Zealand) are the Louis Vuitton of the international beef export market so we are far better off selling our premium products to the world than trying to compete with Brazilian cow beef.  Certainly we will always have a proportion of lesser quality product to “get rid of” but with a smaller cow herd and greater productivity from improved management, the proportion of higher value products should increase.

Indonesia is already very concerned that the price of feeders from Australia is high and rising with the rapid decline in our breeder herd providing strong justification for this trend to continue well into the future.  They need to rebuild their own herd as a matter of the highest priority and are fortunate to have massive areas of oil palm plantations which are ideal for large scale production of beef cattle.  The only logical source of breeding females to get their herd rebuilding started is northern Australia.

Whatever the outcome of the next 5 years for the Australian beef industry, I suspect that by 2021 it will be a very different creature than the one we have been used to for the last 40 years.