Beef and veal: September quarter 2020

Jenny Eather

Prices to fall but remain historically high

Cattle prices are expected to fall marginally in 2020–21 to average 513 cents per kilogram. This reflects higher global beef supply and a weaker demand outlook as a result of the COVID-19 pandemic. However, many of the factors that led to high prices in 2019–20 are expected to persist. Strong competition between Australian restockers, processors and feedlotters for a smaller supply of animals led to record high prices for many cattle types in late 2019–20. This was in response to improved production conditions from January 2020 onward. For example, the Eastern Young Cattle Indicator (EYCI) reached a record high of 767 cents per kilogram in March, and broke the record again in June when it reached 772 cents per kilogram. In the 5 years to 2019, the average was 549 cents per kilogram.

Favourable production conditions expected in 2020–21

More favourable production conditions are expected in 2020–21. In 2018 and 2019, drought conditions across most beef-producing regions led to elevated levels of turn-off. Pasture availability across Australia's south-east had largely recovered to above average levels by the start of 2020–21, following widespread and above average rainfall from January 2020 onward.

Pasture availability remains below average in much of the tropical north and the west. However, according to the AussieGRASS model, the pasture growth outlook for September to November is above average for much of eastern and parts of northern Australia. According to the Bureau of Meteorology's Northern rainfall onset outlook, an early onset of the northern monsoon is likely.

Beef production to fall because of a lower national herd

Beef production is forecast to fall by 18% in 2020–21 to 1.9 million tonnes, compared with 2.4 million tonnes in 2019–20. Slaughter is forecast to fall by 20%, but heavier carcases are forecast as a result of improved pasture and feed availability and a lower proportion of females in slaughter. Heavier carcases are expected to offset some of the production lost to lower turn-off.

The expected fall in production is a result of a smaller national herd and improved seasonal conditions, which have enabled some producers to restock. At the start of 2020–21, the national beef herd was estimated to be 21.1 million head, the smallest since 1989–90. Despite expectations that improved seasonal conditions in late 2019–20 would lead to restocking, high levels of slaughter continued throughout the year.

Slaughter numbers in 2019–20 remained virtually unchanged from the year before, but they rose as a percentage of the opening herd. Total turn-off of adult cattle (slaughter plus live exports) as a percentage of the opening beef cattle herd reached 37%, compared with a 20-year average of 32%.

The percentage of females in slaughter also remained high in 2019–20, indicating a smaller future breeding herd. This could mean a slower recovery in beef production over the medium term than forecast in Agricultural commodities: March 2020. Female slaughter averaged 55% for the year, compared with a 20-year average of 48%. Female slaughter remained at 56% in June 2020. This is much higher than the approximately 47% female slaughter rate that would indicate restocking.

The national herd is yet to enter a restocking phase (based on data to June), despite improvements in pasture availability. After 2 years of drought, many farmers are likely to be weighing the desire to rebuild their herds against the need to manage cash flow and debt. The COVID-19 pandemic has increased uncertainty in global beef markets, making farmers less confident that prices will remain favourable in the medium term. The high prices offered by processors for cows in late 2019–20 provided an incentive to offload less productive breeding stock.

Improvements in production conditions in 2020–21 are expected to lead to herd rebuilding in the first half of the year. In 2020–21 the beef herd is forecast to grow by 2%, reaching 21.5 million head by the end of the year. This would be 11% lower than the 10-year average.

Exports to moderate from historic highs

The volume of beef exports is forecast to fall by 23% in 2020–21 to 1 million tonnes, in line with lower forecast production. Export prices are forecast to fall slightly as a result of higher global supply and a weaker demand outlook. The total value of Australian exports is expected to fall by 27% to $8.3 billion.

Beef exports reached record highs in 2019–20. This was a result of high production in response to drought conditions, and strong international demand leading to high global prices. Demand was driven by Chinese consumers choosing alternative protein sources due to the effects of African swine fever (ASF) on pork production. The US Department of Agriculture (USDA) expects that the Chinese pig herd will recover to about 80% of its pre-ASF size by the end of 2021. As a result, Chinese demand for imported protein is expected to remain relatively strong during 2020–21.

Export volumes were lower in the second half of 2019–20 than in the first half of the year, reflecting a smaller supply of animals after a long period of high drought-related turn-off. The effect on export value was partially offset by an increase in average export unit values, which increased by 4% compared with the first half of the year, despite COVID-19 related disruptions.

Global beef supply expected to increase in 2020–21

Global beef supply is expected to increase in 2020–21, largely because of strong exports from the United States and Brazil. In the United States, slaughter numbers have recovered to pre-COVID-19 levels. This followed a dramatic fall in production capacity in April and May when local processing was disrupted. A backlog of slaughter-ready cattle in the United States is expected to support slaughter numbers and average carcase weights over the outlook period. The USDA is forecasting domestic beef production to increase by 3.4% in 2020–21.

In Brazil, the COVID-19 pandemic continues to disrupt slaughter. However, the effect on production has been modest because Brazilian meat processing is relatively decentralised. Exports from Brazil have remained strong because high global prices, a low currency and low domestic demand have led to a high percentage of beef exported. The USDA is forecasting Brazilian beef production to increase by 4% in 2021, and exports by 8%. Higher supply from the United States is expected to lead to greater competition in the high-value grain-fed market. Higher supply coming out of Latin American countries such as Brazil and Mexico is expected to lead to greater competition in lower-value cuts and manufacturing beef.

Forecast live exports reflect lower turn-off

The value of live exports reached a record high in 2019–20. Falls in the number of cattle exported to Indonesia, our most important market, were more than offset by increased exports to Vietnam. In 2020–21 live exports are forecast to fall by 28% as herd rebuilding in northern Australia commences.

Opportunities and challenges

COVID-19 leads to uncertainty in beef markets

The COVID-19 pandemic has led to considerable uncertainty in global beef markets, in both major importing and exporting countries. These forecasts assume only relatively minor disruptions to processing capacity in Australia and for our major competitors such as the United States and Brazil over the outlook period. However, major disruptions to processing or other parts of the supply chain remain a risk.

In Victoria, 13 meat processing facilities were affected by coronavirus outbreaks in July. Government restrictions introduced in August for an initial period of 6 weeks required Victorian meat processors to cut production by one third, and to provide full personal protective equipment to workers. The impact of these restrictions on beef production is expected to be limited because it comes at a time of lower turn-off, and there is some capacity for other states to compensate by increasing slaughter. However, these measures add to the cost of production at the same time as processing margins are being squeezed by high cattle prices. The possibility of outbreaks in other states remains a downside risk for Australian production.

China, one of Australia's most important beef markets, started testing imported food products for traces of COVID-19 in June 2020. In July, Australian beef exporters were reporting long delays at some Chinese ports as a result of the new testing regime. This adds an additional downside risk to exports if COVID-19 becomes widespread in Australia.

Uncertain pace of herd rebuilding

It is difficult to predict when the Australian beef herd will enter into a herd rebuilding phase after an extended period of destocking. These forecasts involve a fall in slaughter to about 31% of the opening herd in 2020–21, and a fall in female slaughter to about 46%. However, high prices and the cash positions of farms may provide an incentive to continue destocking into 2020–21. If this occurs, production would be higher than forecast in 2020–21, and constrained by a smaller herd size over the medium term.

However, better than assumed seasonal conditions may encourage farmers to reduce turn-off below expected levels. If this occurs, production will fall further than forecast, providing support to saleyard prices. Feedlotters and processors would have difficulty sourcing animals at profitable prices and in volumes high enough to service our major export markets. Under this scenario, the national herd (and therefore production) would recover more quickly, but exporters would cede market share to competitors in the short term.

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