Outlook for livestock

Jonathan Wong, Harry Coë, Damien Thomson and Cameron Van-Lane

Livestock production and export value remains high in 2020–21

Gross value of livestock production is forecast to have reached $30.8 billion in 2020–21, 6% lower than in 2019–20. This was the fifth highest value of livestock production in real terms since 2000–01. Low production volumes more than offset historically high prices. The value of mutton production is forecast to fall by 18% and the value of live sheep exports by 46%. The value of live cattle exports is forecast to fall by 24% and the value of wool production by 19%.

Livestock sector exports are forecast at just under $22 billion in 2020–21, down 19% from the record of 2019–20 but still at historically high levels. Improved seasonal conditions following prolonged drought have led to flock and herd rebuilding and reduced the supply of livestock available for export. At the same time, a recovery of China's pork production following outbreaks of African swine fever is easing import demand and world meat prices. Beef and veal are forecast to account for 37% of exports in 2020–21 and dairy products 17%. Wool and lamb are both forecast to contribute around 11%.

Production and exports to recover in 2021–22

In 2021–22 the value of livestock production is forecast to increase by 4% to $32.2 billion. This is driven by increases in cattle (up $640 million), wool (up $390 million), and dairy products (up $166 million). Wool prices are forecast to rise due to a recovering global economy. Wool prices are forecast to increase by 10% and production by 5% following increasing demand and an increase in both the number of sheep shorn and fleece weights due to improved seasonal conditions.

The value of livestock exports is forecast to increase by 11% to just over $24 billion in 2021–22. Beef and veal exports are forecast to increase by 14% to $9.2 billion, due to a 16% increase in export volumes. Beef export prices are not forecast to fall as much as saleyard prices, because they are far less affected by domestic restocking demand. The value of wool exports is forecast to increase by 21% to $3.1 billion, driven by both higher volumes and prices. Exports of most other livestock products – including dairy products – are forecast to increase slightly in 2021–22, but the value of live exports is expected to remain unchanged.

Livestock prices to remain historically high

Export prices for beef and lamb are forecast to remain historically high in 2021–22, continuing a gradual fall from peaks reached in 2019–20. The global outlook for livestock exports remains positive. For some time, the most significant risk to strong export demand has been a faster-than-predicted recovery in China's pork production and a potential fall in import demand for lamb and beef. However, the recovery has been gradual and is occurring alongside continued rising meat demand in China and globally as incomes recover from the COVID-19 pandemic. Although the COVID-19 pandemic did not significantly reduce world demand for Australia's livestock products, a general improvement in global incomes reduces demand uncertainty for 2021–22 and beyond. Trade tensions with China remains a risk to livestock product exports.

On the upside, global and Australian beef prices could spike in the last 2 months of 2020–21. Argentina has imposed a temporary ban on beef exports in an effort to reduce domestic prices, which could result in China and other importing nations seeking alternatives. Exports from Brazil are likely to remain low, even if an end to COVID-19 welfare supplements causes consumption in Brazil to fall. This is because the Brazilian beef herd has been reduced in response to high domestic and export prices. Exports from the United States are also unlikely to increase significantly in 2021–22. The US Department of Agriculture has forecast US beef production to increase slowly throughout 2021 and be slightly lower in 2022.

Global wool prices are forecast to rise as demand recovers in response to the global economic recovery. Dairy export prices are tracking steadily upwards, on trend with recovery in global economic growth.

Saleyard prices revised up and risks balanced

Saleyard prices for 2021–22 have been revised up since the March 2021 edition of Agricultural commodities, although they are still expected to fall year-on-year. Saleyard prices for 2021–22 have been revised up by 5% for cattle to 570 cents/kg, and 4% for lamb and sheep to 766 cents/kg and 581 cents/kg, respectively.

The pace and duration of restocking is a key uncertainty in the outlook. The current pace of restocking is driven by expectations of future income from larger herds and flocks, which are based on expectations of continued favourable seasonal conditions and high prices. If seasonal conditions were to rapidly deteriorate, domestic saleyard prices would likely fall and the contribution of beef and lamb slaughter to 2021–22 gross value forecasts would fall.

Seasonal conditions for restocking were exceptional across most of Australia in the late summer and early autumn of 2021. This reflects above average rainfall in the northern wet season and across most of the wheat–sheep zone except parts of western Victoria and South Australia. The outlook for late autumn and early winter was even more favourable in Western Australia, but closer to average conditions are forecast to return to large areas of south-eastern Australia.

Historically low sheep and cattle numbers may reduce the risk associated with the possible return of unfavourable seasonal conditions. Low livestock numbers reduce the risk of placing pressure on pastures or incurring high feed costs if seasonal conditions turn less favourable. At an estimated 21.6 million in 2020–21, Australia's beef cattle herd is the smallest since 1992–93, and Australia last had fewer than 66 million sheep in the early 1900s.

The pace of rebuilding is currently a major driver of high saleyard prices. Price rises have been highest in young and lighter cattle categories most attractive to restocking graziers (for example, trade steers), although prices for heavier cattle have also increased. Export unit prices have been lower or steady over the same period. This means that saleyard prices are likely to fall when herds and flocks are rebuilt and production recovers.

Restocking demand is expected to continue to weaken later in 2021–22. Strong global demand means that export prices are unlikely to fall sharply unless affected by factors such as trade disputes. The high saleyard prices that have been eroding export margins are likely to ease as a result of higher turn-off due to increasing livestock numbers and the normal variability of Australia's climate.

 

Global economic recovery increases demand for wool

Forecasts for global income growth means that the Eastern Market Indicator for wool prices is expected to increase by 10% to 1,300 cents per kilogram in 2021–22. Wool prices are sensitive to changes in economic growth because demand for wool is income sensitive.

A spike in wool auction pass-in rates and market uncertainty throughout 2020 has resulted in a build-up of Australian wool stocks. The size of these stocks is uncertain but they potentially add significant supply on top of forecast increases in wool production. This supply could keep wool prices lower than they would otherwise be over the coming months or years. One compensating factor is the wool accumulated over the past year is likely to be skewed towards coarser and lower value grades, and so may not exert much influence over prices for finer micron grades.

Dairy prices and production set to rise

Global demand outpacing supply is expected to result in higher milk prices in 2021–22. The Australian farmgate milk price is forecast to increase by 2.4% to 50.7 cents per litre. Seasonal conditions for dairy producers are also generally favourable with good pasture growth, and low grain, hay and water prices. Milk powder prices are forecast to rise strongly, while butter and cheese prices are forecast to record small gains from 2020–21 due to more favourable conditions in New Zealand.

Global dairy supply is forecast to remain steady, so increasing demand is likely to have a greater impact on prices. The continued economic recovery out of the COVID-19 pandemic is driving strong demand in key export markets across Asia, especially in China. Import demand from China is likely to be boosted by high feed prices limiting domestic milk production. Australian butter exports between July 2020 and March 2021 increased 100% year-on-year, led by a 438% increase in exports to China. Export volumes of skim milk powder between July and March increased by 19% due to a 77% increase in exports to China.

Live exports to remain subdued

The value of live animal exports is expected to remain unchanged in 2021–22, because a 7% increase in numbers will offset a 7% fall in price. High domestic cattle prices are expected to continue diverting young cattle to domestic markets in 2021. However, falling young cattle prices from late 2021 into 2022 will see feeder/slaughter exports slowly increase. A similar trend is expected for live sheep exports, with restored market access to Saudi Arabia expected to boost demand.

Live exports of dairy heifers in 2020–21 and 2021–22 are expected to be lower than the elevated levels of the previous 2 years. The return of favourable seasonal conditions in 2020–21 allowed producers to keep heifers in the herd for breeding. Around 90,000 heifers were exported annually when feeding costs escalated during the dry years of 2018–19 and 2019–20. Dairy heifer exports are expected to increase from 2022–23 to fill Chinese import demand as New Zealand's ban on live exports by sea is progressively implemented from 2021 to 2023.

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