Outlook for livestock: June quarter 2022

The gross value of production for the livestock sector is forecast to rise by 1.2% to $35 billion in 2022-23. Falling livestock prices are expected to push the value of beef production down by 1.4% to $15.6 billion, and the value of sheepmeat production down by 8% to $4.3 billion. Higher production is forecast to increase the value of dairy production by 12% to $5.5 billion and wool by 5% to $3.3 billion.

Livestock prices are forecast to fall due to slowing restocking as graziers become less eager for cattle. Price falls will be limited by both the graziers continuing to buy livestock and strong global meat prices. Farmgate milk prices are forecast to rise with increasing demand for milk from processors. The value of wool production is also forecast to rise due to increasing production.

The value of livestock sector exports is forecast to decrease by 1.2% to be just over $25 billion in 2022-23. The fall in domestic livestock prices is expected to result in a small fall in export prices. This price fall and the forecast lower exchange rate will make Australian livestock products more competitive. Nevertheless, global demand for most livestock products is expected to increase more than global supply as the world economy recovers from the impacts of the COVID-19 pandemic. Demand in China has fallen in the first half of 2022 due to the impact of recent domestic mobility restrictions, however, it is assumed that Chinese demand will return to trend growth in late 2022 (see the Economic overview for more information).

The value of beef and sheepmeat exports are expected to fall to $9.4 billion and $3.6 billion respectively, as price falls outweigh increase in export volumes. Overall, global red meat prices are expected to remain relatively strong. The value of dairy exports is expected to increase to almost $3.6 billion in 2022-23. The increasing value of dairy exports is driven by a substantial increase in the volume of cheese exports and relatively high global dairy prices. High transportation costs and shortages of cold storage containers are expected to continue for meat and dairy exports. These are not expected to reduce overall exports but will continue reduce exporter margins.

Livestock prices to fall as restocking demand eases

Average saleyard prices of cattle and sheep are expected to fall in 2022-23 due to herd rebuilding momentum continuing to ease (Figure 1.1). While herd rebuilding is continuing in many parts of the country, graziers are expected to pay lower prices for less cattle. However, global red meat prices are expected to remain high due to increasing demand and tight supply. Together, these factors are expected to moderate falls in average saleyard prices.

Ongoing rainfall from a late finishing La Niña gave graziers in eastern Australia the confidence to continue rebuilding their beef herds. This rainfall is expected to continue with a negative Indian Ocean Dipole providing rainfall into spring. However, the frenetic buying of the last 18 months is slowing. Prices are still at historical highs for preferred cattle, but less preferred cattle are selling at an increasing discount. This suggests that demand is still strong, but graziers can now afford to be more selective about what cattle they buy. Furthermore, herd rebuilding over the last 18 months has meant that graziers are likely to find it easier to build their own herds, rather than having to buy cattle in. Farms in eastern Australia that have been inundated over the last few months may have lost cattle, have less feed available and experience local transport issues, but these are unlikely to significantly impact national figures.

Sheep flocks are further ahead in their rebuilding cycle. Successive years of restocking and favourable seasonal conditions are expected to result in high joining, lambing, and marking rates, which in turn are expected to produce a large crop of spring lambs. The low costs of finishing a lamb and further strong demand from processors are expected to see an increasing amount of trade lambs in saleyards.

Figure 1.1 Livestock average saleyard prices, 2010-11 to 2022-23

Farmgate milk price buoyed by strong domestic demand and low milk supply

The Australian farmgate milk price is forecast to rise by 11% to 64.5 cents per litre in 2022-23. Processors are expected to continue offering high farmgate milk prices in 2022-23 due to increases in domestic dairy product prices and milk production continuing to recover from historic lows (Figure 1.2). Global economic uncertainty has seen processors offer wide ranges for their 2022-23 opening prices, and based off these ranges, there is a chance that opening prices could be revised up before the season starts. These circumstances are expected to push the real farmgate milk price to its highest level since 2007-08.

Further price step–ups are likely to be small, with global prices expected to slightly fall. Global prices are expected to have peaked in 2021-22 due to reduced feed availability and supply chain constraints lowering milk production across many major exporting countries. These supply constraints are expected to ease in 2022-23. Weather conditions in major dairy exporting countries are also likely to improve.

Demand for dairy products is increasing along with general global economic recovery. Global demand increases will be limited by the impact of mobility restrictions on consumer activity in China. Together, these factors are expected to increase supply and cause a small decrease in world dairy prices.

With increased domestic competition for raw milk driving a higher farmgate milk price and lower export prices for dairy products, processor profit margins may be squeezed. However, high production volumes in 2022-23 will likely mean that processors will still receive a competitive profit next year.

Figure 1.2 Farm gate milk supply and real price, 2000-01 to 2022-23

Wool prices forecast to remain steady

In 2022–23, the Eastern Market Indicator is expected to remain unchanged at an average of 1,390 cents per kilogram (Figure 1.3). A Foot and Mouth Disease outbreak in South Africa, and a subsequent ban on South African wool imports to China, is expected to drive stronger demand for Australian wool. Like Australia, South Africa is heavily reliant on Chinese wool buyers, with 80% (44 thousand tonnes of South African raw wool exported to China in 2020–21. It is unknown how long the ban will be in place. A previous outbreak in 2019 resulted in an 8-month ban on South African wool imports.

Demand for clothing and wool is expected to dampen due to large increases in inflation and interest rates in major economies and mobility restrictions in eastern provinces of China. As consumers face greater uncertainty and prospects of falling disposable incomes, they are expected to consume less clothing and preference cheaper, synthetic alternatives. However, Chinese restrictions on South African wool will provide support to Australian exports. Should China recommence importing wool from South Africa and its wool demand remain at its current levels, the Eastern Market Indicator would be expected to fall.

Figure 1.3 Eastern Market Indicator, 2015-16 to 2022-23

Successive seasons of above average rainfall in much of eastern Australia have enabled graziers to rebuild herds and flocks, which will allow for greater production of meat and a larger flock for wool production. In 2022-23, the national beef herd is forecast to increase by 6% to 24.2 million head, and the sheep flock is forecast to stabilise at around 69 million head (Figure 1.5). Dairy herds are forecast to continue their decline, but higher yields will support a modest increase in production following the low of 2021-22.

Meat production is forecast to increase next year due to greater availability of cattle and sheep, but this will be constrained by the limits of processors. Processing labour shortages are expected to continue being a bottleneck in the meat supply chain with international arrivals still far from 2019 levels and visa programs reportedly seeing limited uptake. However, as international mobility normalises and the economy continues towards 'COVID normal', labour shortages are likely to improve.

The dry start to 2022 in northern Australia resulted in cattle being turned off and provided some short-term relief to live cattle exporters. Prices for live export cattle are expected to fall slightly due to the general fall in average saleyard cattle prices and lower competition for tropical breeds from southern graziers. However, this turn–off has prevented a round of rebuilding for northern Australian herds, meaning supply challenges for the live export industry will remain for 2022-23 and beyond. A good start to the wet season at the end of 2022 could see graziers hang onto cattle and further restrict supply.

Figure 1.4 Herd and flock sizes, 2010-11 to 2022-23

Continued flock rebuilding to increase wool clip

Greater fleece weights and a larger flock have pushed up estimated shorn wool production by 8% to 317 thousand tonnes in 2021–22. A higher sheep shorn ratio is forecast to further increase shorn wool production by 5% to 333 thousand tonnes in 2022–23. The sheep shorn ratio is expected to increase with the increase of international mobility, especially between Australia and New Zealand, increasing Australia's shearing labour supply and reducing shearing intervals.

The high likelihood of another negative Indian Ocean Dipole during winter 2022 is expected to result in a continuation of above average rainfall and good pasture growth in Australian sheep grazing regions. The Australian sheep flock is expected to stabilise, and the wool cut per head will also remain steady at 4.54 kg.

Milk production to increase from historic low

Domestic milk production is forecast to fall by 4% to 8.5 billion litres in 2021–22, the lowest since 1994-95. Adverse weather conditions among the main production regions have reduced feed quality and cow yields, with labour shortages also reported as an issue for many dairy farmers.

Milk production is expected to grow by 0.5% in 2022–23 due to increased pasture availability driving higher cow yields. Higher input costs and weather risks (see Seasonal conditions) could present risks to production. It is expected that labour shortages will continue to increase labour costs and constrain production throughout 2022–23, although as with meat processing, these shortages are more likely to improve with the opening of national borders.

As noted in September 2021, the trend of declining cow numbers is expected to continue due to some dairy farmers taking the opportunity of historically high beef and land prices to transition into beef cattle farms or retire (see Trends in the Australian Agricultural Workforce for more information). Current labour shortages and high input costs are also discouraging dairy farm expansion.

Global demand for livestock products is forecast to continue its upwards trajectory, but red meat supplies are expected to remain tight. Global demand for red meat is expected to remain high due to key export markets continuing their economic recovery. However, there are factors which present downside risk to global prices. There is uncertainty around the impact of mobility restrictions on exports to China, including reports that transport shortages are making it difficult to move product from port to markets. Demand is expected to continue to grow in the medium term (see China's Meat Import Demand for more information).

Additionally, disposable incomes in developed countries are generally expected to fall due to inflation increasing higher than wages. These will be watch points going forward but are more likely to impact fresh and chilled meat exports. This situation could however push consumers from higher quality cuts towards ground beef, particularly in the United States. This would increase US import demand for lean beef from exporters like Australia.

US beef production is expected to be slightly lower in the 2022 calendar year than 2021, but it will still provide strong competition for Australian beef in major export markets. Brazilian beef production is expected to be higher than last year, but still below the highs of the 2018-2020 period.

Emerging biosecurity issues to Australia's north

Lumpy Skin Disease and Foot and Mouth Disease have both been reported in Indonesia and are present in other countries to Australia's north. Both diseases would be extremely disruptive to Australia's livestock industry. In addition to immediate impacts such as reduced animal productivity, increased mortality and any containment measures, disease incursion could impact Australia's market access to major export partners. ABARES modelling from 2013 has been updated and determined that a large multi-state outbreak of Foot and Mouth Disease in Australia could cost more than $80 billion. It is essential that government and industry are prepared to combat incursions of these diseases.

Labour shortages will have a bigger impact if commodity prices fall

Labour shortages in the livestock sector have been exacerbated by the impacts of the COVID-19 pandemic. These shortages have pushed the sector to be as efficient as possible. As the world continues to 'COVID normal' and international mobility increases, it is likely that more workers will again become available to Australian agricultural (and adjacent) industries. Some groups, like shearers from New Zealand, are likely to respond to Australian labour demand quicker than others.

Into the future, the livestock industry will need to develop or access a reliable workforce or look to innovative cost-saving solutions to maximise competitiveness. Input costs for the sector are high, but so are output prices for meat, wool, and dairy. The industry needs to make sure it can still operate competitively if output prices fall in the future.

New trade agreement with India

The Australia-India Comprehensive Economic Cooperation and Trade Agreement (AI-ECTA) was signed by ministers for both countries on 2 April 2022. Its entry into force provides several opportunities for the livestock sector including the elimination of tariffs on sheepmeat, wool, hides and skins. There will also be a tariff reduction for infant formula.

Live sheep exports may be reviewed during the forecast period

The government has previously indicated that it would work with the live sheep export industry and state and territory governments, the Western Australian government in particular, to consider the future of live sheep exports. The timeframes for this consultation have not been announced. However, for the purpose of the forecast, ABARES has assumed that there will be no significant policy changes to live sheep exports during 2022-23. Any substantial policy change in the forecast period may result in a revision of sheep export numbers.