Anthony Pratt, the recently installed chief executive at Endeavour Meats, sees the next six months as one of opportunity as the US herd hits a critical low and Asian customers come online.
Speaking at the Farm Writers’ Association lunch in Sydney, Mr Pratt said he expected the US herd decline to reach a similar point to the Australian herd in 2019.
“They’re starting to kill less cattle but they're basically where we were in 2019. They're now into that second and third cut of the herd that they don't want to be touching but they have to because it's just too dry and they've got to turn them off," he said.
"They're going to pay a very, very heavy price for that, like we did in this country. Supply will dry up and that's going to hurt their processing industry and make their meat very expensive.”
Mr Pratt believes the US market won’t be the saviour for Australian beef, however the reduced competition will make our exports more competitive in Asia.
“We’re about to go pretty strongly back into North Asia due to the US cycle,” he said.
READ MORE: Killing time in the US
Before joining Endeavour, Mr Pratt had a 25-year career in the meat processing industry, including a decade as chief operating officer for JBS Northern Australia.
He said it was unlikely the the US was going to be the “saviour” for exports even though it would get “overblown” by the rural media. Instead, he saw a rebalancing of trade with Asia.
Picture: Endeavour Meats
Mr Pratt said that over his career, he usually saw a 60-40% split in terms of exports dominance into Asia between the US and Australia, that shifted with weather patterns.
He said that the past two to three years had seen the US with 60% and Australia with 40%, but that was about to turn around.
“That'll swing back to 60 in our favour here over the next six months. The Japanese are telling me they think it'll be around March. That's their financial year, and they're very regimented in the way they do things in Japan, so it'll be all centred around their new budgets going forward from 1 April.
“It's going to be the lack of American meat in Japan and Korea where we really kick goals. Two huge markets, 130 million in Japan, 50 million in Korea. Younger generations in both countries are quite affluent, natural meat eaters now, natural beef eaters. That’s really where we'll make hay.
“The US will continue to be a wonderful market for us, but it won't be what really drives the price here, it'll be the lack of US meat in Japan and Korea.
"Cattle prices should $1.00 higher than they currently are."
There’s a simple reason why prices are so low, Mr Pratt said, and no amount of analysis would change the basic maths of capacity.
“The primary function of cattle or lambs or sheep going up or down in the moment is hook space, and probably not enough is talked about or reported on that,” he said.
"Twelve months ago we had 100, 000 cattle for 125,000 hooks. So guess what? Cattle were worth a lot.
"We've now got 140, 000 cattle for 125,000 hooks, and guess what, prices are going down. It's no more complex than that.”
Mr Pratt called 2022 one of the most damaging years for the Australian meat sector in the past decade because processors made so little money.
That forced them to scale back in terms of capacity, which has not caught up with the current influx of supply.
“What's different about this cycle, where we're drying off, is in the past the processing sector was always able to ramp up in a methodical way to roughly marry up with what was coming.
"This cycle, they cannot, because there's just no availability of labour.
"We've seen things go up, we've seen things go down, but this one's been pretty violent. And the reason for that violence is that the processing sector just simply cannot pay for capacity.”
He said 2014 was the opposite, where processors captured 100% of the margin in the supply chain. Now that profitability is back, processors will be expanding again.
“They're back making money and meat and livestock prices drive behaviour. So what they'll do is try and find labour, train labour, because they're making money so they want to kill more livestock.
"Gradually, over time, they'll find a way to ramp up production and then that creates the equilibrium again.”
The violent swings, he said, were dictated by weather, but in a perfect world, prices would have been more stable.
“In 2022, cattle should have been worth $1 to $1.50 less. Now they should be worth $1 more. But that's not how the industry works,” he said.
“It's not an equilibrium. There's either too many or not enough.”
Farmers advised to focus on genetics, long view
Mr Pratt said the overall quality of the herd or flock was “dramatically better than it was 20 years ago” and called out the work of Tom Bull of LambPro, and the NAPCo composite breed.
He advised farmers to look beyond the headlines of a pen of cows or sheep that sell for nothing, as usually they would be of lower quality.
“If you take median and look at the better genetic cattle or lambs on sale that day, they’ll sell for a reasonable price. Nowhere near what they were a year ago, but certainly better than what’s getting reported.”
He advised farmers to keep investing in good genetics and not to sell cattle or lambs in “panic mode”.
“If you've got a body of food, hold them, because there's still an intrinsic value there that is above where we are today. It's that rush to the gate that's creating the lower prices,” he said.
A long-term approach to returns was the best strategy to weather the hard times, Mr Pratt said.
“If farmers put money away in the last two years and then pull a bit out now, well, you'll get an average.
"The old saying I had from my time at JBS was when things are good, let's not bust out the champagne. And when things are bad, let's not go hiding under our desk.
"In this industry, we're going to get plenty of both. And if we ride the highs and lows like that, we're going to be mentally exhausted.
"So, let's just cop both on their merits and deal with both the best we can.
"When things are good, let's bank as much as we can. And then when things are bad, let's tighten our belt, be as efficient as we can and lose the least.”
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