From rebuilding to expansion, waterlogged to backlogged, and record to reasonable, 2023 is set to be a year of transition for the Australian cattle industry.
After three years of La Nina conditions dominating headlines and producer actions, 2023 will see more “traditional” pressures dictate the market direction. A longer-term perspective of the cattle cycle tells us that a larger herd, the emergence of potential excess supply pressures, and reasonable price levels are likely to return in 2023.
Key highlights
Under the assumption that seasonal conditions in the coming year will be “closer to normal” than the run of unprecedented years since 2018, it is expected that the industry will see some traditional patterns return to the national cattle market by winter 2023.
However, it must be stated that given the extent of the “pendulum swings” for seasonal conditions over the past five years, confidence for what will happen in the year ahead is frayed.
While current forecasts are for wetter than average seasonal conditions continuing into early 2023, all eyes will be on key seasonal indicators into February and March 2023.
Regardless of the seasonal outlook, the larger herd will spur additional turnoff, with only short-term logistical disruptions (most likely due to wet season flooding through Queensland) reigniting tighter supplies and spiking prices.
An overview of the supply side of the market points to a 2023 that resembles the final three months of 2022, compared to conditions that were registered from January 2020 through to mid-2022. The rebuilding frenzy that has gripped all cattle producing regions in south-eastern Australia for an extended period is quickly running out of steam. While a bumper wet season through the heart of the cattle industry in central and western Queensland would be well received, any rebuilding efforts are expected to be maintained at best, rather than accelerated. From a national perspective, the heavy lifting of the herd rebuild is in the rearview mirror, with a conservative estimate seeing a breeding herd 15% larger, compared to June 2020. Into the medium term, the cattle industry is set to bring much smaller gains in the expansion of the breeding herd through to 2025-26.
From the demand side of the market, expectations for the US drought and herd liquidation to be the “great savior” and absorb additional Australian beef into late 2023 and beyond is fundamentally correct, historically accurate and the most probable outcome. However, there are still many hurdles that must be cleared before the potential is fulfilled. The US drought needs to break, additional Australian cattle need to be processed and most importantly, US consumers need to have disposable income and jobs to purchase Australian beef. With this being stated, history shows us that global markets tend to throw in a few surprises before the expected destination is reached – with the actions of major Australian imported beef markets, like China, Japan and Korea needing to be closely watched. One thing that will be certain is that the purchase price of cattle for processors will be lower in 2023, which will help restore some beef price competitiveness into key markets, buffering any upwards movements of the A$ and helping to offset cost-conscious consumers in a range of markets.
Records to reasonable
The price climb of the Australian cattle market in the past two years will not be replicated anytime soon. With the EYCI breaking records systematically over twenty months, through to a high of 1,191.5c/kg cwt in January 2022 – it was a great ride for the paddock orientated portion of the industry. Beyond the farm gate, losses mounted month-in-month-out, with the “strategic frustration” that playing the long-game, with an eventual larger cattle herd and higher turnoff, would be financially beneficial. 2023 will start to see this frustration ease for the finishing and processing sectors, as prices shift from record highs to reasonable, underpinned by the significantly improved supply of cattle.
Chart 1 - Eastern Young Cattle Indicator
Source: AuctionsPlus Forecasts, MLA
The path of the EYCI through 2022 was volatile. The EYCI started the year at record levels, fuelled by the wet summer and razor-sharp restocker and buyer demand for a very tight supply of cattle. Averaging above 1,100c/kg cwt for the first five months of the year, the winter months took a toll on the market, but for a very unexpected reason. Concerns sparked by exotic disease coverage pushed the EYCI very quickly to 885c/kg cwt by late July. Once market fundamentals and clearer heads prevailed, the EYCI just as quickly surged back to a high of 1,092c/kg cwt in late September. Into late spring and early summer, the EYCI consistently declined on the back of constrained buyer demand and increased numbers, recently falling to a low of 855c/kg cwt. With all the volatility throughout the year, the end point of the EYCI for the year was predicted, just not in the “snakes and ladders” path it took throughout the year to get there.
From 850-900c/kg cwt in the first half of December 2022, the EYCI is forecast to be less volatile through 2023, trading primarily between 700-900c/kg cwt. After lasts years forecast, a “reasonable price” around 750c/kg cwt in early summer 2023 is most likely – assuming the normality of seasonal conditions return in autumn 2023 and demand fundamentals remain strong. For 2023, the description of “reasonable prices” has been used, as these levels would be “reasonable” for most of the major supply links participating in the market.
Chart 2 - Eastern Young Cattle Indicator - 2023 Range Forecast
Source: AuctionsPlus Forecasts, MLA
Given the forecast for the EYCI to be around 750c/kg in twelve months’ time, the 10-15% decline from current levels would also be felt through the rest of the market. The historical trend of rising and falling tides across all categories in the Australian cattle market is undeniable.
Chart 3: Calendar Year National Saleyard Prices – Annual % Change
Source: AuctionsPlus Forecasts, MLA
Downside risk is always present, particularly if the market was to see an unexpected return to below-average rainfall in the second half of 2023 and a forced sell-off. However, given the run of excellent seasons, the feed reserves from the past few years along with ample water supplies will ensure that producers have adequate resources to withstand any widespread seasonal “liquidation pressure” well into autumn 2024.
On the upside, a continuation of wet seasonal conditions into winter 2023 will support demand for young cattle. Although, the past three months should be seen as the start of the new pricing regime heading into 2023, with the years of rebuilding, combined with price conscious buyers starting to take the market further away from a four-figure EYCI.
Rebuilding to expansion
The rebuild is over. The Australian cattle herd has grown rapidly since the low point in 2019-20, with the population by June 2023 estimated to be around 27.5 – 28 million head. This exceeds the average annual cattle population since 1990 - approximately 26.5 million head. Thus, any growth beyond 2023 should be referred to as an expansion, not rebuild. The cumulative 1.5-2 million head of breeders added since January 2020 has created robust momentum in the national herd that will push it towards 30 million head by late 2025. Adding to the momentum could be refreshed expansion efforts through larger swathes of Queensland if conditions permit.
The expansion of the cattle industry across 2020-2022 was incentivised by sustained favourable seasons and excellent prices - igniting a feedback loop which has only just started to slow in recent months. After the most recent drought period forced producers to “savagely prune” their herds back, the “new growth” from late 2020 onwards has been at record pace, with retention and breeding efforts fuelling records through many categories. Additionally, with the younger female herd, the added investment into improved genetics has been just as phenomenal, with the record prices for bulls in 2021 smashed for most breeds in 2022.
In summary, the efficiency and productivity gains since 2020 has fuelled the record pace of herd growth. For the national herd to exceed the annual average since 1990 is one thing, but to push beyond 30 million head by 2025 should be a “nervous milestone”. At these herd levels, with rapidly rising turnoff rates once seasonal conditions eventually return to “normal”, the pressure upon the processing sector and ability to export beef will be amplified.
Waterlogged to backlogged
Waterlogged paddocks fuelled the rebuild in the herd and prices from 2020 through to late 2022. However, into 2023 it will be the potential “backlog” of finished cattle and the ability for the processing sector to handle growing turnoff which will truly test prices going forward.
Indeed, almost all the expectations for Australian beef to meet the demand from overseas markets hinges on the processing sector. Can the Australian cattle processing sector obtain and sustain the necessary workforce and conditions to raise throughput? The turn of the cattle cycle will signal the processing industry to ramp-up and handle annual slaughter levels exceeding 8 million head in coming years. The ability to absorb large processing volumes is a key determinant of the prosperity of the industry - spanning from producers to exporters. If the processing sector is constrained, prices to producers will falter and the potential beef demand from overseas markets will be unsatisfied.
In the wake of the 2010-2012 rebuild, which drove the herd to over 29 million head, the national adult cattle kill went from 8.3 million head in 2013, then 9.2 and 9 million head in 2014 and 2015, respectively. The 6 million cattle slaughtered in 2021, with a similar historically low number expected in 2022, is a long way from the annual average since 2010 of 7.7 million head - and seemingly miles away from the successive years of high slaughter turnoff when the national herd exceeded 28 million head.
On the assumption that the beef will be available, the demand side of the equations for the Australian industry looks very encouraging over the medium to long term, provided the Australian dollar stays favourable. Given all the current forecasts for global protein demand and the role Australian beef will play in satisfying it, any export demand led slump in cattle prices is very unlikely. However, with the expectations of recessions in major markets, an increasing focus on energy costs and skyrocketing living costs, the influence of the cost-conscious consumers will need to be closely watched.
To conclude, the historical context and cyclical nature of the cattle industry will bear significant weight on the direction of the market in 2023 and beyond. The flattening of the EYCI curve will be a key feature over the next 12 months as the market settles into more “reasonable” price levels and the herd enters expansionary levels.
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