Cattle Producers: Simultaneously Rubbing their Hands Together & Scratching their Heads

Heading into the second half of 2021, the state of the Australian cattle market has many producers simultaneously rubbing their hands together and scratching their heads. It has been a very long time since there have been so many “ticks” in the positive column for the producers. 

Acknowledging that the pain for secondary and tertiary parts of the industry is only escalating every week, there continues to be very few negatives on the horizon for primary producers.

The head-scratching comes with the experience of the new pricing paradigm and acceptance that the industry has not been in this position before. From “doing the sums” to see how additional profit can be made into 2021-22, through to wondering whether this price cycle ends with a whimper or a bang - the outlook ahead is exciting, uncertain and cautious all at once.

“Rubbing their hands together” - have we seen the peak?

At every new milestone for the EYCI, the response to can it go higher has largely been “surely not”!
Surely the EYCI will not go above 800c? It must max out at 875c? 900c will pull it up! Is 975c the peak? This week the big question seems to be “can it hit four figures”? 1,000c/kg used to be a mediocre wool price, now it could be the new ceiling for the EYCI.

Since the turn of the century, there has not been a period where there have been so many factors for the industry all pushing in the same positive direction. The historically low cattle herd, rain (with more forecast), rising rural land prices, low interest rates, robust export markets…the list is extensive and very healthy. Even the Australian dollar seems to be behaving itself and providing some certainty for traders.

But where will the current “bull market” finish? Honestly, given the recent level of prices, does it really matter? 880c, 960c, +1000c…this has exceeded all expectations and there are clear winners and losers. There are very few marginal results at this price level – profit is accentuated and losses are deeper. While in tougher times, 5% up or 5% down throughout a month, or year, could make or break the impact of the trade, today’s levels are well clear of anyone’s expectations.

At the end of the day, it is still the willingness of buyers which sets the final market. Thus, at current levels, the risk of missing out on purchasing cattle still seems a far greater motivator than the pain of “finding the cash”.

“Scratching their heads” - additional supplies & how does this end?

It should be anticipated that the overall numbers of young cattle offered into late spring and through the early part of the calf sales in summer will be greater than the previous year – reflecting the powerful combination of determined breeding programs and above average seasonal conditions. However, it can also be anticipated (given the current seasonal outlook) that any increase in supplies will be met with the same strength in buying as experienced in late 2020 and early 2021. Indeed, after the recent run, historically high prices for calves and weaners in late 2021 and the first quarter of 2022 may not be the impediment for buyers that it would have been previously.

If the wetter than average conditions forecast throughout the second half of 2021 do not eventuate, we could see some softening in the market, as additional cattle hit the market. Will the desire to turn a profit on the current record weaner prices into 2022, if the market softens, see many producers go above and beyond to ensure a positive trade is registered? It can be anticipated that any producers who might face this scenario will be very deliberate in what and when they offload. Initially focusing on cash flow from internally produced weaners from 2021, or older and heavier cattle, and shying away from any sales of breeding stock, or forced premature sale of recently purchased trade cattle (at record high prices).

Given the current seasonal conditions and outlook, along with the very expensive position many buyers have taken in the market, the eventual decline will most likely be a whimper. The most likely scenario is that the air slowly goes out of the very high market throughout 2022, as the herd growth takes effect, additional numbers hit the market and seasonal conditions return to average.

Given where 2021-22 started and the firm expectation that the first half of the production year is already looking solid, there is the very likely prospect that the EYCI will average higher for the current 2021-22 year. Could it be like 2017-18 and average 14% higher following a 44% increase in the previous year? Confidently no, this would give an average of 955c/kg cwt in 2021-22…so no, very unlikely. But average 5% higher in 2021-22, giving an 880c/kg average – now that seems feasible, given the average so far for the first two weeks of the new financial year is 953c/kg cwt.

Any major price decline in the next 18-months would have to come from a demand shock in the beef markets – which if history is anything to go by, are always unseen, complicated and have unintended consequences. The good news is the risk of this type of event occurring is extremely low.

Finally, the long-term impact of the record prices throughout the cattle and beef supply chain must be considered - as not everyone cheers when the young cattle market lifts to another record high.

As mentioned earlier in the year, too much sustained punishment for just one or two links in the beef supply chain for too long can be detrimental for the entire industry over the long term. How long can processors continue to lose money? How long can Australian beef remain expensive in overseas markets? Indeed, there must be a fair bit of “head scratching” going on through these sectors of the industry at the moment.