The steep decline in cattle prices from November 2022 to May 2023 has taken some in the industry by surprise. While the fall from historical price records was considered inevitable, the speed and severity of the decline was not expected. To reassess where the market is today, it is valuable to review the expectations and reality of the last three years.
Key Points
The EYCI is expected to ease further, slipping below 550c by December 2023
The cattle herd is growing beyond the long-term average population
Export demand is expected to improve due to a range of factors
Spring 2020 to the start of 2022, saw most cattle market analysts forecasting prices to turn and ease lower. As we know now, prices continued to increase in a linear fashion from March 2020 to January 2022.
I asked one of those market analysts back in May 2022 why everyone had gotten it wrong. They stated that the herd was much lower than anyone expected from the drought, and that it just kept raining. This meant that restocker demand was stronger and lasted longer than expected, fueling the strongest herd rebuild in almost 50 years.
Turning to the current market, several analysts have been expecting a rebound in cattle prices since January 2023 on the basis that prices were getting ‘too cheap’, instead, prices have continued trending lower in a linear fashion. This is likely due to a much larger cattle herd than expected and a lack of restocker demand which is currently being overestimated due to the Female Slaughter Rate (FSR) technically representing a rebuilding phase.
Therefore, downward pressure on prices will likely continue for the rest of the year, with the EYCI expected to be below 550c/kg cwt in December 2023. This would be well below the 10-year average of 617c and just below the median price of the last 10 years of 562c.
Female Slaughter Ratio (FSR): Rebuild or Expansion
The Australian Bureau of Statistics has released the latest data on livestock products for the first quarter of 2023. The data revealed a 15% increase in the number of cattle slaughtered compared to Q1 2022 to total 1,542,400 head. It also revealed a Female Slaughter Ratio (FSR) of 42.4%.
The long-term average FSR is about 47%, an FSR below this mark is associated with an increasing herd population due to higher retention of females and/or restocking activity. An FSR of more than 47% is associated with a declining herd population through increased slaughter of females or destocking.
While the FSR of 42.4% is below the 47% mark and therefore technically denotes a herd rebuilding phase, the use of that terminology can be misleading. The cattle industry is either classified as being in a herd rebuilding or a herd liquidating phase. But a herd rebuilding phase simply means an increasing herd population. If that herd population is increasing beyond the long-term average, then it can hardly be described as rebuilding and should be considered as expansion.
A more accurate description of the current situation would be an expansion or growth in the herd on the back of three consecutive La Nina’s and a fourth straight good Autumn break in many southern regions. Where producers have eased back on purchasing breeding females but are not yet reducing herd numbers or destocking.
Export markets
Australia’s major export markets, in particular the US and China, were expected to support domestic cattle prices and put a floor in the market. While China became the top export destination for beef in April and production in the US continues to decrease, it has not been enough to support Australian cattle prices.
There are several factors to consider when determining how export markets will influence domestic cattle prices. Firstly, poor economic conditions in both the US and China are suppressing consumer demand for red meat products.
Some areas of the US have received good rainfall leading to a sharp decline in beef cow slaughter and improved restocker intentions, while other areas are still very much in drought with slaughter numbers remaining high.
The ‘Other Country’ import quota including Brazil has been filled, meaning Brazilian imported beef into the US will now be more expensive and Australian imports will be relatively more competitive.
The Australia-United Kingdom Free Trade Agreement (A-UKFTA) takes effect on 31st May 2023 and opens a duty-free quota of 35,000 tonnes of Australian beef.
Overall, these influences are likely to improve export demand for Australian beef and provide some support to falling cattle prices. This is expected to materialise in flattening out prices, but it is important to note that export demand does not have the power to turn prices around against the weight of significantly higher supply of cattle.