Economic hurdles for Australian beef

May 13, 2013

The Australian beef industry is experiencing a perfect storm of economic disaster. Drought, oversupply from closed markets, and ag policy gone awry have left Aussie producers scrambling to find an alternative to simply shooting the hundreds of thousands of excess animals which cost more to feed and ship than they’re worth at market.

The Australian beef industry held its Crisis Summit, Tuesday, May 7, to address the abysmal conditions suffered by Aussie cattlemen and their livestock. Topics of concern covered the ongoing drought, governmental mismanagement of agricultural and disaster aid to rural portions of the country, the shuttering of a pair of Australia’s multi-million dollar live export markets and potential actions.

The Australian live cattle market has been historically a large part of the beef trade in the northwestern portion of the country. Heavily-Muslim neighboring countries like Indonesia and Egypt, which require special slaughter regulations for religious reasons and live animals for various religious holidays, have been the end destination of many of Australia’s cattle.

In 2011, Australian officials stopped the live trade of cattle to Indonesia following evidence of unacceptably cruel treatment of livestock at slaughter plants. Though live trade was renewed later that year, trade has not recovered to prior levels. Some Australian producers blame the current economic woes to that interruption in the live trade to Indonesia.

To add to this difficulty, over the weekend of May 4-5, undercover footage showing “appalling” abuses of Australian cattle at an Egyptian slaughter plant surfaced, leading to the immediate suspension of live cattle trade to the country.

According to reports by The Australian, live cattle trade to Egypt alone accounts for $24 million (Australian dollars, approx. $24.39 million U.S.) in trade and 5 percent of the overall country’s cattle/beef exports.

Western Australia—the largest of the country’s five states which takes up the western third of the continent—alone sends around 225,000 head to Egypt annually. The suspension of live trade with Egypt will only aggravate an already oversupplied market.

Estimates vary, but roughly 300,000 head of northern Australian cattle are thought to be imperiled by the market and drought conditions. Cr Daniels, an Australian producer from northwestern Queensland, told The Australian that the glut of cattle on the market was making for hard decisions.

“If [producers] are only going to get $50 for [cattle] at a sale and it’s going to cost $50 or more to get them there, they are left with no option but to shoot them or let them die in the paddock.”

At the Crisis Summit, some unusual ideas were suggested to alleviate the immediate problems facing Australian cattlemen. Among the more controversial was a suggestion that the government buy 100,000 head of cattle at $1.50 (AU)/ kg (approx. 69 cents (U.S.)/ pound) and donate them to Indonesia. The venture is estimated to cost $150 million (AU).

Member of Parliament, Bob Katter told The Australian that while the gesture might seem expensive, it could go a long way to repairing the relationship between the two countries as well as directly address the overpopulation of cattle in Australia.

“It sounds like a lot of money but if the Indonesian market reopens [the government will] get that money back in taxation in two or three years,” he said.

This suggestion became the first of 29 resolutions put forth by the attendees of the Crisis Summit. Another recommendation amounted to a country-wide sale on beef which would see beef marketed in Australian supermarkets at just 10 percent above its cost of production. The goal here would be to stimulate demand in consumers and facilitate a couple hundred thousand head reduction in the Australian herd.

Among other of the summit’s 29 resolutions was the recommendation that the Australian government reduce interest rates to be competitive globally, reduce the value of the Australian dollar, and a significant restructuring of the country’s rural aid programs.

What it means for U.S.

Australia’s issues are part of a larger beef-related economic situation in Oceania.

New Zealand has long been in drought and that has pushed many dairy cows to slaughter and shipments of grinding beef to the U.S. up. While New Zealand’s drought seems to be slacking off and the hopeful green is returning to their pastures, Australia’s drought is picking up.

Jim Robb, director of the Livestock Market Information Center, explained that the last few years have seen Australia growing their herd. Now the combined blow of poor-to-nonexistent pasture, expensive feed, and closed markets will make for imports of inexpensive Australian grinding beef.

“As a result of increased slaughter in 2013,” wrote Robb recently. “Beef supply for export has increased, with the near record export pace assisted by cheaper beef prices, which is of little comfort to Australian producers.”

“That beef will come to the U.S. and compete with ground beef,” Robb told WLJ. The influx of inexpensive grinding beef from Australia—not to mention the earlier and ongoing shipments from New Zealand and Canada’s high cow slaughter— will continue to put pressure on lean trim values and limit cull cow prices.

Robb noted in some of his recent reports that the slaughter of female cattle in Queensland reached weekly levels not seen since May 1998. As the producer quotes above can attest, the potential for some herd liquidation in Australia is very real.

Cow slaughter seems up all around. Steve Meyer and Len Steiner of CME’s Daily Livestock Report pointed out that Canada’s shipping of slaughter cows into the U.S. as of the end of April has been up 121 percent compared to the same time last year. Added to that, the period between the beginning of March through the end of April has seen 869,503 beef and dairy cows come to market, 7 percent more than a year ago. This number represented 3.9 percent higher dairy cow slaughter than the same time last year and beef cow slaughter 10.6 percent higher compared to last year.

“In the more immediate term, the increase in U.S. cow slaughter has had a significant impact on the price of lean beef coming to market. While we don’t think that the sharp decline in 90CL beef prices is entirely due to the rise in domestic cow slaughter, it certainly is a factor.”

Among other factors cited by Meyer and Steiner were slow first quarter foodservice sales, increased stores of ground product, and sluggish domestic demand borne of the grilling season’s slow, wet start.

“With little pent up demand and high freezer stocks, the increase in domestic cow slaughter caused lean beef prices to decline some 9 percent at a time when it should have been higher for Memorial Day needs,” they noted.

The current and expected higher-than-usual imports of Oceania grinding beef will likely do nothing so much as increase the current situation.

Robb pointed out that a longer term possibility for the U.S. beef industry as a result of Australian misfortunes is the potential for gaining some of the Asian beef market. “Late 2013 to 2014 we could see some potential for U.S. export [to Asia],” he said. — Kerry Halladay, WLJ Editor