Market spooked over 'phantom herd'

Australian producers have likely pumped out most spare stock capacity in the past two years of drought-induced slaughter, according to Mr McRae, to the extent of possibly also eliminating the 'phantom herd'.

The phantom herd are those cattle that don’t appear in statistics, but mysteriously appear in saleyards during times of high turnoff.

Slaughter rates have been so sustained, and poor seasonal conditions so persistent across large swathes of cattle country, that Mr McRae says there can be few spare stock left in the system.

Graph: Mecardo herd numbers

Herd numbers have fallen drastically over the past 24 months, and rebuilding will be slow. The Australian Bureau of Agricultural and Resource Economics and Sciences (ABARES) and Meat and Livestock Australia (MLA) have made different forecasts for herd rebuilding after 2016, with MLA predicting slightly faster growth.

“However, regardless of who is making the forecast, it is blatantly evident that the Australian cattle herd will be operating with at least two million head per year less over the next five years – compared to the past few years,” Mr McRae wrote in a cattle market outlook series for Mecardo.

The presence, or otherwise, of the phantom herd is a wildcard in any forecast, Mr McRae acknowledges.

Analysts think the phantom herd phenomenon can mean that Australia’s herd numbers might be under-reported by 10-15 per cent.

It explains why, when drought and high prices collide, unexpectedly high numbers of cattle can come pouring into saleyards from regions that were thought to have had far less stock to offer.

That seems to have been the case in western Queensland in early 2015.

If, as Mr McRae suspects, the phantom herd has been largely liquidated, then big yardings of stock will become less common, and there will be growing scope for prices to jump up on rain.

Demand isn’t going away, surprises notwithstanding. The strong export demand that drove global beef prices into record territory over the past couple of years - but not, alas, Australian cattle prices - is still there.

Only now, the weaker Australian dollar has greatly boosted the price competitiveness of Australian beef against its rivals.

Mr McRae says competition for Australian beef by the United States and Japan, Korea and China may eventually starve some of the smaller markets that had opened up to Australian product.

But perhaps the biggest consequence of export demand will be on the Australian domestic market. Mr McRae predicts there will be less beef available to domestic consumers, at a higher cost, with the inevitable result that Australia’s per-capita beef consumption will fall.

Graph: Mecardo exports etc.

Mr McRae was MLA's chief economist until he resigned during the staff rationalisations enacted by incoming MLA chief executive Richard Norton in late 2014.

He has spent the past few months working his small cattle farm near Orange, NSW. His return to market analysis under his own banner, Bangalla Consulting, is in collaboration with Mecardo.

Click through to Mr McRae’s cattle supply outlook and his long term shortage of slaughter cattle analysis.