"Own the cow and win the race" for beef profitability. I think I have been yelling this from the rooftops for a couple of years now, and although all beef returns to date have been great, 2017 could be the start of the big profit differential.
To clarify, I am saying, barring extreme events, the beef breeder has three good years of above average to extreme profitability ahead of them. I am not so confident, however, about every other facet of the beef industry, unless they are forward contracted.
Remember, no droughts, no financial crisis, basically no disasters, and I think breeders or more specifically, breeding and selling high quality weaners will be not only beef's, but also agriculture's financial shining light.
Why is it so? It's all in the numbers. World beef populations are on the rise, but Australian numbers are still falling. The numbers say we must lose competitiveness on the world beef market and domestic consumption and niche markets will become so much more important.
Brazil, Argentina and Uruguay are enjoying outstanding seasons, and collectively possess almost 300 million quality cattle. Unfortunately, Brazil is getting unprecedented access to markets we thought we owned.
India, with 300 million cattle, is the world's biggest beef exporter.
The clanger, I think, will be the US. Higher cattle numbers at almost 100 million, combined with low world grain prices, and a very highly organised and efficient feedlot sector means the Americans are by far the world's biggest producer of beef. Our undersupply problems means the Americans will not only target our high quality Japanese and Korean markets, but in time, unthinkably, maybe even our domestic market.
Australia has always been a major beef exporter. The world market governs our Australian price, yet we have a complication. Our declining beef numbers means while the world faces strong supply numbers, Australia is facing a supply crisis.
What does the export processor, and the export feedlotter do? Not enough cattle, but multi million dollar facilities to run. What of the trader and the backrounder, what can they expect? As I have said, it's all in the numbers.
The processor will cut shifts, let price conscious export markets go and target quality niche markets. The processor will want cheaper cattle to survive. He will buy lighter cattle and own them longer. The processor will buy more weaners in 2017.
The export lot feeder has been under pressure since it started raining 18 months ago. Low Australian beef numbers and an excellent domestic season in a more competitive beef world has made life tough for the export lot feeder. He will want lower gross dollar cattle and own them longer. He will background more, he will have cheaper grain, so he will decrease entry weights and will feed longer. The export feeder will buy more weaners in 2017.
The steer trader will be interesting. He has enjoyed triple his normal returns over the past 18 months. Rising prices, and an excellent season are a great combination.What does the steer trader do to combat the inevitable falling heavy feeder market?
He buys lower dollar cattle. In 2017, he buys lighter weaners, more of them and keeps them longer. We have a world beef market that is about three years from average numbers to oversupply.
Our processors and steer traders will need to change their models to be competitive. We have, our lowest cow, and therefore weaner numbers in 20 years in 2017.
The processors and lot feeders can try to manipulate prices through lesser kill days and less cattle on feed, but they still need numbers. The weaner market however, is sheer supply and demand at very specific times.
Low world grain prices means less barley and more oats sown, so more weaner competition, and it only takes two to make a price at an auction.
There will be so much more demand for weaners in 2017, with traders, processors and feeders all competing with the usual suspects. The good time for breeders will extend for two or three years, simply because it takes so long to breed up numbers.
I am not saying there will be any disasters for the Australian beef industry, but simply tighter margins and more flexibility. I am simply saying it is a nice time to be a breeder, and I think that for beef profitability "own the cow and win the race".
