High cattle prices have not flowed through to profits

High cattle prices have not flowed through to profits


Beef News
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Beef's sobering zero return on assets sends a message.

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DROUGHT and increased input costs have delivered a never-before-seen average return on assets of zero for beef producers in the last financial year under leading economic analysis by agriculture consultants RCS Australia.

The organisation’s Profit Probe benchmarking draws on the longest-running data sets in the Australian beef industry and shows that spend-ups with record cattle price money were not reigned in enough to offset the effects of drought and market decline.

ROA has declined for four years in a row, emphasising the low relationship between profit and price received, RCS’s chairman David McLean said.

Profit Probe results for 2017/18 showed that while the top 20 per cent of beef businesses, as ranked by profitability, had a 4.2pc ROA, the average hit zero, a significant drop on the previous low of .2pc in 2012/13.

Producers have tightened the belt - the average cost of production (direct and overhead costs only) declined by $0.12 a kilogram to $1.58/kg, with the top 20pc at $1.18/kg - but it wasn’t enough to offset the effects of a season that went pear-shaped quickly and a very rapid decline in the market.

The cattle market slumped 25pc, from a peak of $3.22/kg for average price received liveweight in 2017 to $2.66/kg, the RCS work showed.

“A risk for a lot of businesses is they assume high prices will give them breathing space. What this result shows is there isn’t as much breathing space as some may think,” Mr McLean said.

He believes some of the cost creep was genuine catch-up repair and maintenance, some came from an increase in input costs as suppliers saw a rising cattle market  and some was simply more relaxed spending and snuck in almost unnoticed.

For the vast majority, there were definitely elements in COP that could be shifted, he said.

In presenting the benchmarking results at industry events in Queensland and Northern NSW, Mr McLean urged producers to consider the fact the cattle market was now much more volatile than it ever has been historically.

SOBERING MESSAGE: RCS’s chairman David McLean presenting the latest beef economic benchmarking results.

SOBERING MESSAGE: RCS’s chairman David McLean presenting the latest beef economic benchmarking results.

“Be careful of spending profits which haven’t yet been earned,” he said.

“We had 15 years where the Eastern Young Cattle Indicator didn’t shift much more than 100 cents a kilogram.

“Now we see 100c/kg fluctuations in the space of a few months.”

There were are many drivers behind that but the bottom line was a beef producer cannot control it and now has to factor in the impact of that on their strategies, he said.

Effectively, the rules of the game have shifted.

RCS’s advice: COP is the number to be concerned with.

“It takes out the noise around prices and is a lovely indicator of how much resilience your business has to absorb price fluctuations,” Mr McLean said.

Unfortunately, an extremely low number of producers know their COP.

“It requires records and data collection - however producers keep a lot of records they don’t use,” Mr McLean said.

“When you understand how to use the information in these records, you can make more timely decisions with less stress involved, in multiple parts of the business.”

The big implication from a zero ROA is the indication beef business structures are not in a position to handle the new norm of price fluctuations, according to Mr McLean.

“It’s time to start considering what strategies can be put in place to manage greater variability in seasons and price,” he said.

The story High cattle prices have not flowed through to profits first appeared on Farm Online.

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