Expanding margins in beef make strong case to restock

Expanding margins in beef make strong case to restock

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Beef benchmarking paints picture of good profit opportunity ahead for those with cattle

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BEEF benchmarking is painting a strong case for southern breeders to invest what is needed to rebuild their herds as quickly as possibly.

Above-average margins are on the cards for better-performing farms in the short-to-medium term, as cost of production comes down post drought and pricing signals continue to encourage more production.

Despite the market being in record territory, experienced consultants say cattle have not yet become too expensive to make the risk of the market falling away outweigh the opportunity on offer.

Southern NSW outfit Aggregate Consulting presented results from its 2019/20 Beef Benchmarks Review at the latest Meat & Livestock Australia productivity and profitability webinar this week.

Director and consultant Sandy McEachern, Wagga Wagga, outlined the return on investment currently available from purchasing the in-demand females that have hit very high rates at southern saleyards this week.

A pregnancy-tested-in-calf cow one month out from calving commanding $2475 - way more than anyone is used to in the past - would still turn a gross margin of around $1000 if marketed in 12 months time, pregnant again with a 10-month-old weaned calf.

That's a simple return on investment of 42 per cent.

"What we're afraid of is incurring a capital loss," Mr McEachern said.

"Allowing for an $800 fall in the capital value if the market shifted in 12 months time, and that PTIC cow was only worth $1600, that's still a 10pc ROI.

"We'd still make $250.

"So there is plenty of room for the market to fall away before you wouldn't be making money.

"On the other hand, if the market doesn't fall and you haven't bought, you have no chance of making money."

New era

ONE of the more notable points to come out of the latest benchmarking results is just how remarkable it was that profits were made during the past two years.

The program has seen data collected from self-replacing breeding herds operating in the south east of the country over the past 23 years.

The only times negative profits were incurred as an average of all data collected were in 1997/98, 2002/03, 2006/07 and 2007/08 - all severe and widespread drought years.

"In severe drought, people haven't made money out of beef. It's a weight-gain exercise and in drought weight gain doesn't happen other than what you get from buying supplementary feed and that's a low-margin business," Mr McEachern said.

"Yet some reasonably healthy profits were made in the past two years.

"It wasn't that this was not a widespread drought, or these were not severe drought years, there was something else going on. The prices were OK right up until the very end of the drought, when store stock took a bath. Anyone not caught in that maelstrom did not fare too badly. That allowed some people to scrape through and make a profit.

"And if you were lucky enough not to be drought-affected, you made very good profits by historical comparison."

Improving margins

Expanding margins in beef, and pricing signals for more production, are a big part of the explanation.

"Prior to this drought, the margins in beef had become really wide in comparison to historical standards," Mr McEachern explained.

"In 2016/18 we were seeing margins never seen before in beef production.

"We are anticipating those above-average margins to return with the easing of drought as producers get back on track. Given that, price signals are for more production."

The data shows the relative price received (dollars per kilogram of beef sold) has increased from $1 to $3 since 1988.

At the same time, cost of production (dollars per kilogram of beef produced) has climbed from just over $1 in 2010 to $2.75 in the past year.

However, the recent COP figures include seriously drought-affected production - a lot of supplementary feeding or liquidation of the herd which means the same cost structure is spread over less production.

"So the last two years are an inflated average COP and we are much more likely to see COP return to sub $2 in the next financial year's data," Mr McEachern said.

What southern producers could look to emulate is a COP of $1.55/kg - better performing farms will likely sit around here this financial year, Aggregate Consulting believes.

"That will give you an extra 25c in margin between COP and price received, where 50kg of beef per hectare, per 100mm, is produced," Mr McEachern said.

There are pre-conditions to achieving that, of course.

They include being stocked near long-term carrying capacity - overheads have to be spread over enough production.

Efficient production systems and adequate livestock performance are also a must. Cattle need to hit target markets in a reasonable amount of time.

Getting back to full production quickly will be the key to maximising beef profits in the short to medium term, Mr McEachern said.

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