Beef processing can be a cut-throat industry, excuse the unintended pun. Meatworks within Australia are not required to fulfil mandatory price reporting requirements, unlike their counterparts in the United States. In 1999 the United States Department of Agriculture introduced a mandatory reporting scheme in order to "facilitate open, transparent price discovery and provide all market participants, both large and small, with comparable levels of market information for slaughter cattle".
Historically, Australian processors have been tentative about divulging too much about their operations with respect to pricing. This is understandable, as the landscape locally and overseas is incredibly competitive so there has been a reluctance to provide a market edge to a competitor by giving away too much information.
However, participants across the beef industry supply chain can benefit from understanding how meat processors are faring season to season. Improved processor profitability can see them paying a premium to secure cattle at the saleyard at times when prices weaken and the market dips. In the same way, worsening processor margins are also reflected in their buying behaviour at the saleyard. To provide some insight into the state of play across the beef processing sector Mecardo developed a theoretical processor margin model that crunches the numbers on all the available data and gives an indication of beef processing profitability at any given time. The Mecardo processor margin model is reported on a monthly basis and provides a snapshot of beef processing industry profitability going back nearly 20 years.
In March 2019, the Australian Meat Processor Corporation (AMPC) published their own version of a representative cattle processor model in order to "gain insight into the drivers of economic performance and sustainability in the red meat processing industry".
Understanding processor margin models
While the Mecardo processor model and the AMPC representative cattle processor model are designed in a similar fashion, they use some different data reference points. One key difference is that the Mecardo model is based on cow input pricing while the AMPC model works off steer input pricing. Furthermore, the AMPC model is assumed to purchase stock through a combination of saleyard and direct sales channels via the Meat and Livestock Australia OTH prices, whereas the Mecardo model uses only saleyard data.
A comparison of the two margin models shows that when the cow to steer prices vary significantly, like at present, the processor margins can diverge. However, using the monthly Australian Bureau of Statistics reported female cattle slaughter ratio, a combined, weighted version of the two processor margin models can be created. This forms an industry-wide representative processor margin model that uses both cow and steer input prices.
The output of this Mecardo-AMPC processor margin model shows that since 2000 the monthly margin has averaged $35 profit per head (Figure 1- black dashed line). The normal range for fluctuations in the margin each month can vary between a $55 per head loss to a $125 per head profit, as shown by the 70 per cent range boundary (grey shaded zone). It also demonstrates times of extremely low or high margins when the model extends beyond the 95pc range boundaries of a $145 loss to a $220 profit (red dashed lines).
The climate impact upon processor profitability
The processor margin trend clearly demonstrates the impact of drier and wetter seasons on processor profitability. During July 2019, the model shows that margins eased toward more normal levels after spending much of the season above the extremely profitable boundary.
The dry season across NSW and Queensland this year has allowed domestic cattle prices to remain subdued at a time when offshore beef export prices have been rising. Drier conditions result in lower feasibility for grazing leading to increased slaughter rates. We know that high female cattle slaughter rates are often a symptom of drought and lead to a tough cattle trading environment.
Generally, this situation also corresponds to improved processor margins. However, this relationship works against the beef processor too. This occurs when the climate conditions favour cattle producers, driving restockers to compete with processors for stock.
During the 2016-17 season, processors saw periods of negative margins due to wetter conditions generating a herd rebuilding phase, while the 2013-15 period saw robust profits for beef processors due to dry conditions creating a herd liquidation phase, like what we are experiencing currently.
The last time processor margins were as strong as they are now was during 2014. By comparing these two seasons, we can see that the half yearly average margins aren't too dissimilar. The January to June average margin in 2014 was a profit of $202, only $3 below the January to June margin for 2019. Robust beef export prices and a low Australian dollar have helped to lift demand and prices for most categories of beef co-products.
A look at the seasonal trend in the processor margin shows that average monthly profit levels have eased toward $145 per beast processed in July after peaking at over $280 during May 2019. The annual average margin for 2019 sits at $195 profit, compared to just $36/head for the 2018 season. However, a comparison to the 2014 season shows the impact a drier than normal spring and summer can have on processor margins as the annual average margin for the year reached $255.
During 2014, the processor margin continued to improve throughout the latter half of the season, peaking at over $385 profit per head in November. The drier than average forecast leading into spring issued by the Bureau of Meteorology last week should continue to support firm processor margins into the second half of this year.
This combined Mecardo-AMPC processor margin model is designed to reflect the general trend in meatworks profitability and should be viewed as a reflection of an average industry participant. Due to the diversity in the scale of operations, internal processes and supply chain differences across the red meat processing industry, individual meatworks' profitability will vary.
Note: The "Mecardo-AMPC processor margin model" referred to in this article has not been endorsed nor approved by the Australian Meat Processor Corporation (AMPC) and no formal agreement exists between AMPC and Mecardo for the development of such a model. The blended model was constructed solely by the Mecardo team using data from the AMPC model and the Mecardo model for illustrative purposes only to demonstrate historic profitability of a theoretical participant in the beef processing industry. Mecardo had no intention to imply that such an authorised Mecardo-AMPC model exists.