As the Christmas decorations go up and the year draws to a close, questions turn to what 2017 might hold for the northern cattle prices.
While 2016 saw a dramatic rise in cattle prices and a severe reduction in cattle slaughter, 2017 is expected to be more conservative, with the market consolidating and commencing the rebuilding process.
The US market is an interesting case study on how a market can turn around very quickly.
There, the industry became so consumed with how high and fast cattle prices were moving that the market forgot the most important element – the consumer.
It was also the case that the US market was based around the high prices of 2014, so this was the benchmark for the supply chain in determining the market rate or margin calculations into the future.
When the US cattle market fell, it fell in a big way. US feeder cattle prices fell 42 per cent between the record highs in December 2014 (USD 2.44/lb) and the start of July 2016 (USD 1.42/lb). Feeder prices today have dropped further and are hovering around USD 1.26/lb.
So is Australia heading for the same experience? It is fair to say the record high prices that experienced through 2016 were unsustainable and needed to fall to allow all parties in the supply chain to make a margin.
However, there are a couple of reasons why Australian prices are not expected to fall as rapidly and as far as they did in the US.
There are a couple of reasons why Australian prices are not expected to fall as rapidly and as far as they did in the US.
Firstly a large proportion of our cattle trades are conducted in a contested marketplace and therefore the prices should closely reflect the demand and supply dynamics and should be more responsive.
In the US, a large proportion of trades are based on a formula system that are slightly shielded from the market and less responsive to the demand/supply interaction.
The US industry is very much a feedlot-based industry, with over 80 per cent of US cattle going through feedlots. As such, when cattle numbers were low, they were able to increase production by increasing slaughter weights. Following the increase in cattle numbers, the higher slaughter weights have had a multiplier effect on production.
US beef also faced some very strong retail price competition from the competing proteins, which went through their own increase in production at the same time.
These factors distinguish the US market from Australia and as such the same rapid drop in prices is not expected here.
That said, however, softer global beef prices – driven by larger global supplies and lower US prices – will have a drag on domestic prices through the course of 2017.
The balancing factor will be the competition for the reduced supplies and producer demand for cattle as part of the herd-rebuilding process.
