Global economic crisis eases, but short-term challenges remain for Australian beef – industry report.

A return to growth in consumer demand for animal proteins as the world emerges from the global financial crisis will spell good news for the Australian beef industry, according to a recently-released industry report.

In its Global Focus report on Australian Beef, leading food and agribusiness bank Rabobank says, with the market now pointing towards a potential global economic recovery, it is expected there will be a return to the trend of continuing growth in global demand for proteins seen prior to the financial crisis once income growth begins to take hold.

However report author, Rabobank senior analyst Wendy Voss says that while the worst effects of the economic crisis now appear to have subsided, there remain a number of challenges for the Australian cattle industry.

"While the paralysis experienced by global beef markets now appears to have passed, we are unlikely to see any major increase in prices in the short term," she says.

"A number of fundamentals are currently holding back beef prices, not the least of which is the Australian dollar which was over 86 US cents in early spring and has been further impacted by the Reserve Bank‟s decision to increase interest rates."

Also, while IMF forecasts global economic growth to improve from late 2009, for many of Australian beef‟s key export nations, such as the US and Japan, the recovery is expected to be modest in the first half of next year.

"The saving mentality that has now been instilled into many consumers as a result of increasing unemployment and a plunge in housing and asset values is likely to limit beef demand growth in the short term, particularly for premium cuts," Ms Voss says.

"In Japan, Australia‟s largest beef export market, unemployment reached record highs in July and the expected strong seasonal rise in beef demand in Japan in the second half of the year has failed to materialise."

Falling US herd to provide opportunities

While the Australian beef market has been impacted by slowing global demand, its competitors, such as the United States, have also faced their share of growth challenges.

The Rabobank report says that while falling demand has affected the US cattle industry, the grain price shocks experienced since 2006 have had an equal or even greater impact.

"The United States is the world‟s largest producer of beef, with around two-thirds of all cattle in the US finished in feedlots (compared to around a third in Australia). This reliance on feedlotting has meant that the US cattle industry has been particularly vulnerable to the volatile grain market," Ms Voss says.

"Despite finished cattle prices rising to record levels in 2008, feedlotters in the US faced their third consecutive year of average losses on the back of surging grains and other input costs. After a decade of positive returns, the average margins for cow-calf producers also fell into negative territory last year."

The pressure on margins for cow-calf producers has seen a continuation of the long-term decline in the size of the US cattle herd. From next year beef production in the US is expected to fall through to at least 2013 as the effects of this herd reduction begins to impact on cattle supply.

"While the fall in cows available to slaughter should support prices for Australian manufacturing beef exports to the US market, we also expect that the reduced supply of calves available for feedlots will potentially open up opportunities for Australian grain-fed beef sales into the US market," Ms Voss says.

Longer-term fundamentals remain strong

In spite of the current global economic downturn, the longer-term fundamentals for beef producers remain positive.

"Population and income growth will result in increased demand for beef and other meat products," Ms Voss says.

"We are likely to see this growth take place in an environment of rising demand, not just for meat products but for a range of commodities, including dairy, sugar and grains. With limited agricultural land available, the recovery in demand will possibly see a renewal of the „battle for acres‟ which was seen in the agricultural sector worldwide in the lead up to the crisis. So with increased demand and limited land available, it is expected that cattle producers both in Australia and overseas will need to see farm gate prices rise in order to expand supply to match the expected growth in demand for beef."

However while the longer-term fundamentals for Australian beef are strong, a major concern for the cattle industry in the short term is the prospect of a return to drought conditions. If drought returns, farm gate prices are likely to fall in late 2009 as more cattle enter the market due to reduced feed and water availability, with fewer buyers willing or able to purchase for the same reason.

"Rainfall and the Australian dollar remain the „X factor‟ in the short term, even with a recovery in global beef demand, a return to drought or a continuance in the high Australian dollar would delay the improvement in prices and margins for Australian producers," she says.

www.rabobank.com