A drought in Australia, the world’s third-largest beef exporter, is fueling a surge in shipments as pastures dry up and ranchers shrink cattle herds to curb losses.
“We can’t keep them,” said Will Abel Smith, 49, the livestock marketing manager for S. Kidman & Co., which raises cattle on ranches mostly in Queensland and South Australia covering 110,000 square kilometres (42,471 square miles), or an area the size of the US state of Tennessee. “We’re not in the position to feed cattle. If you try to bring hay in, it’d break you.”
Queensland state had its driest December since 1938, and demand for grain to replace parched grasslands sent sorghum futures up 71 per cent since 2011 to a six-year high this week. Kidman, founded in 1899 by Abel Smith’s great-grandfather, Sir Sidney Kidman, cut its herd by 11 per cent to 200,000 head last year, sending more animals to slaughterhouses as cattle prices tumbled 35 per cent from a peak in December 2011.
While the drought squeezes profit for ranchers, the jump in cattle supplies is a boon to Australian operations of Cargill Inc and JBS SA, the world’s largest beef producer. The government estimates beef exports will rise 7 per cent to 1.09 million metric tonnes in the 12 months through June, including a 74 per cent increase to China and an 11 per cent jump in sales to the US, where the meat is used in McDonald’s Corp hamburgers and prices are the highest ever.
Dry Spell
The dry weather in Queensland, Australia’s largest cattle producer, emerged in 2013 after two years of wetter-than-normal weather. Almost 65 per cent of the area is in drought after the fifth-driest August on record and the least December rainfall in 75 years, according to the Bureau of Meteorology.
“We’re already several weeks into the wet season and nothing much has happened,” said Blair Trewin, a bureau climatologist in Melbourne. “While there is certainly a window of opportunity for significant rain, it’s progressively narrowing.”
The loss of pastures normally used to feed cattle forced ranchers to buy more feed. Sorghum futures on the ASX Ltd. exchange in Sydney are up 18 per cent since the end of November, reaching A$346.50 ($305.09) a ton on January 20, the highest since 2007. The grain accounts for about 75 per cent of the feed used in the state.
With costs rising, ranchers cut their herds. The number of cattle and calves slaughtered from July to October rose 16 per cent from a year earlier, the biggest gain since 1997, according to Australian Bureau of Statistics data. The Eastern Young Cattle Indicator of sales across Queensland, New South Wales and Victoria shows prices tumbled to A$2.785 per kilogram yesterday, the lowest since December 2009.
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The government estimates beef exports will rise 7 per cent to 1.09 million metric tonnes in the 12 months through June, including a 74 per cent increase to China and an 11 per cent jump in sales to the US
More Exports
With more animals available, abattoirs will increase slaughter by 5.6 per cent to 8.9 million head this year, the government estimates. That’s boosting beef supplies and incentives for record exports. Shipments to China will jump to an all-time high of 160,000 tonnes, while the US purchases will reach a five-year high of 230,000 tonnes, the government said.
Demand for meat is increasing as world economic growth boosts incomes. The International Monetary Fund estimates the economy will expand 3.7 per cent this year, up from 3 per cent in 2013. Global beef imports will climb for a third straight year, gaining 4.3 per cent to a record 7.49 million tonnes, according to the US Department of Agriculture. Consumption will expand 0.2 per cent to 56.96 million tonnes, a six-year high.
US Market
Shipments to the US will benefit from the highest prices on record. Drought and high feed costs forced ranchers to cut their herds to the smallest since 1952, sending domestic beef output to a 20-year low in 2014, USDA data show. Cattle futures on the Chicago Mercantile Exchange jumped 16 per cent since the end of June and touched $1.432 a pound yesterday, the highest since the contract started trading in 1964. Prices traded at $1.42 by 10:45 a.m. in Singapore today.
Retail US ground-beef averaged $3.46 a pound in December, after climbing in September to $3.502, the highest since at least 1984, the latest data from the Bureau of Labor Statistics show. Wholesale prices are up 19 per cent this month to $2.4073 a pound yesterday, the highest since at least 2004.
The tight supply “puts a lot of pressure on imports for fast-food grinding beef,” said Brett Stuart, chief executive officer of meat researcher Global AgriTrends, which is based in Denver. While demand for Australian beef is expanding, other countries, especially China, also increased their appetite for imports, he said in a telephone interview. That means prices will rise, and “beef will go to the highest bidder,” he said.
Brazilian Beef
Price gains may be tempered by increasing sales from Brazil, the world’s largest beef exporter. The country is set to supply 1.94 million tonnes of the meat to world markets this year, 7.8 per cent more than in 2013 and the most in seven years, the US government estimates.
Brazil’s beef output will increase by 3.1 per cent to an all-time high of 9.9 million tonnes, USDA data show. Above-average inflation and a slowing economy may curb consumption and boost exports, helped by a weakening currency, according to Paul Deane, an analyst at Australia & New Zealand Banking Group Ltd. in Melbourne.
Total shipments from Brazil, Argentina and Uruguay will rise 17 per cent this year, with the bulk of the increase coming from Brazil, the bank said in a January 6 report.
Weaker Currency
Australian exporters may have an advantage after the nation’s currency plunged 14 per cent against the US dollar in 2013. The Australian dollar slipped to a three-year low of 87.57 US cents on January 20, compared with last year’s high of $1.0599 on January 10, 2013.
“Australia’s not that competitive on the global meat market when the dollar is above parity,” said Troy Setter, the chief operating officer at Australian Agricultural Co. (AAC), which has more than 600,000 head of cattle on land exceeding 7.2 million hectares (27,800 square miles). The weaker currency “is really helpful” for exports, he said in an interview from Brisbane.
Rising shipments to the US and China will more than offset a decline in sales to Japan, the country’s largest market, the Australian Bureau of Agricultural and Resource Economics and Sciences said in a December 10 report. Exports to Japan may drop 6.4 per cent to 280,000 tonnes, the lowest in about a decade, as US competition expands after the Asian nation eased mad cow-related curbs, the bureau said.
More Demand
Shipments to China will increase in 2014 as the world’s second-largest economy consumes the most beef ever, according to the USDA. Imports will account for 8 per cent of domestic beef consumption in the 12 months through June, up from 2 per cent a year earlier, according to Abares. Imports from the US and Brazil remain banned on concerns over mad cow disease, it says.
Expanding overseas demand will benefit Australian shippers such as Sao Paulo-based JBS and Minneapolis-based Cargill. JBS Australia has 11 meat processing plants with access to ports and is the largest feedlot operator with six locations, according to its website. Teys Australia, Cargill’s joint venture, is the second-biggest meat processor and exporter, its website says.
Cattle farmers are still culling and feed costs are rising with a 23 per cent increase in sorghum in the past two months.
Forecasters aren’t sure if the drought will ease or get worse. The chances that the period from February to April will be wetter or drier than normal are roughly equal, the Bureau of Meteorology said January 22 on its website.
“We still haven’t received any significant rain,” Abel Smith said from Adelaide, South Australia. “So we’re going cautiously and reducing numbers as we go.”
