By Matt Dalgleish | Source: MLA, ABS, Steiner, ALIC, Trade, Mecardo.
Updated monthly processor margin calculations from the Mecardo cut-out model indicate that processor margins have slipped into negative territory for the first time this season, registering an $18 per head loss for the month of November. Despite the weak finish to the year average margins across the 2018 season are still looking healthy, which is to be expected during a herd liquidation phase.
Since July, a combination of falling beef export cut-out values, down 2.5%, and lower co-product values, off 5.5%, have reduced processor revenues over the last five months. Taking into account increased cattle prices, up 3% since July, this has resulted in downward pressure on margins over the past few months. The first negative monthly processor margin calculation since the start of 2018 has been recorded for November, coming in at an $18 loss per head of animal processed (Figure 1).
On an annual basis, the processor margin currently sits at an average of $90 profit per head processed. Robust margins are not surprising given the destocking that has been underway this season. During herd liquidation, it is common to see processor margins benefit as destocking allows processors to source cheaper input cattle. Australian Bureau of Statistics data for September shows that the female slaughter ratio trend since May has remained above the levels seen during the liquidation experienced during the 2014/15 seasons. At an annual average of 50.7% for 2018, the female slaughter ratio remains at levels consistent with herd liquidation (Figure 2).
Based on MLA annual slaughter estimates from the October revisions of the 2018 cattle outlook, we can expect to see close to 4 million head of female cattle slaughtered this season. There is a reasonably strong positive correlation between annual female slaughter levels and the annual average processor margin (Figure 3).
As female slaughter levels increase beyond 4 million head per annum, processor margins tend to expand above $100 profit per head. Similarly, as the female slaughter levels decline under 3.5 million head per year, the annual average processor margins shrink into negative territory.
Our previous updates on processor margins can be accessed on the links below:
Processor margins remain strong despite a mid-Winter dip - August update.
Can solid processor margins spark a rally in the EYCI? - September update.
September mourning for processor margins, or is it? - October update.
N.B – Input data to the Mecardo cutout model, such as beef export prices/cutout values and co-product prices, can be revised post reporting each month. These amendments to can sometimes see the previous monthly margin figures revised to factor in the input revisions.
* The Mecardo processor cut out margin slipped into negative territory for the first time this season with the November figure recording an $18 loss per head of beast processed.
* The annual average processor margin for 2018 remains healthy at $90 profit per head, despite the narrowing margins since the middle of the year.
* Healthy annual processor margins are not uncommon during herd liquidation phases.
What does this mean?
With the herd remaining in liquidation phase and female slaughter levels likely to finish the season near 4 million head, the annual average processor margin remains on track to complete 2018 in line with our original forecast (outlined in our August update) at around $100 per head.