By Matt Dalgleish | Source: MLA, Steiner, USDA, Mecardo, Trade
Average monthly processor margins have returned to the normal seasonal range during July after exhibiting extreme highs in May and June. The monthly processor margin for July remains in the black and above the seasonal July average at $81.50 per head of cattle processed. This suggests the dry times are continuing to benefit meat works.
The historic monthly processor margin pattern since 2000 demonstrates that in dry times the margin can reach extremely high levels. Indeed, during the last quarter of 2006 when nearly all of the Eastern half of Australia was suffering under below average or very much below average rainfall deciles, processor margins spiked to above $250 per head (Figure 1).
Similarly, the prolonged drought that impacted Queensland through the mid-2013 to mid-2015 seasons saw monthly margins average nearly $245 per head. Conversely, during wetter times like the 2016 season or the 2010/2011 period, the margin slipped into negative territory.
The move to a drier than normal climate over 2018 has seen the monthly processor margin pattern mimic the trend set as the climate became drier throughout the 2013 period (Figure 2). Both seasons started the first quarter of the year recording margins close to the average seasonal levels but then experienced a surge in margins during the second quarter, before narrowing into Winter.
The annual average margin for 2018 sits at $121 per head of beast processed. The annual average margin from January to July during 2013 was $105. However, the very dry finish to the 2013 season saw processor margins remain elevated and the annual average margin by the end of the 2013 season was $138 per head of cattle slaughtered.
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.
Key points
* The July processor margin sits at $81.50 and has recorded an annual average of $121 per head of cattle processed, so far, for the 2018 season.
* During the lead up to the last dry spell, annual average processor margins in 2013 reached $138 per head.
* The relationship between female slaughter levels and processor margins suggests that the annual average margin for 2018 will finish the season at around $100 per head.
What does this mean?
Prolonged dry conditions often see the herd begin liquidation, with breeding stock sent to slaughter. The subsequent decline in cattle prices as the herd is destocked can benefit processor margins, particularly if they can offload product offshore at good prices (as was the case in the 2013/15 turnoff).
The strong correlation between annual female slaughter and the annual average processor margin is highlighted in Figure 3. It suggests that if the dry conditions continue and the herd remains in liquidation phase the processor margin will end the 2018 season at an annual average of around $100 per head of cattle slaughtered.
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