CURRENT beef prices might be as good as it gets, literally, if ABARES forecasts for generic beef prove accurate.
At Outlook 2015, ABARES predicted that there might be a slight increase in saleyard prices over the next couple of years, as locked-in herd declines take effect. But the lift will be slight, and prices will begin to fall again around 2018 as herd numbers begin to increase again.
On ABARES figures, even the current rise in saleyard prices only puts beef producers back on an equal footing with prices in 2005.
The Eastern Young Cattle Indicator (EYCI) tells a slightly different story. In the past 15 years, the EYCI has been above 400 cents a kilogram twice, in 2005 and 2011, and although it is now falling off record highs, at around 430c/kg it is still in record territory.
Beef exports, the engine of growth for the Australian beef industry, are forecast to flatline out to 2020. As well as cattle supply constraints imposed by Australia’s temperamental biophysical environment, beef exporters like Brazil and India are boosting supply to fill markets that might otherwise fund expansion.
ABARES' forecast, subject to all the usual caveats about weather and political surprises, paints a troubling picture for producers of generic beef - which is most Australian producers.
It suggests that beef may have reached a price ceiling, in which case producers who can’t build capital on current prices won’t be building it in the future either.
Beef's marginal gains
A sobering portrait of the generic beef business was presented in another Outlook 2015 session by Dave Brownhill, a farmer with extensive holdings on the Liverpool Plains and a history of innovation in the cropping sector.
Mr Brownhill screened an analysis of his 2013 Return on Assets Managed (ROAM) across his business. Dryland cropping returned slightly over four per cent, irrigation slightly over seven per cent - and his 1600-hectare beef enterprise, about 0.5 per cent.
Admittedly, 2013 was a tough drought year, Mr Brownhill later told Fairfax Media.
Nor has he put the same level of investment or thought into the beef enterprise as he bestows on the cropping businesses. He has a good manager rolling out a rotational grazing system, and invests in pasture improvement, but he hasn’t yet looked into intense levels of genetic improvement or other strategies.
He’s not uninterested in ramping up the beef operation, but in his business, investing in gains in beef production delivers marginal returns against investing in cropping.
ABARES senior economist Trish Gleeson, who reported the beef price and export outlook, also noted another challenge for the beef industry: it doesn’t scale.
In the cropping, dairy and vegetable sectors, expanding the business resulted in useful increases in rates of return.
For beef, the sweet spot seems to be a business turnover of $450,000 to $2 million. Increasing turnover past $2m, according to ABARES assessment, produces only marginal increases on what is already a comparatively low return.
That calculation of investment versus return is going to get increasingly critical for producers of generic beef. Which is why many beef producers, including the world’s largest, are investing in a different model.
Bragging rights vs economic worth
AACo chief executive Jason Strong told another Outlook session that being the oldest, largest beef cattle producer in the world meant nothing except for bragging rights - and he expressed a dim view of the economic worth of bragging rights.
“We talk a lot about our export volumes and tonnages, but we don’t talk as much about export volumes in terms of value,” Mr Strong said.
“Tonnes represents production, but value represents margin from our response to consumers.”
In recognition of this, AACo has moved from being primarily a pastoral company to being primarily a “beef company”.
That means deciding from the outset how an animal will be converted to beef and sold for maximum value, and then making sure every point through the supply chain supports that decision.
“If you buy a bull, you’ve made a market decision,” Mr Strong said.
“We’ve got seven different supply chains through which we market cattle, and we’ve made a fundamental decision about the market destination for each animal.”
“If you don’t have a way to link that decision to the value that comes from a consumer, then you are at the mercy of other peoples' decision making as far as your margins are concerned.”
Mr Strong’s call to action requires a degree of scale, and in this regard Trish Gleeson highlighted a structural challenge for the beef industry.
About 75pc of beef enterprises had receipts of less than $200,000 in 2012-13, and only about 10pc of enterprises had receipts greater than $450,000.
It’s not surprising that there is pain in the beef industry. The question remains whether any of the political solutions now being sought will do anything to alleviate it, or only a complete rebooting of the sector.