Feedlots to remain influential for young cattle in 2016 - Discussion piece

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Survey results for September quarter cattle on feed will be released over the coming weeks and it is more than likely the figures will again be upwards of 900,000 head.

However, looking beyond September and through to the end of next year, the question that people will be asking – is how much longer can Australian feedlots remain at near capacity? Especially under the assumption of tight cattle availability going forward.

In drawing a conclusion, a number of factors need to be taken into consideration.

• First and foremost is the global demand for grain fed beef. This year alone, Australian grain fed beef exports have enjoyed significant growth and are at 170,785 tonnes swt after the first eight months, up 8% year-on-year and the highest volume on record for the period.
• The continuous weakening of the A$ is working in Australia’s favour, globally. It has reduced from 81US¢ at the beginning of 2015 to approximately 70US¢ at present, and is projected – by Business Monitor International (BMI) – to finish 2016 at 60US¢.
• The ongoing reductions in tariffs on Australian beef into the largest grain fed beef export destinations, Japan and Korea. Exports to these two markets have also been supported by reduced production from our largest competitor, the US, in the wake of significant herd liquidation. Furthermore, progressive growth in grain fed beef shipments to the EU continues to be recorded, a situation that will only change if the US is successful in its efforts to terminate the current high quality grain fed quota and replace it with an alternative (which is inferior from Australia’s perspective).  
• Finally, the Australian domestic market will continue to provide a strong foundation for grain fed beef demand, despite a forecast year-on-year decline in utilisation next year.

Illustrating the strength of the grain fed beef market this year has been the increase in the Queensland 100-day grainfed steer (300-320kg cwt) indicator, which averaged 554¢/kg cwt this week, up 24% from the beginning of the year.

Moving on, to two of the key feedlot input costs, grain and feeder cattle.

Feed grain prices have been trending down over the course of the year, with indicative feed wheat prices declining from $312/tonne (delivered to Sydney), down to $279/tonne last week.

Given world feed grain demand is largely influenced by the US corn crop – which is forecast by the United States Department of Agriculture (USDA) to be the second largest crop ever for 2016, at 13.585 billion bushels – a marked increase in Australian feed grain prices is unlikely over the coming year.

The only immediate and likely ongoing pressure for feedlots will be the price of feeder cattle. This year alone, the eastern states domestic paddock feeder steer indicator (280-350kg) has increased 51% from the close of last year’s quotes, to 307¢/kg lwt this week. Considering the demand for young cattle has been largely driven by feedlot demand, rather than any significant interest from restockers, there appears to be more upside price potential in that domain – especially when a widespread break in drought conditions occurs.

One further potential reason for feedlot demand to remain strong next year is the opportunity for greater beef production to be achieved through lot feeding – rather than grass finishing. This will act to offset part of the decline in cattle slaughter predicted for next year.

Overall, of the three main factors impacting feedlot margins, two are likely to be working in the feedlots favour over the coming year, namely the demand for grain fed beef and feed grain prices. The greatest challenge will be securing feeder cattle due to increased competition for diminishing supplies and ensuring finished cattle prices (a reflection of beef prices) can offset higher feeder cattle prices.

Taking all this into consideration, numbers on feed for 2016 are expected to commence above the five-year average of 800,000 head, before edging closer to that figure as the year progresses. Results from the most recent survey (June 2015 quarter) indicated there were 956,000 head on feed.

The demand for young cattle during 2016 by lot feeders is likely to remain strong and will more than likely be boosted when widespread restocker interest is ignited. The bottom line for cattle producers is to keep a close eye on the grain fed over-the-hooks indicators and how much they’re moving, relative to feeder cattle prices, and continue to monitor feed grain prices.

Ben Thomas