Strong cattle prices drive cost of production

On the back on historically high cattle prices, ABARES estimates that the cost of Australian beef production for the three year period ending 2015-16 has risen as more producers utilise the increased cash flow on inputs. Indeed, northern and southern Australian cost of production estimates were relatively similar, equating to 193c and 199c/kg of beef produced, respectively.

The three year period encompassed the rise of the Australian cattle market to record highs, driven by reduced beef production in the US which lifted global demand. Average cattle prices received by producers increased from 146¢ in 2013-14 to 249¢ in 2015-16 in southern Australia, while northern Australia was reported to increase from 153¢ to 253¢/kg lwt.

This is a direct contrast to the previous three year period (2008-09 to 2012-13), which – due to the depressed cattle market at the time – saw cost of production remain low as producers reduced expenditure to maintain margins.

Total costs increased particularly in 2015-16, with southern expenditure averaging 221¢/kg of beef produced while northern production systems reached 210¢/kg.

Unpaid labour remains the largest cost incurred by producers, particularly in southern regions where it accounts for almost 40¢/kg of costs. Meanwhile, as a result of the rising cost of cattle, purchases and transfers represented the second largest cost for both northern and southern Australian enterprises.

Finance costs eased over the reporting period, primarily as a result of decreased interest rates but also due to some reduction in average farm debt per farm, particularly in northern Australia.

Meanwhile, expenditure on inputs such as repairs and maintenance and fertiliser increased. Northern producers spent 18% more on repairs and maintenance in 2015-16 than the previous year, while southern producers spent 24% more in real terms. Similarly, both northern and southern regions saw a 13% greater expenditure on fertiliser. The outlay for fodder also increased, particularly in the south, where costs increased by 31% from 2014-15 to 2015-16, the result of deteriorating seasonal conditions.

ABARES also identified the economy of scale gained by larger enterprises. Over the three year period ending 2015-16, producers managing smaller sized herds (less than 400 head) typically had a higher cost of production than their larger counterparts. This was due to smaller herd sizes averaging higher overheads, higher cash costs, greater proportion of unpaid labour and included a greater occurrence of using off-farm income to help meet living expenses.

During the three year period ending 2015-16, southern Australian farms with;

• 100-200 head of cattle averaged a cost of production of 267¢/kg lwt
• 200-400 head averaged a cost of production of 225¢/kg lwt
• 400-800 head averaged a cost of production of 178¢/kg lwt
• More than 800 head averaged a cost of production of 165¢/kg lwt

On the other hand, drier conditions in northern Australia which hampered producers ability to turn-off finished cattle, saw larger operations (more than 5,400 head) receive a slightly lower price for cattle sold. This was offset by the larger management areas and greater average herd size to that of southern farms, which ABARES found to benefit from economy of scale.

In northern Australia, farms with;

• 100-400 head – cost of production equated to 335¢/kg lwt
• 400-1,600 head averaged a cost of production of 232¢/kg lwt
• 1,600-5,400 head averaged a cost of production of 186¢/kg lwt
• More than 5,400 head averaged a cost of production of 146¢/kg lwt

On a state basis, cost of production partially reflected the distribution of herd size. Victoria has the highest proportion of small herds and cost of production averaged 223¢/kg lwt – the highest of the states. In contrast, the Northern Territory averaged the lowest cost of production on 138¢/kg lwt. This reflects the large herd and farm sizes in the state and was influenced by the lower cost involved in producing cattle to live export which are typically younger and lighter.

Cost of production for;

• NSW averaged 203¢/kg lwt
• Victoria settled on 223¢/kg lwt
• Queensland equated to 202¢/kg lwt
• SA reached 172¢/kg lwt
• WA averaged 167¢/kg lwt
• Tasmania equated to 175¢/kg lwt
• NT averaged 138¢/kg lwt

Cost of production in Queensland was relatively high, due to a high proportion of smaller farms as well as large enterprises. It also reflects the larger expenditure on fodder that arose from poor seasonal conditions during the three year period. Further contributing to the higher production cost is the higher level of debt associated with many farms. Interestingly, financial costs accounted for 10% of production costs – the highest amongst the states.

Despite increasing expenditure on costs, the rise in beef cattle prices was enough to offset costs, meaning that operating margins increased. In 2015-16, northern Australia averaged a 49¢/kg lwt margin while southern Australian margins equated to 31¢/kg lwt.

For more information please click here to view the ABARES Cost of Production report.