EXTREME opposing forces will dominate the Australian cattle market in 2020, with limited supply and strong local demand driving prices, but tempered by the global COVID-19 disruption, according to Rabobank’s Australian Beef Cattle Seasonal Outlook report.

The just-released report, titled The Battle of the Bulls versus Bears, outlined that despite the market being seriously tested by contracting global economic growth and COVID-19 containment measures, domestic forces would emerge victorious, keeping cattle prices high. 

Rabobank senior animal proteins analyst Angus Gidley-Baird said widespread rain had buoyed local restocking motivation among producers, reducing cattle sales and adding buying competition in an already supply-constrained market, with Australia’s cattle inventory reportedly at a 30-year low.

“We estimate the Australian cattle slaughter will fall 14 percent in 2020 to 7.29 million head, with a further decrease of two per cent in 2021,” Mr Gidley-Baird said.

Production was expected to drop to 2.1 million tonnes – among the lowest volumes seen in 15 years – with seasonally-driven increases in slaughter weights failing to offset reduced numbers.

While price-positive for graziers looking to sell livestock, Mr Gidley-Baird said low cattle availability would create challenges for producers, processors and feedlots, forced to manage their businesses with lower livestock numbers and high cattle prices.

Low slaughter numbers were also expected to contribute to a dramatic decline in Australian beef exports, forecast to drop 17 percent in 2020 to one million tonnes.

The significantly decreased cow slaughter – reducing Australia’s production of lean manufacturing beef – was also expected to result in a shift in volumes between export markets, Mr Gidley-Baird said.

“The US is a large market for lean manufacturing beef – 62 percent of exports to the US are manufacturing beef – and, all other things being equal, we expect exports to the US to drop in 2020,” he said. 

GLOBAL TRADE DOWN

Forecasts suggest a dramatic contraction in global economic growth in 2020 resulting from COVID-19 that will be worse than experienced in the global financial crisis (GFC) of 2009, with large economic declines expected in key Australian beef markets such as the US, China and Japan.

As a high-priced protein, Mr Gidley-Baird said, beef would feel the impact of reduced consumer expenditure, with overall beef demand – particularly for premium products sold through full-service restaurants – expected to decline.

Heavily reliant on foodservice trade, Australia’s beef exports would also be hit by COVID-19-led social restrictions, particularly in China, where more beef was eaten out of home.

“This disruption to food service and slowing economic conditions is expected to place downward pressure on Australia’s beef export prices, creating a difficult price squeeze for those in the beef supply chain managing high cattle prices in a softer global market,” Mr Gidley-Baird said.

At the same time, Mr Gidley-Baird said, a weaker Australian dollar, China’s reduced pork availability due to African swine fever, and the US-China trade deal were all positive offsetting factors.

DOMESTIC PRICE OUTLOOK POSITIVE

Despite countering global and domestic forces at play, the report forecasts the average annual Eastern Young Cattle Indicator (EYCI) to increase by 30 percent in 2020, to equal the annual average record set in 2016 at A$6.32 per kg.

Based on the last reported EYCI price of A$7.41/kg on March 19, this would mean prices were expected to ease but still remain strong over the remainder of the year.

However, given the forecast dramatic reduction in economic activity, uncertainty remained surrounding global beef price performance.

AUSTRALIAN REGIONAL OUTLOOK RECOVERING

With climatic conditions taking a toll on northern cattle herds in past seasons, breeding inventory across Queensland and Northern Territory was estimated at a 20-year low in late 2019.

Mr Gidley-Baird said breeding numbers in some areas of southern Queensland were expected to be 75 percent below normal, yet, despite tough conditions, well-priced sales had generated solid returns, placing producers in a strong position to start the recovery.

As such, the report tipped Queensland would emerge as the 'colosseum' of the Australian cattle recovery.

“Producers, feedlotters, processors and live exporters are all vying for a very small pool of cattle, and prices in Queensland may see some of the strongest gains across all states given this fierce competition,’ Mr Gidley-Baird said.

Breeding cattle numbers were also significantly down in central and northern New South Wales, while higher breeder numbers and calf availability out of the south of the state remained closer to normal.

He said Victorian producers remained well-positioned to capitalise on national restocking demand and higher prices, with most areas – east Gippsland excluded – maintaining close to normal breeding numbers.

In South Australia, Mr Gidley-Baird said, producers could also look forward to a positive year, despite 2019’s dry conditions and reduced cattle inventory in the northern pastoral country.

“There may be slightly softer demand by local producers for replacement cattle, compared to NSW and Queensland, but these markets will still provide strong buyer interest for South Australian producers looking to sell cattle,” he said.

Dry conditions across much of Western Australia’s cattle-producing regions had driven increased slaughter rates, and would curb 2020 production, Mr Gidley-Baird said, however upward price pressure would come from east coast demand.

In Tasmania, current breeding cattle on-farm numbers were similar to early 2019, reflective of normal levels, yet increased competition from the mainland could see the movement of cattle out of the state.

www.rabobank.com.au

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WHILE the OPEC oil fall out and coronavirus pandemic continue to impact global sugar markets, the Australian sector remains firm thanks to an increase in projected yields and strong export prospects, according to Rabobank's research.

However, Rabobank’s latest global Sugar Quarterly warns there will be new challenges to navigate amidst this new environment.

In its Q1 report, the agricultural banking specialist said widespread rain across key cane- growing regions – up to 800mm recorded in parts of north-east Australia – had strengthened yield prospects for the incoming 2020 crush, however warned the risk of cyclones and floods still loomed.

Rabobank commodity analyst Charles Clack said the robust yield trajectory also had the potential to mitigate a decreased growing area over recent years. 

“The domestic cane area fell by 11 percent from 2017 to 2019, with Rabobank forecasting a stabilisation in area in 2020,” Mr Clack said.

As such, assuming higher year-on-year (YOY) cane yields, the bank forecasts the 2020 Australian cane crop at 31 million tonnes, suggesting 4.2 million to 4.3 million tonnes in raw sugar production.

While comparative to the 4.2 million tonnes produced in 2019, Mr Clack said the figure still remained below the national five-year average.

He said the Australian industry could benefit from increased export opportunities, particularly in light of the severely-decreased 2019/20 Thai cane crop, down 40 per cent due to diminishing cane area and drought.

This, he said, was forecast to contribute to a 6.7 million tonne global supply deficit in 2019/20, before a return to a small surplus in 2020/21.

“Raw sugar output in Thailand is set to reach just 8.6 million tonnes, versus 15.4 million tonnes last years, allowing exports to reach just six to seven million tonnes and maintaining Thai premiums,” Mr Clack said.

“We expect demand for Australian sugar to improve in 2020 amid this cut in Thai supplies, particularly as Asian buyers such as Indonesia, who rely on Thai imports, look to origins further afield.”

FALL IN INDONESIAN PRODUCTION

Mr Clack said a drought-led fall in Indonesian 2019/20 production, coupled with a growing appetite, could also benefit both Australian and Indian exporters.

The significant depreciation of the Australian dollar – with the AUD/USD now standing at 0.59, down from 0.69 year to date – could also bolster export opportunities, Mr Clack said, and had so far, to an extent, insulated the local industry against the sharp fall in world sugar prices.

In February, Thailand’s low production drove ICE #11 Raw Sugar futures soaring above the 15USc/lb, yet Mr Clack said the coronavirus threat, followed by Russia abandoning its oil supply pact with OPEC and dragging down oil prices, in turn saw sugar prices fall below 11USc/lb.

OPEC REPERCUSSIONS

Mr Clack said Brazil was one key sugar producer severely impacted by the Russian and Saudi Arabian oil fall out, and could potentially shift a significant volume of production from ethanol to sugar.

Low gasoline pump prices in response to oil’s slump, coupled with a decreased demand for local fuel due to COVID-19 had resulted in Brazil’s ex-mill ethanol prices falling sharply.

“The bottom line is that millers’ ethanol revenues and margins in 2020 look very vulnerable in the face of weeks, if not months, of reduced demand plus the threat of persistently-low oil prices, and a corresponding price decrease,” he said.

The global sugar price would continue to take its lead from the oil market in the coming weeks, and Mr Clack said any average ethanol prices reaching above a sugar equivalent of 11USc/lb would encourage a swing towards sugar production over ethanol.

COVID-19 CHALLENGES

Further impacts of the coronavirus crisis on consumption were difficult to predict at this stage, Mr Clack said, with Rabobank’s initial expectations indicating a large absence of global consumption growth in 2019/20 as industries including foodservice see diminished demand prospects.

“In the EU, for example, we foresee very little sugar consumption growth, due in part to the outbreak but more so the downtrend in sugar demand,” he said.

“Interestingly, the flattening demand in the EU, and globally, may be minimised by the assumption that people tend to eat more sugary and processed foods during hard economic times.”

In China – where low acreage and yields cut 2019/20 production by up to nine percent year-on-year – the negative impacts of COVID-19 on logistics and labour, leading to a delayed planting, could further decrease 2020/21 output.

Logistics bottlenecks, particularly delays in ports and borders were also expected side-effects globally, but with a prioritisation by governments on the food and agri sector, Mr Clack said food supply chain disruptions should be minimised.

www.rabobank.com

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By Dan Hadley >>

AS AUSTRALIANS celebrate Australia Day this week and commemorate the arrival of the British First Fleet in 1788, the fallout of a vote in the United Kingdom sees offices in Brussels being packed, flags being taken down and Brits walking out of the European Union for good.

This is a week to watch and remember and the ‘British exit’ could mark a significant turning point for Australia.

Australia forms a very important part of the Commonwealth of Britain. The relationship we continue to share is an important one, historically, culturally and economically. 

Nonetheless, Australia’s relationship with the European Union (EU) is not strictly predicated on the actions of Great Britain.

The Brexit does represent a significant shift in geopolitical as well as economic forces throughout the European region and throughout the world.

Many Australians are left wondering if this shift will have a ripple affect all the way down into the southern hemisphere.

Packing up and rolling out

As of January 31, 2020, at 11pm GMT, Britain will no longer be a member of the EU. Australia will be required to work directly with Britain in everything it does, as opposed to working through EU agreements in place for member states.

This will be true for every country currently working through this avenue. British diplomats and officials engaged in the EU are quite literally packing their offices up, ready to fly home to new assignments and roles.

Australia’s relationship with the EU

Australia’s relationship has steadily improved with the EU over the years and as such Australia has benefitted from the largest negotiated agreement ever signed between Australia and the EU, commonly known as a framework agreement, that is set to lead to a free trade agreement (FTA).

Speculation amongst politicians and economists has led to the possibility that Britain’s exodus may serve to undermine the potential for an FTA.

This would represent two decades of relationship building between European countries and Australia tossed aside.

Going back over the last 20 years, Australia has seen strained diplomatic and political engagements with European member states and the Union itself.

These tensions largely centered on the EU’s Common Agricultural Policy. Ultimately, this policy almost completely excluded Australia’s primary agricultural goods following British entry into the EU.

Australia was, for want of better words, left out of the party. Years on, this scenario has changed and the opportunity for a Free Trade Agreement represents increased opportunity for Australian produce (largely seen as high in quality) to be sold into the European market.

Exports as a whole

Putting aside a roller coaster ride of political chess play, the EU has become one of Australia’s most important trade partners – second only to China.

Furthermore, the EU represents the largest partner in two-way services trade and foreign direct investment. Despite holding a distance and isolation disadvantage, with Australia being on the opposite side of the globe, strong negotiations and steady political relationship building have seen the door to party open wider.

 This political negotiation has been, in some degree, supported by Britain. From a purely economic point of view, Australia would prefer for Britain to retain its seat at the EU table and now loses an economical and political ally at the negotiation table.

It is conceivable that we may see delays or greater friction in attaining the FTA with the EU in the wake of the Brexit exodus.

On the whole however, the UK represents an important export market for Australia in the European region. The UK is also currently Australia’s eighth largest export market and represents 37 percent of Australia’s exports into Europe.

Conversely, Australia represents just under 2 percent of the UK’s export market. It will be vital for Australia to continue to foster good economic trade relationships with EU member states while simultaneously maintaining its long-standing relationship with Great Britain.

With all this in mind, it will be important to watch where Australia ranks when Brexit is complete, and the UK possesses the freedom to commence trade negotiations on its own terms.

Australia must continue to focus its attentions on the EU and not just the UK, to maintain export demand. The Australian Government has indicated on numerous occasions that it will continue to pursue strong relationships and agreements with Europe while not conflicting its ties with Britain.

Having said the above, it’s important to note that Australia holds its own bargaining power in this chess game of trade and economics. Australia represents a very attractive market for investment for both European and British businesses within (or seeking to enter) the greater Asia-Pacific economy.

Existing relationships built on bilateral agreements have resulted in the establishment of some 2,400 EU companies in Australia over recent years.

This landscape of investment is unlikely to alter much, if at all, as Brexit goes down. In terms of goods and services exports from Australia to Europe, we may see individual companies expanding directly into Europe as opposed to an often-used model of first entering the UK market before entering the Continental EU. 

Travel to Europe and the UK from Australia

Taking a more micro look at Aussie travellers enjoying European holidays is important, as many an Aussie enjoy the relaxed lifestyle in Spain, the wine of the South of France of the cafes of Italy.

The good news, in short, is that the Brexit won’t directly affect a holiday goer’s ability to work or travel within the UK or Europe. The same rules and regulations will apply.

Dual Australian/British citizens who travel to Europe, and have previously enjoyed the EU membership benefits of ease of travel through to the continent, will need to look at changes that remove such privileges moving forward.

Summary

This week represents an important part of Britain’s history but also represents a delicate time for Australia/EU relations.

The Australian Government must make every effort to preserve the important ties and agreements in place and currently under negotiation with the EU.

Important, too, is Australia’s relations with the UK. It should not be presumed that just because Australia is a member of the Commonwealth that no effort is required to maintain good economic trade and free flowing international exchanges with Britain.

Nonetheless, the vote has been taken, the date has been set and from tonight onwards, the Australian commerce sector will set its eyes on the 28 member Union becoming 27, as of 11pm Greenwich Mean Time. 

Dan Hadley is a British/Australian economist and business management consultant for JLB based in Adelaide, South Australia.