Bloomberg News

Australia Drought Spurs Beef-Sales Boom on Herd Cut: Commodities

January 23, 2014

A drought in Australia, the world’s third-largest beef exporter, is fueling a surge in shipments as pastures dry up and ranchers shrink cattle herds to curb losses.

“We can’t keep them,” said Will Abel Smith, 49, the livestock marketing manager for S. Kidman & Co., which raises cattle on ranches mostly in Queensland and South Australia covering 110,000 square kilometers (42,471 square miles), or an area the size of the U.S. state of Tennessee. “We’re not in the position to feed cattle. If you try to bring hay in, it’d break you.”

Queensland state had its driest December since 1938, and demand for grain to replace parched grasslands sent sorghum futures up 71 percent since 2011 to a six-year high this week. Kidman, founded in 1899 by Abel Smith’s great-grandfather, Sir Sidney Kidman, cut its herd by 11 percent to 200,000 head last year, sending more animals to slaughterhouses as cattle prices tumbled 35 percent from a peak in December 2011.

While the drought squeezes profit for ranchers, the jump in cattle supplies is a boon to Australian operations of Cargill Inc. and JBS SA (JBSS3), the world’s largest beef producer. The government estimates beef exports will rise 7 percent to 1.09 million metric tons in the 12 months through June, including a 74 percent increase to China and an 11 percent jump in sales to the U.S., where the meat is used in McDonald’s Corp. (MCD:US) hamburgers and prices are the highest ever.

Dry Spell

The dry weather in Queensland, Australia’s largest cattle producer, emerged in 2013 after two years of wetter-than-normal weather. Almost 65 percent of the area is in drought after the fifth-driest August on record and the least December rainfall in 75 years, according to the Bureau of Meteorology.

“We’re already several weeks into the wet season and nothing much has happened,” said Blair Trewin, a bureau climatologist in Melbourne. “While there is certainly a window of opportunity for significant rain, it’s progressively narrowing.”

The loss of pastures normally used to feed cattle forced ranchers to buy more feed. Sorghum futures on the ASX Ltd. exchange in Sydney are up 18 percent since the end of November, reaching A$346.50 ($305.09) a ton on Jan. 20, the highest since 2007. The grain accounts for about 75 percent of the feed used in the state.

With costs rising, ranchers cut their herds. The number of cattle and calves slaughtered from July to October rose 16 percent from a year earlier, the biggest gain since 1997, according to Australian Bureau of Statistics data. The Eastern Young Cattle Indicator of sales across Queensland, New South Wales and Victoria shows prices tumbled to A$2.785 per kilogram yesterday, the lowest since December 2009.

More Exports

With more animals available, abattoirs will increase slaughter by 5.6 percent to 8.9 million head this year, the government estimates. That’s boosting beef supplies and incentives for record exports. Shipments to China will jump to an all-time high of 160,000 tons, while the U.S. purchases will reach a five-year high of 230,000 tons, the government said.

Demand for meat is increasing as world economic growth boosts incomes. The International Monetary Fund estimates the economy will expand 3.7 percent this year, up from 3 percent in 2013. Global beef imports will climb for a third straight year, gaining 4.3 percent to a record 7.49 million tons, according to the U.S. Department of Agriculture. Consumption will expand 0.2 percent to 56.96 million tons, a six-year high.

U.S. Market

Shipments to the U.S. will benefit from the highest prices on record. Drought and high feed costs forced ranchers to cut their herds to the smallest since 1952, sending domestic beef output to a 20-year low in 2014, USDA data show. Cattle futures on the Chicago Mercantile Exchange jumped 16 percent since the end of June and touched $1.432 a pound yesterday, the highest since the contract started trading in 1964. Prices fell 0.7 percent to $1.4085 today.

Retail U.S. ground-beef averaged $3.46 a pound in December, after climbing in September to $3.502, the highest since at least 1984, the latest data from the Bureau of Labor Statistics show. Wholesale prices are up 19 percent this month to $2.4073 a pound yesterday, the highest since at least 2004.

The tight supply “puts a lot of pressure on imports for fast-food grinding beef,” said Brett Stuart, chief executive officer of meat researcher Global AgriTrends, which is based in Denver. While demand for Australian beef is expanding, other countries, especially China, also increased their appetite for imports, he said in a telephone interview. That means prices will rise, and “beef will go to the highest bidder,” he said.

Brazilian Beef

Price gains may be tempered by increasing sales from Brazil, the world’s largest beef exporter. The country is set to supply 1.94 million tons of the meat to world markets this year, 7.8 percent more than in 2013 and the most in seven years, the U.S. government estimates.

Brazil’s beef output will increase by 3.1 percent to an all-time high of 9.9 million tons, USDA data show. Above-average inflation and a slowing economy may curb consumption and boost exports, helped by a weakening currency, according to Paul Deane, an analyst at Australia & New Zealand Banking Group Ltd. in Melbourne.

Total shipments from Brazil, Argentina and Uruguay will rise 17 percent this year, with the bulk of the increase coming from Brazil, the bank said in a Jan. 6 report.

Weaker Currency

Australian exporters may have an advantage after the nation’s currency plunged 14 percent against the U.S. dollar in 2013. The Australian dollar slipped to a three-year low of 87.57 U.S. cents on Jan. 20, compared with last year’s high of $1.0599 on Jan. 10, 2013.

“Australia’s not that competitive on the global meat market when the dollar is above parity,” said Troy Setter, the chief operating officer at Australian Agricultural Co. (AAC), which has more than 600,000 head of cattle on land exceeding 7.2 million hectares (27,800 square miles). The weaker currency “is really helpful” for exports, he said in an interview from Brisbane.

Rising shipments to the U.S. and China will more than offset a decline in sales to Japan, the country’s largest market, the Australian Bureau of Agricultural and Resource Economics and Sciences said in a Dec. 10 report. Exports to Japan may drop 6.4 percent to 280,000 tons, the lowest in about a decade, as U.S. competition expands after the Asian nation eased mad cow-related curbs, the bureau said.

More Demand

Shipments to China will increase in 2014 as the world’s second-largest economy consumes the most beef ever, according to the USDA. Imports will account for 8 percent of domestic beef consumption in the 12 months through June, up from 2 percent a year earlier, according to Abares. Imports from the U.S. and Brazil remain banned on concerns over mad cow disease, it says.

Expanding overseas demand will benefit Australian shippers such as Sao Paulo-based JBS and Minneapolis-based Cargill. JBS Australia has 11 meat processing plants with access to ports and is the largest feedlot operator with six locations, according to its website. Teys Australia, Cargill’s joint venture, is the second-biggest meat processor and exporter, its website says.

Cattle farmers are still culling and feed costs are rising with a 23 percent increase in sorghum in the past two months.

Forecasters aren’t sure if the drought will ease or get worse. The chances that the period from February to April will be wetter or drier than normal are roughly equal, the Bureau of Meteorology said Jan. 22 on its website.

“We still haven’t received any significant rain,” Abel Smith said from Adelaide, South Australia. “So we’re going cautiously and reducing numbers as we go.”

To contact the reporter on this story: Phoebe Sedgman in Melbourne at psedgman2@bloomberg.net

To contact the editor responsible for this story: James Poole at jpoole4@bloomberg.net


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