No relief in sight

The Detail

The EP3 theoretical beef processor margin model indicated improved margins for the last two months of the year after the horror October 2021, when losses per head slipped to their worst ever at $434*. A strong lift in beef export values helped reduce processor losses, despite a solid finish to the 2021 season for domestic beef cattle prices in Australia.

November 2021 saw processor margin losses reduce to $348 per head of animal processed, according to the model. The very strong finish for young cattle in December meant that margin losses widened slightly to finish at $357 per head. The annual average processor margin for the 2021 season came in a loss of $326 per head, over double the average annual losses recorded in 2020 of $130 per head.

The long term pattern for monthly processor margins shows that levels remain beyond the extreme loss boundary, despite the improved finish to the year. Historically, the previous toughest trading environment for beef processors was the 2016 and 2017 herd rebuild phase when annual average margins recorded a loss of $129 and $121 per head, respectively.

However, given the increased cattle values over the last two decades a more accurate measure of how extreme current per head processor losses are at present would be to compare them in percentage terms to the value of cattle. Current losses, as a proportion of the heavy steer cwt price, have crept back inside the extreme range with the ratio sitting at -42% for December 2021.

As outlined earlier, the annual average beef processor margin loss for 2021 came in at $326 per head. A scatter plot of annual average margins versus the annual cattle slaughter volumes shows the strong correlation between processor losses/profits and the variation in cattle supply. Cattle slaughter is forecast to be 6 million head for 2021, the lowest in more than 35 years, and the tight scenario has pushed processor margin losses to extreme levels.

Meat and Livestock Australia (MLA) are anticipating cattle slaughter at 6.65 million head in 2022. Based on the previous relationship between processor margins and cattle slaughter this would suggest annual average processor losses this year to be around $150 per head. Cattle slaughter closer to the 7.5 million head area in 2023 should see margins begin to normalise and the model may start to record a profit.

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*Note – The EP3 processor margin model can be adjusted retrospectively as updated/new input data is made available.