Remember, it’s a model

Livestock | 29th March 2022 | By Matt Dalgleish

The Snapshot

  • Given the many assumptions required to build the model, this should not be seen as a whole of industry model, but rather a reflection of an average industry participant.
  • February 2022 has seen the monthly average margin narrow from a loss of $345 per head in January to a loss of $272 per head of cattle processed.
  • The average annual margin for 2022 currently sits at a loss of $308 per head.
  • Annual average margins are anticipated to move into the $150 per head loss region as the year progresses.

The Detail

Its been some time since we covered the beef processor margin model at EP3, but before we dive into the February figures we though it prudent to remind the subscribers about the model.

In March 2019 the Australian Meat Processor Corporation (AMPC) released a report on their representative beef processor model. The model was built to “gain insight into the drivers of economic performance and sustainability in the red meat processing industry”.

The AMPC processor model was designed to represent a theoretical single species cattle plant, processing a mixture of grass- and grain-fed steers. The AMPC model was focused on the time period between 2008 to 2018.

AMPC were  keen to outline that “given the many assumptions required to build the model, this should not be seen as a whole of industry model, but rather a reflection of an average industry participant. Due to the diversity of plant size, operational processes, and supply chain focus across the red meat processing industry, individual processors will certainly vary from the modelled results; however, the model provides an indicator of the broad industry trend.”

Episode3 wanted to continue reporting on the trend in profitability of the beef processing sector as we had assisted AMPC with the development of their model. Having experience building a previous processor margin model at another agricultural analysis firm we were able to construct a new model that was built on a similar basis to the AMPC model. The chart above highlights that both models have determined relatively similar profit outcomes during the 2008 to 2018 period.

February 2022 has seen the monthly average margin narrow from a loss of $345 per head in January to a loss of $272 per head of cattle processed. This is the best monthly result seen for the model since June 2021 and brings the average annual margin for 2022 to a loss of $308 per head.

Analysis of the annual average processor margin, according to the model, versus the annual Australian cattle slaughter volumes highlights a reasonably strong relationship between the two series.

An environment of low slaughter and tight cattle supplies corresponds to more difficult trading environments for the beef processor. This was particularly evident when the 2021 annual slaughter of just 6 million head pushed the model to its worst ever annual average loss of  $327 per head of cattle processed.

Annual slaughter forecast at 6.65 million head in 2022 suggests margins should begin to improve from the depths seen in 2021. As the line of best fit demonstrates annual average margins are anticipated to move into the $150 per head loss region as the year progresses.

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Tags

  • Processing
  • Margins
  • Modelling
  • Beef
  • Cattle