Omicron adds to processors’ pain

The recent trading environment has been difficult for the nation’s red meat processors, with high livestock prices leading to incredibly tight processing margins.

Indeed, for beef processors, the Thomas Elder Markets theoretical processing margin model highlighted that the 2021 season returned average annual losses on cattle processed at $326 per head.

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.

Correlation analysis between annual Australian cattle slaughter volumes and annual average beef processor margins since the early 2000s shows that slaughter levels are a reasonably good predictor for how beef processors will manage the season.

The correlation coefficient sits at 0.77, suggesting a strong inter-relationship between the two data sets.

Annual cattle slaughter was 6 million head for 2021, the lowest in more than 35 years, and the tight supply scenario has pushed cattle prices to record highs and beef processor margin losses to extreme levels.

Meat and Livestock Australia is 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 help margins start to normalise and the model may start to record a profit.

The rapid spread of the Omicron variant of COVID-19 has brought further workforce constraints in the nation’s processing sector, with some abattoirs reporting staff absences of between 30 per cent and 50 per cent.

The impact of the virus’s spread within the meat processing sector has been keenly felt across the east coast, with significantly reduced slaughter volumes being seen since the start of 2022.

Not so quiet on western front

In Western Australia, however, the combination of tight border policy and (comparatively) effective control of the spread of Omicron has resulted in limited disruption to the meat processing volumes.

Analysis of average processing volumes for sheep/lamb and cattle (east coast figures only available) during January since 2019 show that volumes have been getting tighter and low herd and flock numbers reduce the availability of stock and the favourable climatic conditions encourage herd and flock rebuild.

East coast sheep and lamb slaughter averaged more than 513,000 head per week in January 2019, easing to 442,000 head in 2020 and 342,000 head in 2021.

The impact of Omicron in January 2022 meant east coast sheep and lamb slaughter fell a further 18 per cent from January 2021 levels to record 280,000 head processed, on average per week.

It has been a similar picture for east coast cattle.

In January 2019, 134,000 head of cattle were processed on average per week, reducing to 111,000 in 2020.

The strong herd rebuild intent in 2021 led to an average weekly cattle slaughter dip in January dip to 67,000 head.

In January 2022 east coast cattle slaughter volumes dropped a further 32 per cent to record an average weekly cull of just 45,000 head.

In WA, there were similar falls in slaughter volumes for sheep and lamb from January 2019 to January 2020, with processing levels reducing from 90,000 head per week to 69,000, reflective of the tight supply scenario playing out nationally.

In 2021, average weekly WA sheep and lamb slaughter during January sat at 66,000 head, and in 2022 volumes are just 3 per cent down, coming in at just under 65,000 head.

While the unexpected extension to border closures in WA announced last week caused consternation in some circles, the state’s meat processors are probably thankful it is keeping the spread of Omicron away as it’s already hard enough to source and retain experienced abattoir staff in the current environment.

• Matt Dalgleish is a manager of commodity market insights at Thomas Elder Markets (TEM)