The landscape for Australian heavy steer pricing has evolved dramatically this year.
A slide in pricing for Australian heavy steer compared to its American equivalent, the US choice fed steer, has led to an unprecedented expansion in the discount price spread.
When converted to US cents a kilogram, the Australian heavy steer’s domestic price is trailing its American equivalent by an astounding US250 cents.
This disparity is roughly equivalent to a discount of nearly 400 cents when converted into Australian dollar terms.
A significant change is afoot in Australia’s cattle industry. The robust herd rebuild that was once the talk of the town seems to be nearing its conclusion.
The fervour of restocking purchases witnessed in prior years has notably dwindled. Producers, it seems, are bracing for less rainfall.
One of the primary metrics that can provide clarity on whether we’re in a herd-building or liquidation phase is the female slaughter ratio (FSR).
Essentially, the FSR evaluates the percentage of female cattle in the total cattle slaughter figures.
When this ratio exceeds 47 per cent, it indicates that not enough breeding cattle are being retained, signalling the beginning of herd liquidation.
On the contrary, if the FSR is below 47 per cent, it means we’re keeping enough breeding cattle to boost the herd size.
June quarter data in 2023 from the Australian Bureau of Statistics offers intriguing insights. The FSR for cattle has surpassed the critical 47 per cent mark, settling at 48 per cent.
This is a significant increase, the likes of which hasn’t been seen since the last quarter of 2020.
These figures hint that Australia might be transitioning to herd liquidation.
While the annual average FSR for 2023 is still at 45.2 per cent, which doesn’t indicate liquidation, the upward trend will likely push it into formal herd liquidation territory sometime during this year.
Contrastingly, the US is currently navigating its fourth consecutive year of herd liquidation. Historically, there’s a spike in US pricing towards the end of their liquidation cycle due to constricting supply.
This trend has propelled US cattle prices to unparalleled highs this year.
A deeper dive into the data reveals that the discount spread between Australian heavy steer and its US equivalent has broadened to an all-time high of nearly 62 per cent.
This surpasses the previous record of 59 per cent, set amidst the devastating drought from 2013 to 2015.
Traditionally, the average price differential between Australian and US heavy steer hovers around 28 per cent.
Therefore, the current levels are straying far from the norm. Such stark disparities are typically witnessed during Australian drought periods when domestic cattle slaughter volumes exceed 9 million annually.
However, 2023 projections estimate slaughter levels to be around 7 million, illustrating that the current price differences don’t mirror the domestic situation.
Looking at the US, the FSR statistics for 2023 have remained high, averaging above 52 per cent so far during 2023.
Last year, the average FSR in the US was 51.4 per cent, which was the previous record peak since data collection began in 1986.
These figures emphasise the persistent pressure to cull the herd in the US.
Predictions for 2023 indicate a 3 per cent shrinkage in the US cattle herd, decreasing from 92.1 million in 2022 to an estimated 89.3 million.
Such reduction results in lesser cattle supply and beef production, underpinning strong US cattle prices.
This has caused the price difference between Australian and American cattle to expand to levels typically observed during Australian droughts.
However, Australia isn’t currently grappling with a drought.
As mentioned above, the current annual price disparity in US cents per kilogram for this year closely approximates a discount of US250 cents.
Yet, based on existing correlations between cattle slaughter and price discounts between the two countries, the discount should ideally be around US50 cents.
This means that Australian beef exports are particularly competitive this year. The US is our main competitor into key beef exports markets such as Japan, South Korea and China.
So, the current wide price discount is favouring the Australian beef producer and makes our beef exports super competitive.
Additionally, the US is also a key destination for Australian beef exports. The US cattle cycle is likely to switch toward herd rebuild into the coming year, which means we will have the opportunity to export more Australian beef to the US as beef production volumes there begin to decline.
• Matt Dalgleish is co-founder and director of Episode 3 (EP3)