MORE beef processing cutbacks and shutdowns of the ilk of the just-closed Manildra Cootamundra plant look certain given how tightly squeezed profit margins currently are.
Tough export conditions and the local cattle supply shortage are conspiring to deliver trading conditions that will be very difficult to ride out for those lacking large scale efficiencies.
Processors are quoting losses in excess of $200 per head at the moment and market analysts have forecast an annual average negative margin of $70/head for the 2017 season.
Part-time kills are now commonplace, extended shutdowns have been announced at several locations and Manildra’s decision to close came with a statement it could no longer maintain a viable business in the current environment.
Processors were certainly well aware of the looming cattle supply shortage ahead of time, and had a period of very high profit margin times in the lead-up.
However, the extent of the disconnect between beef returns on the global market and the costs of putting together a kill, and the length of time that disconnect has drawn on for, was perhaps underestimated.
Throw into the mix the accumulation of pressure from “big ticket items’ the sector has long been pushing governments to act on, such as regulatory burden, non-tariff trade barriers and increasing energy costs, and you have an extremely fragile landscape for beef processing.
Market analyst Mecardo’s theoretical processor cut-out margin model shows the 2016 season came in at an average loss of $59 a head and things have turned even more miserable since the start of 2017.
The January figure was a $102 per head loss and the forecast for the year is $70.
In the peaks of the cattle sell-off in 2014, the Mecardo model was showing a profit of $299 a head.
Analyst Matt Dalgleish said processing was very much a 20-year game.
“There is money to be made but clearly there has to be a long term strategy and deep pockets,” he said.
Asked about the long term implications of abattoirs closing their doors in 2017, Mr Dalgleish said other bigger players would likely pick up the slack when times turn.
It did, however, speak to the importance of broadening markets, encouraging diversity and constantly looking to open new markets and build in new efficiencies, he said.
Australian Meat Industry Council chairman Lachie Hart said the sector had never before in his time experienced more difficult circumstances.
High cattle prices were good for the industry and couldn’t be criticised, he said.
“It’s the timing, with increased competition from American, both north and south, competitors and the backdrop of those issues that need to be addressed,” he said.
Research commissioned by the processing sector has determined non-tariff trade barriers are having a $2.35b impact alone.
“Rising energy costs are also an enormous burden, with one of our largest processors citing an increase of $20m in recent times in this area,” Mr Hart said.
Industry rhetoric needed to change, he said.
Political bickering about membership of peak industry bodies and mistrust between producers and processors needed to be replaced with a focus on breaking down trade barriers and reducing unnecessary costs, he said.
“These are the things that will reward the supply chain with better sustainability in the long run,” Mr Hart said.