Live export volumes have started to pick up of late. Does this mean we are seeing a return to stronger demand?
The increase is not just driven by one market but across many.
After a relatively quiet first six months of the year, larger volumes through June, July and August have seen live export volumes for 2018 surpass 2017. The year-to-date exports for feeder and slaughter cattle at the end of August were 21 per cent higher than the same time last year.
In further positive news, this increase is not just driven by one market but across many, with year-to-date exports to Indonesia, Malaysia, and Vietnam up 15pc, 38pc and 36pc respectively. There have also been some larger volumes going to the Philippines.
In our largest market, Indonesia, the slaughter cattle price has remained relatively stable since the key festival periods of Ramadan, Lebaran and then Idul Adha on August 22. Prices have been between IDR42,000/kg and IDR44,000/kg (AUD3.90/kg and AUD4.08/kg).
Although demand is seasonally declining, supply is still limited and it is not expected to see this slaughter price decline for several months. This might provide some support for feedlot margins in Indonesia.
Although the normal dry season conditions support greater movement of Australian stock in the middle of the year and generally lead to a dip in prices, this year’s prices have been between 30 and 50 cents lower than last year. Prices went as low as AUD2.60/kg for light steers out of Darwin in May and June. This margin between Australian cattle prices and slaughter cattle prices in Indonesia may have just been enough to shoot a bit of life back into the market and see the export volumes lift.
There remains an uncertainty in the Indonesian market however. The government’s first audit of the 5:1 feeder/breeder ratio is due to occur in December 2018. Since the introduction of the regulation in October 2016, it is estimated that breeder imports into Indonesia have not even reached 20pc of the 500,000 feeders needed annually. Depending on the response to this audit, there remains the possibility that some lotfeeders may face penalties for not meeting the ratio.
Interestingly, despite beef retail prices trading in the historically high range above IDR113,000/kg (AUD10.50/kg) this year and reaching current levels of IDR119,000/kg, there has been little news on high beef prices. Perhaps the ambition to have beef available at IDR80,000/kg (AUD7.43/kg) is fading and margin pressure for feedlots with capped fed cattle prices might be eased.
The increased volumes of live export cattle over the past couple of months are expected to have filled up feedlots in Indonesia and we may well see a slight easing in demand before the traditional peak period lifts again before the end of the year. Dry conditions in eastern parts of Australia are expected to keep domestic prices under pressure, which should be reflected in live export prices. But despite this, prices remain good and perhaps this is the point at which things are in balance.
- Angus Gidley-Baird is a Rabobank senior analyst.