Australian cattle industry projections mid year update

Tim McRae – Economist, International Markets and Economic Services10th August 2009

A tumultuous past 12 months

• The global economic and financial environment got very ugly, very quickly - recessions in US, Japan, Europe…and almost Australia

• Massive currency fluctuations…the A$ went from 98.5US¢ (July 08), to 61.2US¢ (Oct 08) and then back to 84.5US¢ (Aug 09).

• Demand for beef was altered in almost all markets, with consumers trading down purchases towards cheaper beef cuts and items…strong demand in fast food sector.

• Very difficult beef trading conditions for Australian exporters, compounded by the plunge in hide and co-product returns.

• High input costs subsided – grain, finance, fuel etc…

•Floods in the north, drought in the south…but overall an improvement in conditions for the cattle industry.

Changes from January projections

Given these changes in the supply and demand landscape, changes from the January projections include…

• Contraction in beef and veal exports for 2009 – back 4% to 950,000 tonnes swt

• Cattle slaughter revised back 3%, or 250,000 head, as producers retain cattle

• Average carcase weights revised 3kg lower, to 270kg/head

But medium/long term outlook remain relatively unaltered …

• Australian herd expand toward 30 million head

• Export demand to recover from 2010 onwards

• Global beef demand/supply balance to tighten, lifting prices

Economic growth, 2009 a shocker…but things to improve

Source: International Monetary Fund, World Economic Update - July 2009

World US EU Japan UK CIS China India ASEAN-5

0

5

10

15

-5

-10

year-on-year % change

2007 2008 2009e 2010f

e = estimate f = forecast

A$ plummets…but then bounces back

Source: RBA

2000 2001 2002 2003 2004 2005 2006 2007 2008 20090.4

0.5

0.6

0.7

0.8

0.9

1

1.1A$/US$

40

50

60

70

80

90

100

110A$/Yen

A$/US$ A$/Yen

Returns* from co-products fall

Source: MLA's NLRS & Kurrajong Meat Technology

2008 2009 2008 2009 2008 20090

50

100

150

200

250

300A$/head

hides

tallow

meat meal

offals

grassfed Japan steer grain fed steer US cow

* June average

Potential return

But producers have seen a fall in costs

Source: ABARE

98 99 00 01 02 03 04 05 06 07 08 09s 10f

year ending June

50

100

150

200

250

300Index 1997-98 = 100

fodder and feedstuff prices

fertiliser price

store and breeding stock

fuel and lubricant prices

s = subject to revisionf = forecast

Australian saleyard cattle prices have improved in the past 3 months - EYCI

Source: NLRS

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec250

300

350

400A¢/kg cwt

2009

2008

2004-08 average

1999-03 average

Lower costs boost farm cash incomes

Source: ABARE

79 81 83 85 87 89 91 93 95 97 99 01 03 05 07 09e0

50

100

150

200$'000 (2008-09 dollars)

northern southern

e = estimate

Not a bad past 12 months…especially in northern Australia

Good past 3 months…but much more needed in southern Australia

Australian cattle herd to expand towards 30 million head

Source: ABS, MLA forecasts

93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09f 10f 11f 12f 13f

As at 30 June, as at 31 March up until 1999

16

18

20

22

24

26

28

30

32million head

f = forecasts

Record proportion of female cattle to underpin herd growth

Source: ABS

70 75 80 85 90 95 00 05 08

As at 30 June, as at 31 March up until 1999

8

10

12

14

16million head

30

35

40

45

50

55

60 female % of national herd

beef cows and heifers one year and older

percentage of national beef herd

Australian herd continues to move north

Source: ABS, MLA forecast

95 96 97 98 99 00 01census

02 03 04 05 06census

07 08 09f 10f 11f 12f 13f

As at 30 June, as at 31 March up until 1999

10

13

16

19million head

Qld, NT & WA

NSW, Vic, SA & Tas

f = forecasts

forecast

Australian cattle turnoff to recover in 2010

Source: ABS, MLA forecasts

91 93 95 97 99 01 03 05 07 09f 11f 13f0

1

2

3

4

5million head

male cattle female cattle live export

f = forecasts

forecast

Australian beef and veal production to steadily rise

Source: ABS, MLA forecasts

91 93 95 97 99 01 03 05 07 09f 11f 13f0

1

2

3million tonnes cwt

0

50

100

150

200

250

300

350carcase weight kg/head

beef & veal production carcase weights

f = forecasts

Australian cattle on feed numbers to slowly recover

Source: ALFA, MLA

M J S DM J S DM J S DM J S DM J S DM J S DM J S DM J S DM J S DM J00 01 02 03 04 05 06 07 08 09

250

500

750

1,000'000 head

Beef exports to expand from 2010 onwards

Source: DAFF, ABS, MLA forecasts

91 93 95 97 99 01 03 05 07 09f 11f 13f0

200

400

600

800

1,000

1,200'000 tonnes swt

50

55

60

65

70% of production

exports % production

f = forecasts

Australian beef exports to Japan to increase 3% in 2010

Source: DAFF volume, ABS value, MLA forecasts

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09f10f0

100

200

300

400

500'000 tonnes swt

0

0.5

1

1.5

2

2.5A$ billion

exports value

f = forecast

Export prices to Japan fail to benefit from lower A$ in first half of 2009

, Source: RBA, MLA

J F M A M J J A S O N D J F M A M J J0.8

1

1.2

1.4

1.6 US$/A$

400

500

600

700

800A¢/kg FOB

US$/A$

chilled grassfed fullset

chilled shortfed fullset

2008 2009

Grainfed exports and prices to Japan

Source: MLA, DAFF

2005 2006 2007 2008 20090

4

8

12

16

20

24'000 tonnes swt

300

400

500

600

700

800

900

1000A¢/kg FAS

grainfed exports

chilled shortfed fullset price

Australian beef exports to Korea to face increase competition

Source: DAFF volume, ABS value, MLA forecasts

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09f10f0

20

40

60

80

100

120

140

160'000 tonnes swt

0

200

400

600

800

1000A$ million

exports value

f = forecast

US to increase Korea presence in 2010

Source: KOTIS, MLA estimates

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09f 10f0

50

100

150

200

250

300

350'000 tonnes swt

Australia US other

f = forecast

Australian beef exports to US to recover 13% in 2010

Source: DAFF volume, ABS value, MLA forecasts

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 0809f10f0

100

200

300

400

500'000 tonnes swt

0

0.5

1

1.5

2A$ billion

exports value

f = forecast

US cattle herd declining, with production falling

Source: USDA, CattleFax projections

81 83 85 87 89 91 93 95 97 99 01 03 05 07 09f 11f

As at 1 January

80

90

100

110

120million head

f = forecast

Australian exports to Indonesia a highlight…

92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09f 10f0

10

20

30

40

50'000 tonnes swt

0

20

40

60

80

100

120A$ million

volume value

Source: DAFF volume, ABS value, MLA f = forecast

Restrained exports to Russia … 2008 was “out of the box”

98 99 00 01 02 03 04 05 06 07 08 09f 10f0

25

50

75'000 tonnes swt

0

50

100

150

200

250

300

350A$ million

Source: DAFF volume, ABS value, MLA f = forecast

Australian beef exports to China and Hong Kong to record levels

92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09f 10f0

2

4

6

8

10

12

14'000 tonnes swt

China

Hong Kong

Source: DAFF, MLA f = forecast

Australian beef exports to Middle East to consolidate growth

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09f 10f0

5

10

15

20'000 tonnes swt

Source: DAFF, MLA f = forecast

Australian beef consumption to decline

Source: MLA from ABS production and DAFF trade data, ABARE

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09f 10f 11f 12f 13f500

550

600

650

700

750

800'000 tonnes cwt

600

800

1,000

1,200

1,400

1,600

1,800A¢/kg

beef retail price beef consumption

f = forecasts

Australian live cattle export to register steady growth

Source: ABS, MLA forecasts

91 93 95 97 99 01 03 05 07 09f 11f 13f0

200

400

600

800

1,000

1,200'000 head

0

100

200

300

400

500

600

700$A million

numbers value

f = forecasts

Indonesia will continue to underpin cattle shipments

Source: ABS, MLA forecasts

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06 07 08 09f10f0

100

200

300

400

500

600

700'000 head

0

100

200

300

400

500$A million

numbers value

f = forecasts

Beef and cattle industry overview“Exporters are currently grappling with tight livestock supplies, higher Australian dollar,

weak co-product prices and low import prices. It probably won’t be until 2010 that exports will start to really gather steam. Over the medium to long term, Australia’s slowly expanding beef production is forecast to be met by rising global demand, especially as economic conditions improve in Australia’s major beef markets,”

Through to 2013:

• Further herd growth, underpinned by stronger prices and profitability

• Feedlot industry to steadily recover, reaching record numbers in late 2011

• Beef and veal exports to exceed 1 million tonnes swt in 2010

• Live cattle exports to resume growth in 2010, reaching 850,000 head

However much depends upon:

• Speed of economic recovery – US, Japan, Korea, Australia

• Value of the A$

• Seasonal factors