Friday, May 09, 2014

Australia's Northern Beef Industry - Maybe Unsustainable??

A recent analysis seems to be proposing that the northern Australian beef industry is unsustainable financially.

What it does not seem to say though, is that the analysis was focussed on the almost worst period in many years for the region - somewhat akin to the shock of the US stopping the purchase of northern beef in the mid 1970s, when a lot of properties went to the wall.  This period is the same as the dramatic drop in live cattle exports to Asia, especially Indonesia, a trade dramatically stopped by the government of Australia on animal cruelty grounds [arguable, at best].
NT brahman cattle for export

Since the conclusion of the report, prices and volumes have increased rapidly and are now at around A$2.30 per kg live and numbers are on track for maybe 800 000 head this year to Indonesia alone, and with new markets opening in Vietnam and China, although prices may be a bit lower.

It is all doom and gloom........BUT - a few critical points emerge from the study, one being that a herd size of 3000 head is seen as the minimum.

Read the summary below, and available on the MLA web site, as is the full report.

The Northern beef report - 2013 Northern beef situation analysis

Project code: 
Date commenced: 
June 26, 2013
End date: 
April 11, 2014
Project status: 


The 2013 Northern Beef Report comprehensively details the performance of the northern beef industry, by region, market and herd size over the 12 years since the start of the century. On average, the profits achieved over that time frame have been low, but not trending down. However the profitability of the top performers across the industry has been trending down over the period analysed. Profit after interest is decreasing, and is mostly negative, as a result of increasing debt with no increase in profits. The majority of Northern Beef producers are not economically sustainable as they are not able to fund present and future liabilities. There is wide variation in performance across the industry; this report clearly identifies what separates the top performers and what factors determine the profitability of a beef business. This report provides analysis of a wide range of measures, providing the means for individual producers to understand their herd and business performance and to improve by setting realistic targets.

Final report summary:

• This report analyses in detail the performance of the northern beef industry for the 12 years from 2001 to 2012. Incorporating quality private and public data, this report provides a comprehensive picture of the performance of the northern beef industry by region, herd size and market.
• This report incorporates the concept of economic sustainability; clear definitions are provided and used to assess industry performance.
• On the basis of these definitions, the data indicates that the majority of northern beef businesses are not economically sustainable at present. This is not a recent phenomenon, with recent average business performance, before financing, similar to longer term averages.
• Economic sustainability takes a longer term view; in the short term many beef businesses are struggling to survive with cash deficits accumulating.
• Whilst profits before financing are largely unchanged (on average over the 12 year period analysed), after financing, performance is deteriorating due to increased debt with no increase in profit.
• Income has decreased over the period analysed, mostly a function of declining beef prices rather than a decline in productivity (kg beef/AE). Costs have reduced as income has reduced, through belt tightening, and improved labour efficiency, resulting in little change in profits.
• Profitability of the top performers has declined over the longer term, suggesting that industry profitability is decreasing.
• Excluding land value changes, return on assets has averaged less than 1% across the industry over the last 3 and 12 years.
• Comparison of profitability is made between businesses that supply different markets, namely live export, slaughter and store. When the effect of scale is excluded, producers primarily supplying the slaughter market recorded the highest profit per adult equivalent, due primarily to better productivity.
• Both total numbers of cattle in the north and stocking rates have risen, what these stocking rates are relative to carrying capacity is unknown. The extent to which environmental capital is substituting for financial capital is also unknown.
• There is considerable variation in performance between beef businesses within the industry. The Top 25% performers (across all regions, herd sizes and markets) consistently outperform the average and have businesses more likely to be economically sustainable over the long term. This indicates that there are successful business models for producing beef in northern Australia.
• The superior performance of Top 25% producers can be attributed to:
o Higher income through better herd productivity.
o Lower operating expenses, largely through better labour efficiency.
• There is no evidence that superior long term performance can be attributed to a higher average beef price received, more rainfall or better quality land.
• Operating scale (number of adult equivalents under management) has a significant influence on business performance. Operating scale, along with labour efficiency, can explain most of the differences in overhead expenses per AE between businesses.
• Lack of operating scale is a major impediment for smaller beef businesses (less than 3,000 adult equivalents), but the benefits of additional scale for larger businesses are limited with herd profits decreasing as herd sizes become very large. There appears to be an optimal operating scale range, either side of which different factors can erode performance.
• It is paramount that smaller producers understand the implications of operating scale on their viability and how best to address to it. There is mounting financial pressure for smaller producers to make structural changes to their business.
• Efficient use of labour is a key finding amongst producers in the Top 25%. Labour costs and achieving a highly efficient use of on-farm labour is a challenge that the industry must understand and work towards.
• There is no evidence of expense increases over the period analysed, this is not to say that some input costs have not increased in real terms, but any increases have been absorbed and the overall cost structure of businesses has not increased.
• Differences in income explain more of the differences in profit between average and Top 25% performers than expenses. Nearly all differences in income per AE between herds are attributable to productivity differences.
• Nearly all productivity differences between herds can be attributed to the better performers achieving:
o Higher reproductive rates
o Lower mortality rates
o Heavier sale weights
• The findings of this report now make it possible to construct a very clear roadmap for economic sustainability for a northern beef business, embracing both location and target market. This roadmap provides clear guidelines on factors critical to income (productivity) and expenses (scale & labour efficiency).
• This analysis is consistent with other recent and more targeted studies of herd productivity (reproduction and mortality). This analysis also finds wide variation between businesses in these measures of herd productivity and report that improvements in herd productivity have a big influence on overall business performance.
• There is wide variation across the industry in what it costs to produce a kilogram of beef (cost of production) and this analysis shows that there is significant scope for improvement for a lot of producers. There is far less variation in beef price received and much less scope for individual producers to improve beef price received. Therefore it could be said that it is the high cost of production that is the main cause of low profits for the majority of northern beef producers.

Researcher name:

Bush AgriBusiness Pty Ltd, Holmes & Co.   

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