Processor margins are nearing record highs but long-term averages show different picture

There is one key factor driving the gap in profits made by cattle producers and processors, and the volatility is getting worse. See the graph here.

Wild variations in rainfall and climatic conditions are one of the main reasons for the increasingly volatile profitability of Australian beef producing and processing.

This is according to Episode3 analyst and director Matt Dalgleish whose new set of indices, which compare the relative profitability of beef producing and beef processing, shows a strong, inversely correlated relationship.

And it is one where the gulf between processors and producers’ profit positions have gotten progressively greater since 2007.

Mr Dalgleish’s calculations show that when beef processor conditions are favourable and peaking in their cycle it corresponds closely to the low points in beef farm profitability.

“Similarly, when beef farms are running most profitably the beef processing sector is experiencing tougher trading conditions,” he said.

How processor and producer fortunes compare.

To cope with this fluctuation, he said the development of a futures cattle trading market and more vertical integration and producer co-ops have been flagged as potential ways of alleviating the negative impacts on those invested in the sector.

While the recent period coincided with a booming international beef market, since 2007, the increased volatility was mainly caused by the extreme swings in rebuilding and liquidating the herd as a response to droughts and floods.

“An average rainfall year is now less common,” Mr Dalgleish said.

Another factor was supply chain disruptions, including Covid.

The Australian beef sector could see a reduction in this volatility, which makes “life pretty difficult to navigate” for all players in the supply chain, if a functioning cattle futures market was established, like what the Unites States had.

Some processors had also moved to take ownership along the red meat supply chain, purchasing more of their own farms or feedlots.

At the producers level, successful processing co-ops like Western Australia’s WAMMCO, where members have received more than $63m in bonus payments since 2013, was another way the volatility could be reduced for industry players.

“If there was a handful of farmer-owned processors it would be a way for farmers to smooth out (profits and losses),” he said. Mr Dalgleish said when viewed as a long-term average, his indices showed since 2007 processors were returning a profit in 56 per cent of years, while producers, on average, returned a profit in 55 per cent of years.