The decision made by livestock processing giant JBS to close its Dinmore facility in southern Queensland for the first week of June provides some clues about the current state of the sector after living with the coronavirus for several months.
JBS Northern chief operating officer Anthony Pratt told Beef Central last week the decision was not taken lightly. It was, however, necessary in the current market conditions. “The loss involved in shutting a plant like Dinmore for a week is extreme, but we just cannot fill a kill roster for next week,” he said.
Several factors have come together to force JBS to take this step, which also shows the potential squeeze that is coming for Australia’s cattle sector later this year.
First, Australia’s cattle herd is hovering at around 20-year lows following a severe, extended drought in the eastern states and up into much of Queensland. With producers now in restocking mode after selling off during the drought, there is low availability of cattle.
“The kill numbers for Australia, if you add up the four weeks in May, were down almost 14 percent on last year’s numbers,” Rabobank senior animal proteins analyst Angus Gidley-Baird told Agri Investor. “Tracking those numbers [into the future] will put us at the lower end of slaughter numbers over the last 10-20 years.”
But a turn in seasonal conditions has helped keep prices high, with re-stockers and breeders re-entering the market to compete with processors, providing another customer channel for those looking to sell. This is obviously a positive for vendors, but it is contributing to the second issue for processors and exporters like JBS: difficulty in finding willing buyers for expensive-to-produce products.
One specific challenge for JBS has been China: the Dinmore plant was one of four whose exports to China were suspended last month as part of escalating trade tensions.
However, the coronavirus is also playing a role when it comes to other major markets.
The food service sector has either shut down or suffered severe restrictions in many of Australia’s key beef export markets, including the UK, US, South Korea and Japan.
This has made it harder to find a home for premium beef exports in particular. And with the Australian dollar remaining persistently weak, the country’s competitiveness relative to other export countries has become challenging.
Demand from the US has remained fairly strong to pick up the slack caused by widespread domestic shutdowns in meat processing facilities due to employee illness and other restrictions. There are signs the sector is starting to get back on track though.
“That took a lot of beef out of the US system – but they’ve still got a lot of cattle waiting to go through those plants,” Gidley-Baird said. “If the US can’t get meat out of their own system, they’ll search elsewhere for it – which is partly why Australian beef prices also jumped in May, probably a bit more than we expected.”
And the shutdown issue doesn’t take into account the possibility of prolonged recessions in these export markets, which would also likely suppress demand for premium produce.
Obviously, something will have to give – Australian processors won’t be able to keep paying high prices for cattle if they can’t then sell the product in the same way they have in the past.
“A lot of it will hinge on the recovery of the restaurant and food service trade in those key export markets, and the economic conditions there as well,” Gidley-Baird said.
“If the downturn in the global economy is as bad as some suggest and we don’t see a recovery, the ability to extract premiums out of the market will be a lot tougher, and therefore the ability to cover the high cattle prices will be harder.”
This means we could see further temporary shutdowns of plants like JBS is undertaking this week, with exporters occasionally finding it more economical to close than work at a loss.
And while current high cattle prices remain good news for producers, it seems that uncertainty and volatility in the market may be here for some time yet, thanks both to the coronavirus and other more localized issues.
Write to the author at daniel.b@peimedia.com
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