CATTLE production businesses operating with a lower cost of production are still finding a profit margin at current market levels, despite the dramatic price falls of recent months, according to farm business management advisor Ian McLean, Bush Agribusiness.
Based in Toowoomba, Bush Agribusiness works with hundreds of cattle producing businesses to improve their business performance across Australia and produces, along with well known veterinarian and agribusiness consultant Phil Holmes, the Australian Beef Report.
Mr McLean has produced the above chart tracking the past 20-years, which shows, among other things, that when the cattle market is expressed in real terms (with inflation stripped out), there is a cycle in the market.
It shows an upward trend over time, but with a lot of variability around that trend through the cycle.
While no one can tell you definitely when the market will come down or by how much, it is inevitable that it will, Mr McLean said.
“Reversion to the mean is a powerful force,” he said.
Another key point depicted in the chart is that prices at the moment are around the median of prices over the last 20 years.
Mr McLean said the fall in cattle prices and rise in interest rates is leading to some big changes in producers’ budgets at the moment.
“Our forward budgets over recent years with clients have been factoring in a fall in cattle prices, however we’ve been constantly surprised on the upside. This year it will go the other way.
“The previous phase of the cycle favoured breeders, it is now favouring the backgrounders and feedlotters more now.”
So, the million-dollar question is, what can producers do about it?
“Focus on cost of production, as they always should,” is Mr McLean’s straight-forward advice.
“Industry profitability has been high in recent years, which is fantastic and is necessary to make up for lower returns through the rest of the cycle.
“Through the high prices, we’ve been encouraging our clients to keep a very close eye on their Cost of Production, it is a key measure of the efficiency of the production system and is unaffected by higher prices.
“If your beef business has a cost of production below $1.50, which many of our clients do, then there is still a wide profit margin at current prices. If your cost of production is around $3, there may be some pain ahead.”
The recent increase in land prices has been underpinned by the high cattle prices and low interest rates (along with scarcity of land – see earlier article Beef Land vs Gold: Which is the better investment?)
What will happen there is not something Mr McLean is prepared to tackle – “I’m neither brave nor stupid enough to predict what will happen to land prices” but he adds that it will be interesting to observe now that the drivers of land appreciation have somewhat reversed.
He does believe there are likely to be opportunities in the future for businesses that are well positioned to take advantage of them.
“Those businesses with strong balance sheets and a low cost of production will be well positioned for opportunities, those businesses with weaker balance sheets and a high cost of production could be in strife.
This is how efficient markets operate, as Warren Buffett says; “only when the tide goes out do you learn who has been swimming naked.”
To read more stories from Ian McLean and the Bush Agribusiness’ “Business of Beef” series on Beef Central, click here