As Australia farmers hit by drought, boom time for meat processors

Thu Feb 27, 2014 4:00pm EST

* Australian meat processors running at near capacity

* Cattle slaughter rate hits record due to severe drought

* Will likely drive Aus beef exports beyond record already touted

By Colin Packham

SYDNEY, Feb 28 (Reuters) - Normally at this time of year Australian meat processors are operating part time as cattle gorge on summer grass.

But a scorching drought has forced farmers to cull cows as pastures wither, driving processors to work flat out and likely pushing beef shipments in the world's third-biggest exporter beyond record levels already touted.

Slaughter rates have hit three consecutive weekly highs, which could prompt the Australian Bureau of Agriculture and Resource Economics and Sciences (ABARES) to raise its forecasts on beef exports in a closely watched report issued on Tuesday.

New evidence of rocketing shipments from Australia will drag on global prices. U.S. live cattle futures marked record peaks this year after the U.S. herd was pegged at its lowest in over six decades and with the northern hemisphere in the grips of a savage winter.

While beleaguered Australian farmers grapple with local cattle prices at four-year lows, abattoirs are earning fat margins by selling onto Asian markets hungry for beef.

"Normally at this time of year, there has been rain and processors are running at fewer days as they are having trouble sourcing cattle," said Tim McRae, senior economist at industry body Meat and Livestock Australia (MLA). "But at the moment, it's the complete opposite."

ABARES in December forecast beef exports would rise 7 percent in the 2013/14 marketing year that began in July to a record of 1.085 million tonnes, accounting for just under half of national beef output.

But the increased supply of meat on the back of a drought entering a second year should push exports beyond that figure, with Australia's agriculture department, which collates historic data, saying shipments in the first half of 2013/14 climbed 18 percent from the year before to 668,755 tonnes.

"While I'm not sure exports can sustain that pace, ABARES could increase its estimate," said MLA's McRae.

Longer term, the drought could spell beef shortages due to reduced breeding stock and provide fewer cattle for slaughterhouses.

STEAK MATE?

Asian demand for beef is soaring as increasingly affluent middle classes develop a taste for high-protein Western diets and fast-food such as hamburgers.

Pan Chenjun, senior analyst at Rabobank in Beijing, says beef in China's retail market is priced at 61 yuan ($10.06) per kg, way above the rate Australian processors are paying for cattle at about A$3 ($2.71) a kg.

"Beef prices in China are already quite high and in the longer term we don't expect prices to decline as there is a shortage in the domestic market," she said.

"The shortage is mainly due to lower domestic production, imports are increasing very fast but imports can't cover the shortfall."

The weaker local dollar makes Australian beef particularly appealing, analysts said. The currency fell more than 15 percent against the U.S. dollar in 2013 and is nearly unchanged this year.

"Cattle came strongly into the market in 2013 and that has continued into this year as well, while on the other side there has been strong demand from key markets like China," said Matt Costello, Rabobank animal proteins analyst. "Processors have been winning at the expense of the farmer."

Meat processors would not disclose processing margins, but analysts said the difference between beef processors' costs and revenues had touched highs of around 20 percent in the current marketing season, way above the 1 or 2 percent seen typically.

"We will be at near capacity until at least April," said an abattoir manager, who declined to be named.

Australian meat processors tend to be small or medium-sized businesses, although a unit of Brazil's JBS, the world's biggest meat producer, operates in the country.

($1 = 6.0641 Chinese yuan) ($1 = 1.1080 Australian dollars) (Additional reporting by Naveen Thukral; Editing by Joseph Radford)

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