Profitability across value chain

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Definition: To be economically sustainable, the industry must generate a positive rate of return over the long-term on all capital used in cattle raising and beef production. Currently this priority looks at only farm business profit due to data limitations.

Indicators


The context

All sectors along the beef value chain operate in an interdependent system with the share of profit moving
between them. There are significant external factors that contribute to profitability including seasonal conditions, the value of the Australian dollar, and global competition and demand.

A persistent focus on increasing productivity and profitability across the industry will raise whole-of-industry competitiveness, assist long-term sustainability and help offset the ongoing cost-price squeeze.

On-farm profitability across much of the country remains a challenge in 2019. Extreme weather events, such as drought and the Queensland floods are having a significant impact on farmers’ ability to turn a profit and will also have longer term impacts on the processing sector.

Deriving income solely from grazing cattle is becoming less practical for smaller enterprises and in some regions of Australia. A significant number of producers are supplementing farm income with off-farm earnings. Many cattle producers also earn income from producing other commodities on their farm. These factors make it difficult for the Framework to measure on-farm profitability specifically for beef.

Feedlots are facing their own profitability challenges. The drought is having a considerable impact on the availability and cost of feed and water. Rising energy prices have increased cost pressure and have also affected the profitability of the feedlot sector.

In beef processing, Australia is at a significant price disadvantage to major global competitors due to high labour, regulatory and energy costs. This creates challenges for the whole value chain to compete on price in global markets. Australian beef is positioned as a premium, high-quality product but is meeting increasing competition from other countries which are leveraging their lower cost structure to make gains in our key global markets.

More broadly, significant challenges to improving productivity occur because of environmental extremes including floods, heat waves and drought.

Industry has three goals: to increase business revenue by selling more high quality beef, cutting production costs through efficient management systems and practices, and increasing the price for beef through good marketing, and by opening and maintaining markets. Major boosts in knowledge have been achieved through investments in programs like BREEDPLAN and the CashCow project; as well as research, development and extension work related to animal genetics and nutrition.

Improving profitability across the whole beef value chain requires encouraging adoption of best practice and continuing research and development.

Driving adoption across the extensive farm sector is one of the greatest challenges to increasing industry-wide profitability. This is why it is critical that the tools and technologies developed are timely, accurate and relevant.

In feedlots and processing, new technologies and processes are generally adopted faster than on farm, but the high level of cost for investment in new infrastructure is a barrier for these low-margin businesses.


Industry position

At an industry level RMAC supports investment, policy settings and practices that foster a prosperous and profitable industry.

The next Meat Industry Strategic Plan (MISP) will outline the industry’s position for a profitable future. It will be released in late 2019. The current MISP seeks to unlock $7 billion for the industry’s bottom line by 2030. On the flip side, it aims to protect the industry from losing $6 billion.


What is the data telling us?

This indicator has been renamed from ‘Farm business profit at full equity’ to ‘Rate of return to total capital for beef farms’ to more accurately describe what is being measured. Data this year is still comparable to last year.

A key challenge for reporting on-farm profitability is that not all beef producers view profit as a main motivator. Some producers are motivated by their values and beliefs about farming, or the lifestyle. A percentage of the cattle industry are part-time ‘hobby farmers’ and not necessarily focused on profit. These factors can influence the data. For these reasons, the Framework reports on rate of return for both the industry average and the top 25% of producers.

The industry 5-year rolling average figure for rate of return was 4.4%, with the top quartile sitting at 8.2% for 2017-18. Beef farms saw an increase of 1.0% on their rate of return compared to the previous year. The top quartile saw a bigger rise of 1.5%, see Chart 1.

Chart 1: The rolling 5-year average rate of return to total capital including capital appreciation for all producers specialised in beef, and the top 25% performers.

The average farm cash income varies greatly between northern and southern Australia, and by scale of operation.

The average farm cash income prior to 2015-16 saw year-on-year increases to around $204,000 per farm, underpinned by high livestock prices and above-average crop production.

In recent years, drought across eastern Australia has been the dominant influence on farm financial performance. Crop production has been well below average, contributing to higher prices for fodder and feed-grains across the country. The drought has also reduced the availability of pasture on livestock farms, increasing expenditure on feed.

Farm cash income is higher in Queensland due to larger property sizes, scaling up figures.

Chart 2: Average farm cash income for beef farms.

On-farm cost of production has also been increasing showing a marked difference with international competitors. Compared to the US – Australia’s primary global competitor – the on-farm cost to produce beef in Australia is 1.4 times more expensive, see Chart 3. There is wider variation in Australian beef systems where there is a diverse mix of hobby, family and corporate producers, and intensive and extensive farming. In comparison, US systems have a much higher proportion of commercial feedlots, which results in less cost variation.

Chart 3: A comparison of on-farm production costs between Australia and the US. Australia is 1.4 times more expensive.

These high costs are also reflected in the processing sector. This year, an AMPC-led study into 2015-16 processing costs showed that Australia’s cost of beef processing is significantly higher than other countries. It is 24% more expensive to process cattle in Australia than the US, over twice as expensive compared to Brazil and 75% more expensive than Argentina. This disparity has a large impact on the global competitiveness of Australian beef.

Chart 4: The average cost of processing cattle per head in Australia compared to three other beef-exporting countries. Other costs include transport, packaging and maintenance

It is estimated that 54% of these processing costs are attributable to regulation – much higher than competitor countries. This regulatory burden is 2.2 times higher than both the US and Venezuela, and 3.2 times higher than Brazil.

Chart 5: The average cost of regulation for beef processors per cattle head processed in Australia compared to three other beef-producing countries.


Snapshot of activity

Organisations that deliver programs focused on improving profitability include state and federal agricultural departments, private consultants and industry service providers including MLA, LiveCorp and the Australian Meat Processor Corporation (AMPC).

Major profitability programs are focused on:

  • Reducing the cost of production through the feedbase program
  • Unlocking productivity and profitability benefits from genetics
  • Driving adoption of research and best practice
  • Producing a premium product that meets consumer expectations
  • Innovating in precision livestock management

Reducing the cost of production through the feedbase program

The livestock industry depends on the feedbase, such as pastures and grain, which itself relies on soil, water and nutrient resources. Management of these resources and the feedbase is critical to generating income in the short and long term. The challenge for the industry is delivering to market specifications while maintaining the underpinning resources. The increasing variability of climate is making this even more challenging.

MLA’s feedbase program is focused on:

  • Contributing to reducing cost of production ($/kg live weight) by 1.5% in real terms by 2020. This will occur through a range of new pastures and legumes, improved seasonal forecasting, options for climate-adapted grazing systems and producers with new knowledge options
  • Reducing cost of managing feral animals and weeds by $50m
  • Improving total factor productivity (TFP) by 1.75% for southern beef and 0.5% for northern beef
  • Improving overall business performance by >5%

Unlocking productivity and profitability benefits from genetics

Improving genetics is a critical pathway to improved productivity and profitability. The beef industry continues to maintain BREEDPLAN – a system of genetically evaluating cattle across a range of traits such as fertility and weight gain. In evaluating cattle, the system calculates Estimated Breeding Values (EBVs) for an animal, which are used by breeders and buyers to make decisions. A joint venture between NSW Department of Primary Industries and the University of New England, with MLA funding, continuously improves BREEDPLAN.

In 2017, BREEDPLAN released ‘single-step genetic analyses’ for the Brahman and Hereford breeds. These analyses tie genomic information with performance records to better calculate EBVs. Single-step analyses have been released for Brahman, Hereford, Angus and Wagyu breeds, with Santa Gertrudis expected soon.

A National Livestock Genetics Consortium has been established with the objective that by 2022, it can deliver more than $400 million in industry improvements through doubling the rate of annual genetic gain in commercial livestock.

Driving adoption of research and best practice

Withdrawal of state governments from extension or adoption services in most Australian jurisdictions has dramatically changed the way research and development is delivered to producers. Today’s environment demands new commercial business models that deliver adoption services, and support red meat producers’ decision making.

Profitable Grazing Systems (PGS) is MLA’s flagship producer adoption program that aims to increase on-farm productivity and profitability through positive on-farm practice change. The adoption program comprises of a tiered learning structure, which allows producers to enter and exit the system as required. The program also focuses on upskilling consultants and other trusted advisors in the sector. The pilot saw 130 producers and 96 businesses participate, and achieved an increase of participant knowledge, attitude, skills and aspirations from 46% to 76%.

Lotfeeding remains an integral part of the beef industry, supporting a consistent supply of quality product for an expanding population. Priorities include the development of tools to increase productivity and reduce costs, through automation and remote monitoring technologies of routine feedlot processes and genetic pursuit of feed efficient animals.

The feedlot sector delivers adoption through its industry body, Australian Lot Feeders’ Association (ALFA). In 2018-2019 significant investments have been made by ALFA in automation, designed to improve profitability and productivity of the sector.

The testing of a prototype bunk scanner has demonstrated better-than-human accuracy in predicting feed remaining in bunks. Better predictions mean increased feed utilisation and less wastage.

This bunk scanner has inspired research into an auto-feed delivery prototype which can be fitted onto existing feed trucks. This prototype has achieved better feed distribution, carcase gains and efficiencies.

National Meat Industry Training Council

The Australian Meat Processing Corporation (AMPC) continues to support and work closely with the National Meat Industry Training Council (MINTRAC) on various activities, including the extension of AMPC project outputs. Extension activities are critical to the effective uptake of RD&E investments in the industry, contributing to AMPC’s strong track record of facilitating processor adoption of RD&E and other AMPC-funded outputs.

Producing a premium product that meets consumer expectations

Meat Standards Australia (MSA) is an independent eating quality standard developed in Australia more than 20 years ago. MSA continues to enjoy strong uptake throughout the supply chain. During 2017–18, the MSA beef program returned an additional $152m in farmgate returns despite tighter supplies due to reduced slaughter numbers.

Nationally, 46% of adult cattle slaughtered were graded for MSA. Feedback from MSA is now flowing back to producers to inform their on-farm decisions and realise additional profit.

Innovating in the precision livestock management space

Precision livestock management (PLM) optimises the contribution of each animal through technologies that allow monitoring and controlling of livestock in real-time, and remotely. PLM provides management opportunities for producers to maximise their productivity, profitability and sustainability. There is a crossover in the PLM program of work between the beef productivity and the feedbase portfolios. Projects using internet of things (IoT) at the same time as focusing on connectivity are exploring the use of existing technologies including walk over weighing to chart the reproductive status of cows and feed budgeting.


Definition: To be economically sustainable, the industry must generate a positive rate of return over the long-term on all capital used in cattle raising and beef production. Currently this priority looks at only farm business profit due to data limitations.

Indicators


The context

All sectors along the beef value chain operate in an interdependent system with the share of profit moving
between them. There are significant external factors that contribute to profitability including seasonal conditions, the value of the Australian dollar, and global competition and demand.

A persistent focus on increasing productivity and profitability across the industry will raise whole-of-industry competitiveness, assist long-term sustainability and help offset the ongoing cost-price squeeze.

On-farm profitability across much of the country remains a challenge in 2019. Extreme weather events, such as drought and the Queensland floods are having a significant impact on farmers’ ability to turn a profit and will also have longer term impacts on the processing sector.

Deriving income solely from grazing cattle is becoming less practical for smaller enterprises and in some regions of Australia. A significant number of producers are supplementing farm income with off-farm earnings. Many cattle producers also earn income from producing other commodities on their farm. These factors make it difficult for the Framework to measure on-farm profitability specifically for beef.

Feedlots are facing their own profitability challenges. The drought is having a considerable impact on the availability and cost of feed and water. Rising energy prices have increased cost pressure and have also affected the profitability of the feedlot sector.

In beef processing, Australia is at a significant price disadvantage to major global competitors due to high labour, regulatory and energy costs. This creates challenges for the whole value chain to compete on price in global markets. Australian beef is positioned as a premium, high-quality product but is meeting increasing competition from other countries which are leveraging their lower cost structure to make gains in our key global markets.

More broadly, significant challenges to improving productivity occur because of environmental extremes including floods, heat waves and drought.

Industry has three goals: to increase business revenue by selling more high quality beef, cutting production costs through efficient management systems and practices, and increasing the price for beef through good marketing, and by opening and maintaining markets. Major boosts in knowledge have been achieved through investments in programs like BREEDPLAN and the CashCow project; as well as research, development and extension work related to animal genetics and nutrition.

Improving profitability across the whole beef value chain requires encouraging adoption of best practice and continuing research and development.

Driving adoption across the extensive farm sector is one of the greatest challenges to increasing industry-wide profitability. This is why it is critical that the tools and technologies developed are timely, accurate and relevant.

In feedlots and processing, new technologies and processes are generally adopted faster than on farm, but the high level of cost for investment in new infrastructure is a barrier for these low-margin businesses.


Industry position

At an industry level RMAC supports investment, policy settings and practices that foster a prosperous and profitable industry.

The next Meat Industry Strategic Plan (MISP) will outline the industry’s position for a profitable future. It will be released in late 2019. The current MISP seeks to unlock $7 billion for the industry’s bottom line by 2030. On the flip side, it aims to protect the industry from losing $6 billion.


What is the data telling us?

This indicator has been renamed from ‘Farm business profit at full equity’ to ‘Rate of return to total capital for beef farms’ to more accurately describe what is being measured. Data this year is still comparable to last year.

A key challenge for reporting on-farm profitability is that not all beef producers view profit as a main motivator. Some producers are motivated by their values and beliefs about farming, or the lifestyle. A percentage of the cattle industry are part-time ‘hobby farmers’ and not necessarily focused on profit. These factors can influence the data. For these reasons, the Framework reports on rate of return for both the industry average and the top 25% of producers.

The industry 5-year rolling average figure for rate of return was 4.4%, with the top quartile sitting at 8.2% for 2017-18. Beef farms saw an increase of 1.0% on their rate of return compared to the previous year. The top quartile saw a bigger rise of 1.5%, see Chart 1.

Chart 1: The rolling 5-year average rate of return to total capital including capital appreciation for all producers specialised in beef, and the top 25% performers.

The average farm cash income varies greatly between northern and southern Australia, and by scale of operation.

The average farm cash income prior to 2015-16 saw year-on-year increases to around $204,000 per farm, underpinned by high livestock prices and above-average crop production.

In recent years, drought across eastern Australia has been the dominant influence on farm financial performance. Crop production has been well below average, contributing to higher prices for fodder and feed-grains across the country. The drought has also reduced the availability of pasture on livestock farms, increasing expenditure on feed.

Farm cash income is higher in Queensland due to larger property sizes, scaling up figures.

Chart 2: Average farm cash income for beef farms.

On-farm cost of production has also been increasing showing a marked difference with international competitors. Compared to the US – Australia’s primary global competitor – the on-farm cost to produce beef in Australia is 1.4 times more expensive, see Chart 3. There is wider variation in Australian beef systems where there is a diverse mix of hobby, family and corporate producers, and intensive and extensive farming. In comparison, US systems have a much higher proportion of commercial feedlots, which results in less cost variation.

Chart 3: A comparison of on-farm production costs between Australia and the US. Australia is 1.4 times more expensive.

These high costs are also reflected in the processing sector. This year, an AMPC-led study into 2015-16 processing costs showed that Australia’s cost of beef processing is significantly higher than other countries. It is 24% more expensive to process cattle in Australia than the US, over twice as expensive compared to Brazil and 75% more expensive than Argentina. This disparity has a large impact on the global competitiveness of Australian beef.

Chart 4: The average cost of processing cattle per head in Australia compared to three other beef-exporting countries. Other costs include transport, packaging and maintenance

It is estimated that 54% of these processing costs are attributable to regulation – much higher than competitor countries. This regulatory burden is 2.2 times higher than both the US and Venezuela, and 3.2 times higher than Brazil.

Chart 5: The average cost of regulation for beef processors per cattle head processed in Australia compared to three other beef-producing countries.


Snapshot of activity

Organisations that deliver programs focused on improving profitability include state and federal agricultural departments, private consultants and industry service providers including MLA, LiveCorp and the Australian Meat Processor Corporation (AMPC).

Major profitability programs are focused on:

  • Reducing the cost of production through the feedbase program
  • Unlocking productivity and profitability benefits from genetics
  • Driving adoption of research and best practice
  • Producing a premium product that meets consumer expectations
  • Innovating in precision livestock management

Reducing the cost of production through the feedbase program

The livestock industry depends on the feedbase, such as pastures and grain, which itself relies on soil, water and nutrient resources. Management of these resources and the feedbase is critical to generating income in the short and long term. The challenge for the industry is delivering to market specifications while maintaining the underpinning resources. The increasing variability of climate is making this even more challenging.

MLA’s feedbase program is focused on:

  • Contributing to reducing cost of production ($/kg live weight) by 1.5% in real terms by 2020. This will occur through a range of new pastures and legumes, improved seasonal forecasting, options for climate-adapted grazing systems and producers with new knowledge options
  • Reducing cost of managing feral animals and weeds by $50m
  • Improving total factor productivity (TFP) by 1.75% for southern beef and 0.5% for northern beef
  • Improving overall business performance by >5%

Unlocking productivity and profitability benefits from genetics

Improving genetics is a critical pathway to improved productivity and profitability. The beef industry continues to maintain BREEDPLAN – a system of genetically evaluating cattle across a range of traits such as fertility and weight gain. In evaluating cattle, the system calculates Estimated Breeding Values (EBVs) for an animal, which are used by breeders and buyers to make decisions. A joint venture between NSW Department of Primary Industries and the University of New England, with MLA funding, continuously improves BREEDPLAN.

In 2017, BREEDPLAN released ‘single-step genetic analyses’ for the Brahman and Hereford breeds. These analyses tie genomic information with performance records to better calculate EBVs. Single-step analyses have been released for Brahman, Hereford, Angus and Wagyu breeds, with Santa Gertrudis expected soon.

A National Livestock Genetics Consortium has been established with the objective that by 2022, it can deliver more than $400 million in industry improvements through doubling the rate of annual genetic gain in commercial livestock.

Driving adoption of research and best practice

Withdrawal of state governments from extension or adoption services in most Australian jurisdictions has dramatically changed the way research and development is delivered to producers. Today’s environment demands new commercial business models that deliver adoption services, and support red meat producers’ decision making.

Profitable Grazing Systems (PGS) is MLA’s flagship producer adoption program that aims to increase on-farm productivity and profitability through positive on-farm practice change. The adoption program comprises of a tiered learning structure, which allows producers to enter and exit the system as required. The program also focuses on upskilling consultants and other trusted advisors in the sector. The pilot saw 130 producers and 96 businesses participate, and achieved an increase of participant knowledge, attitude, skills and aspirations from 46% to 76%.

Lotfeeding remains an integral part of the beef industry, supporting a consistent supply of quality product for an expanding population. Priorities include the development of tools to increase productivity and reduce costs, through automation and remote monitoring technologies of routine feedlot processes and genetic pursuit of feed efficient animals.

The feedlot sector delivers adoption through its industry body, Australian Lot Feeders’ Association (ALFA). In 2018-2019 significant investments have been made by ALFA in automation, designed to improve profitability and productivity of the sector.

The testing of a prototype bunk scanner has demonstrated better-than-human accuracy in predicting feed remaining in bunks. Better predictions mean increased feed utilisation and less wastage.

This bunk scanner has inspired research into an auto-feed delivery prototype which can be fitted onto existing feed trucks. This prototype has achieved better feed distribution, carcase gains and efficiencies.

National Meat Industry Training Council

The Australian Meat Processing Corporation (AMPC) continues to support and work closely with the National Meat Industry Training Council (MINTRAC) on various activities, including the extension of AMPC project outputs. Extension activities are critical to the effective uptake of RD&E investments in the industry, contributing to AMPC’s strong track record of facilitating processor adoption of RD&E and other AMPC-funded outputs.

Producing a premium product that meets consumer expectations

Meat Standards Australia (MSA) is an independent eating quality standard developed in Australia more than 20 years ago. MSA continues to enjoy strong uptake throughout the supply chain. During 2017–18, the MSA beef program returned an additional $152m in farmgate returns despite tighter supplies due to reduced slaughter numbers.

Nationally, 46% of adult cattle slaughtered were graded for MSA. Feedback from MSA is now flowing back to producers to inform their on-farm decisions and realise additional profit.

Innovating in the precision livestock management space

Precision livestock management (PLM) optimises the contribution of each animal through technologies that allow monitoring and controlling of livestock in real-time, and remotely. PLM provides management opportunities for producers to maximise their productivity, profitability and sustainability. There is a crossover in the PLM program of work between the beef productivity and the feedbase portfolios. Projects using internet of things (IoT) at the same time as focusing on connectivity are exploring the use of existing technologies including walk over weighing to chart the reproductive status of cows and feed budgeting.