16 minute read
The new norm
Positive signals for Wagyu's future
By far the most applauded seminar at WagyuEdge’24, Simon Quilty delivered an engaging and humorous session on exactly what Australian farmers want to hear: That prices are going to go up, and up, and up.
For the past year, Australia has been in what I call the “holding pattern”: steady prices with a small uptick overall. It’s as we move into next year that prices will really start to improve. 2025 will be a year of momentum, as tight supply and what we believe will be a pickup in global demands extends into 2026, sustaining from 2027 through to 2030, if not even later.
The backdrop to it all
I believe cattle prices today are truly undervalued, and that within the next two years, commodity cattle prices (flat backs) in Australia are going to double. Let me explain.
A key part of why this is going to happen, is weather. Moving from a quick El Niño to another hot and wet La Niña summer in Australia, we expect the US to dry up at the same time. It’s been a troublesome three and a half years for America – rain finally comes for them, but the belief is it will be short-lived.
Looking at Australia’s supply situation, we have a lot of states liquidating their stock, while Queensland and Tasmania rebuild their numbers. It’s this liquidation now and into the future that will eventually see a rebuild that will continue driving prices up just as demand also starts to rise given the US’s coming dry spell.
With our national herd dropping as we liquidate, then growing as we use the coming favourable weather to rebuild numbers, coupled with the drop in slaughtering as we retain those females necessary for breeding, we begin to see the picture of a tightness in the market which lends itself to higher prices.
Cattle on feed numbers sit at record levels today, driven by the liquidation across our states: There are 1.294 million total cattle on feed around Australia. There has been lots of talk about how amazing global demand has been lately, but that’s simply not true.
Last year was a challenging year and the movement across into cattle on feed is driven by the dryer Australian states.
I actually see the number of cattle on feed growing over the next few months, to 1.320 million head. (Recent figures now confirm 1.350 million head) With strong numbers of cattle on feed to remain in Australia, prices will be supported for the feeder sector.
Onto the Wagyu sector, and I estimate there are currently 208,000 head of Wagyu on feed in Australia. When we had that downturn last year, people exited the market and our numbers fell from 230,000 head to where they are today. The good news is that this time around we have been far more reserved than the downturn in 2018/2019, where there was mass exodus from the market and collateral damage to pricing as a result. This time, we have done a much better job as a more mature industry.
Looking to the global markets, we know that 2023 was a challenging year for Australian red meat: volume came on because of the dry conditions, but export beef values fell 21% in America, 11% in Japan and 18% in both South Korea and China.
The US is key to all of this, and where I see the recovery of, and improvement to, Australian beef prices over the next five to seven years. The US and Australia compete with one another in those key markets of Japan, Korea and China. For instance in Japan we own 83 per cent of their market with America. When the US exports lower volumes, such as they have in the past year, Australia steps in to fill the void.
Globally, Australia has stepped up in markets other than Japan, Korea and China, producing an additional 49 per cent of volume while the US has gone down 6 per cent.
We are truly the one nation in the world that can step up and fill the void left behind by the US when their stock is tight.
Green shoots appearing
Wagyu export prices out of Japan give us an interesting window into what’s going on around the world. There’s no other data available that tells us this except out of Japan.
Each year, they ship about 8,500 tons around the globe. By comparison, Australia ships around 70,000 tons.
Since June of 2021, Japanese Wagyu export prices fell about 35 per cent, bottoming out in October of 2023 – a date familiar to Australians as that’s when our market also bottomed out. It wasn’t just Australians feeling the pinch: the Japanese felt it too, though their prices have recovered 10 per cent since.
China is a truly challenging market. Currently their freezers are full, mainly with South American meat from Argentina, Brazil and Uruguay. Nonetheless the challenges in the Chinese market remain – consumer confidence has fallen off a cliff since COVID 19. Thankfully their market is improving, but we need to see still more improvement.
In Korea we can see our exported beef prices fell dramatically by 24 per cent, but the good news is the worst is over and in the last twelve months prices have mildly improved by 3 per cent. In 2020 Korea introduced a culling program for its Hanwoo herd, but given it wasn’t compulsory the herd instead continued to grow, impacting Australian Wagyu greatly.
The figures belying green shoots starting to appear comes out of North America. In May last year, volumes fell as tightness occurred in the market as numbers fell (producers are yet to go into a full rebuild): They simply do not have the beef. Australia is attempting to fill the vacuum with our quality grass-fed beef. One of our biggest competitors in this marketplace is that China is looking for quality and value for money. Taste, but at the right price. I think that as we go forward, the challenge for Australian Wagyu is affordability.
It is in the US where the key lies in terms of recovery and improvement in prices for Australia over the next 3, 5 and 7 years. Currently, the US herd is at a 73-year low and we’re starting to see price signals reflecting this in the market. The American forward futures market is predicting a 2 per cent increase in pricing by April next year, which I think is vastly undervalued. The key driving this increase is the weekly production figures and female kill rates. For the last 28 months this has sat at 51 per cent, and the break even number is 48 per cent: They’ve been shrinking their herd for a long time, to the point that meat supply is now holding up dramatically.
Taking a closer look at their kill figures, we see the US is now slaughtering fewer than 600K head a week. This is a critical number for the US, because in the past when we have seen this occur, prices improve automatically. Watch this figure in the future because it flows on into all other markets.
In terms of total US production, we are expecting a drop of almost 10 per cent between last year and this year and expect that in 2026 that will translate into a 26 per cent fall in global exports out of America. When you look back at my earlier point that Australia shares 85-90 per cent of the Japanese and Korean markets with the US, when the US drop 24 per cent of their exports into those countries, Australia is going to be the one stepping in to fill that shortfall.
Natural disasters, natural opportunities
In the last year, even among the headwinds of higher cost of living in the US, beef remained king of the castle generating $36B of the $68B fresh meat market – that’s almost 53 per cent of total fresh meat sales. The next closest meat was poultry, with $18B and it is a sharp slide in numbers from there.
Let’s now talk about the US market and Australian Wagyu’s position within that market. Looking at prices for US Tenderloins against Australian Wagyu beef with marble scores of 4-5, we can see the US Prime is almost the safety net for our beef in that market. Whenever Australian Wagyu falls slightly below US Prime’s price, it doesn’t take long to get back above it. This is one of our lowest grade marbling scores, yet it out competes the best of US Prime beef. Where the US is a highly sophisticated market, which pays higher premiums for better and better qualities of beef, the Asian market is all about brand. In those Asian markets we compete against the US in, we’re putting our Australian brand against their Prime brand.
When we look at some of the dramatic events in recent times, Australian Wagyu has seen an extraordinary fall in US pricing since June of 2022. Hurricane Ian hit the US market in late 2021 – the worst natural disaster in Florida for 90 years, causing deaths and $50B worth of damage. Florida, being one of the major outlets for Australian Wagyu, backed up everywhere and forced our product into the other markets, like Chicago, New York and onto the West Coast. This overloaded those markets and for one full year we had to freeze down the chilled meat that would have gone into Florida. The good news today is that those stocks are down to almost nothing, but it’s because of this stock being held in the US that we’ve seen such poor pricing for our meat over there.
As we look forward in 2024, it looks like we’ll hit a peak in the US Prime market value come June, then move sideways. Instead of coming off here due to lack of supply, I expect we’ll see a fairly flat line to the back end of this year.
All the trimmings
The Wagyu trim market is critical for the profitability of the Wagyu sector, because as prices go higher and consumers are challenged, we must ensure we’re getting the most bang for our buck in every animal. We saw in America over the last year that trim was on the rise, and in fact all meats went up in terms of both volume and value.
The key here is that if consumers can’t afford a Wagyu steak, we want them to buy the Wagyu burger; that the eating experience doesn’t disappear and that the customer stays with you.
How the US compares to other global markets
The US market is sophisticated in that marble score is truly rewarded. Australia’s own domestic market is critical and through COVID we made a huge effort to sell our Wagyu here, and today producers try to keep 20 per cent of their sales local as a safety mechanism. Asian markets are ultimately driven by brands and establishment numbers. Australian Wagyu competes in Korea directly with Hanwoo, where there’s a large Hanwoo herd that’s not declining quickly enough. In China, US Prime and upper Choice is what we compete with – though as US supply restricts it will open up opportunities for Australia. In the US we are competing Prime, Choice, CAB and Select, and as their numbers dwindle and prices move higher, our Wagyu prices will move with it. Other key markets such as Taiwan, Mauritius and Saudi will continue to be important, as the less US product there is, the more demand there will be for Australian beef.
Looking at Japanese Wagyu exports again, we can gain insight into global Wagyu markets by volume. 87 per cent of their total volume is snapped up by the top ten countries Japan exports to, starting with Hong Kong, Taiwan, the US, Cambodia, Singapore, Thailand, Tajikistan, Malaysia, the Philippines and Netherlands.
But volume isn’t everything. When we look at pricing, what’s interesting is that out of the top five countries three of them are Middle East, due to strong resources-based economies. Of the remainder of the top twenty countries Japan exports to, Europe makes up half. The importance of Europe cannot be understated for the Australian Wagyu sector: while those smaller Euro markets might be hard to gain entry into, they pay vastly higher prices for your product when you do.
Key drivers leading to a new, elevated price norm
Globally, cattle and beef prices are currently undervalued. We've bounced back from a low of AUD$3 per kilo in October 2023 to around AUD$4.55 for F1 Wagyu today. Unlike the 2018/2019 crash where prices stayed low for 18 months, we've seen faster recovery due to improved genetics, stable market presence, and a stronger, more diverse customer base. Our industry has matured, showing resilience and better management of market downturns.
Let’s quickly walk through why and how we’re going to get to a new norm of higher prices.
If you looked at the nominal value of cattle you’d see that every ten years we reach a new peak in the market. Then we see seven years of stable pricing, then another ten years to reach a new peak, and so on. By the end of 2025 we’ll be at the end of the latest upward cycle, enjoying market stability until 2032, and at much higher prices than today. Part of this is driven by inflation input costs moving higher.
Looking at grinding meat, over in America today they’ve hit new record levels of 352 usc/lb for Fresh 90s. A rising tide lifts all boats, and when grinding meat lifts, it takes everything with it: Round cuts, tenderloins, everything. If the product does not sell it ends up in the grinding meat pack, and the pack will lift and it will lift the value of carcase, animals and global meat prices.
Which is where Wagyu comes into the picture. We’re at the start of the demand season, not at the end. In my
opinion we’re going to see Fresh 90s continue to rise to 410 usc/lb by 2026, which will lift global beef prices, in turn lifting US cattle prices. The same holds true for Australian cattle prices: We’ve seen challenges lately but are due an uptick to come back in line with global beef prices. Australia is at the end of ten-year rise in prices which will be reached in late 2025, which will then see a period of stability for the next seven years, finally settling at a new feeder steer LW price of $5.20 on average. This year is to be a slight move sideways, but when we make it to next year it’ll be a strong year all the way through to eventually find the new norm by late 2025.
It should be noted that the doubling of cattle prices in Australia in 2026 is for commodity type animals, it will be in 2027 when I expect Angus feeders to follow suit and for Wagyu F1’s it will be 2027 when prices will be double (todays level of 430 ac/kg LW). The consumer needs to time for their incomes to improve so they can afford Wagyu at these levels.
Can consumers afford this? They already are. The retail price is about 40% higher than the wholesale price. As wholesale prices tighten, this gap remains. Retail prices won't drop because retailers anticipate a meat shortage for the next five years. Lowering prices now would mean raising them later, which isn’t necessary with the current tight supply. So, customers are already paying top dollar; it's just a matter of wholesale prices catching up.
What is the biggest threat to Australian Wagyu? The real threat is keeping producers, producing Wagyu.
The next big question is, will chicken and pork be an issue? While chicken and pork cannot be ignored, they too have gone through high-cost restructuring over the last three years and they’re up almost 30 per cent. The fact is that their threat is nowhere near as strong as it could be, if their prices had remained low. Could alternate meats pose a threat? No, in actual fact alternate meats – fake meats – make up about 0.3 per cent of total sales in the meat department, and it’s been on the decline each quarter since 2020.
Overall, we’re expecting grass-fed beef numbers to fall as Brazil goes into rebuild. Grain-fed is expected to fall as the US contracts, and Indian Buffalo, well I think that will fall as well. For the first time in my life, we have four cattle cycles moving into a rebuild come 2025.
What is the biggest threat to Australian Wagyu? The real threat is keeping producers, producing Wagyu. Meaning, if they don’t get the premiums required to produce Wagyu, they will exit the industry and go elsewhere.
DISCLAIMER
This article, including the information contained in this disclaimer, is given in strict confidence. By reading it, you agree that no part of the article may be disclosed, distributed or reproduced to any third part without the consent of Global AgriTrends. No representation, express or implied, is made to the fairness, accuracy, completeness or correctness of information contained in this article, including the accuracy, likelihood or achievement or reasonableness of any forecasts, prospects, returns or statements in relation to future matters contained within. Such forward looking statements are by their nature subject to significant uncertainties and contingencies and are based upon a number of estimate and assumptions that are subject to change (and in many cases are outside the control of Global AgriTrends) which may cause the presented results or performance to be materially different from any future results of performance expressed or implied by such forward looking statements.
To extend permitted by law, Global AgriTrends does not accept any liability including, without limitation, any liability arising from fault or negligence, for any loss arising from the use of this presentation or its contents or otherwise arising in connection with it. You represent and confirm by reading this article that you accept the above conditions.
