Australian Beef Report: High cattle prices mask operating returns

High prices have masked the reality of continually rising costs.

Most of the returns for beef businesses in the past few years have not come from operating return.

In fact, in the south, operating return before interest is typically less than the beef producer's interest bill itself.

These in-your-face realities are laid bare in the latest Australian Beef Report from prominent consultants Bush Agribusiness, hot off the press next month.

Speaking at the Northern Beef Research Update Conference in Darwin last week, Bush Agribusiness managing director Ian McLean said if cattle business costs were going up, productivity needed to match it.

He made the case that harnessing intellectual capital was one good pathway to that.

"As capital entry points get higher and it gets harder for people to get into this industry, young people can use intellectual capital to get in - that's something they can bring to the table," he said.

The Australian Beef Report is an independent tri-annual publication detailing the long-term picture of beef business performance.

The 2023 edition shows that ROA is not rising with profits because asset values have increased so much.

That has big implications going forward, Mr McLean said.

Total returns for the past three years are up more than 10 per cent across both the north and south, the report shows.

"That's fantastic. Usually, if you take a return like that to the bank they'll throw money at you. But take a step back - where is that return coming from," Mr McLean said.

"Not from the operating return, which in the north is only just covering the interest bill and in the south is now less.

"Most of it has come from capital return, off the back of the massive increases in land prices we'd seen in recent years."

Mr McLean explained profitability had been constrained by what was called yield compression: the value of assets has gone up with price which means you need more profit to get the same ROA.

That was a big challenge when it came to debt serviceability and leverage, he said.

The average capital required for a beef business is now $10 million in both the north and the south. That means the average beef business is underscale, which Mr McLean said was a big structural issue for the industry.

"This has massive implications in terms of capital required for the industry," he said.

Operating return, which is ROA excluding capital gain, is currently 5pc for the top 25pc most profitable beef producers and just over 2pc for the average operations, in the north.

It wasn't much different in 2016/17.

The main driver is that operating costs are increasing in real terms.

"Total factor productivity - that is what outputs the industry is generating for the inputs invested - isn't increasing in the long term," Mr McLean said.

"These issues have been masked by high cattle prices.

"Our industry needs a productivity boost."