Drought conditions and forced herd liquidation, along with the risk of recessionary pressures on the US economy, are set to pressure global beef trade and prices.
Presenting to 200 beef producers and industry leaders at Beef Week in Rockhampton, Rabobank’s US senior animal protein analyst Don Close said in a statement said these market developments in the US would directly impact Australian producers “with the US the largest export customer Australia has, and with both countries being fierce competitors for export business in Japan and South Korea and potentially fighting it out for market share in China in the future”.
Despite the headwinds facing US and global beef markets, Close remained bullish about the longer-term outlook for global beef markets, saying he had never in his 45-year career “seen the global marketplace as exciting and ready for change”.
“While the market will remain cyclical, the overall direction will be driven by the increasing demand for animal protein,” Close said. “And we are talking about the 300 million in China’s emerging middle class, but also South-East Asia and southern Africa – where the opportunities are incredible. We are also seeing rapid changes in consumer demand, and the insatiable demand for convenience. Rarely a day goes by without a new development in home delivery or meal kits.”
In the US, Close said, this changing consumer demand had been taking place during a time when the US economy had been expanding and it would be interesting to see the US market “stress-tested’ by a contracting economy.
“The US is currently in its second longest period of economic expansion in US history, at 108 months,” he said. “But I have very serious doubts that we will reach the all-time record of 120 months, as we are starting to see the yield curve flatten out close to parity or even discount, with virtually full employment creating inflation. So within the next year or 18 months, the likelihood of US recessionary pressure is very high.”
Close said this recessionary risk, together with increasing gasoline prices, is likely to impact the US consumers’ discretionary income, and their demand for beef – particularly more premium cuts – at a time when US beef production is on the rise.
“After bottoming out at 28.7 million cows in 2014, there has been aggressive herd rebuilding and the US beef herd is now sitting around 31.7 million head and I estimate this cycle will peak somewhere between 32 and 32.5 million head,” he said.
“However, currently 70 per cent of our US beef herd are residing in areas of extreme drought. While we still have a window of opportunity for rain, the likelihood we will see some level of forced liquidation before the end of the US summer is very high. If we see cow slaughter rates increase because of forced liquidation, there is a very real risk that there will be too many cattle for the system.”
Currently beef cow slaughter rates are up 10.5 per cent above year ago levels, but this could rise to between 12 and 15 per cent, he said. Compounding the number of beef cattle on the market is the liquidation of dairy cows, Close said, with the poor economic returns for US dairy farmers. Close said with US production of beef and also pork up by five per cent, there was “a tonne of protein coming at us” in the US, but also globally.
“Australia is going to have to work harder to find a home for their product in the US,” he said. “Already we have seen Australia and New Zealand’s share of total US beef production fall from between 12 and 14 per cent, down to four per cent, because the US is generating more of its own beef.”
US product is also generating a premium over Australian beef, Close said.
“Historically Australian 90CL beef attracts a two to five cents per pound premium over US product,” he said. “However, even with the escalated US cattle slaughter, US 90CL is generating a 10 to 15 cents per pound premium over Australian product.”
Reducing the incentive to buy Australian product, Close said this was creating vulnerability for Australia’s beef exports into the US but also in key export markets.
“In 2017, the US exported 11.06 per cent of their beef production, a ‘monster number’ as beef exports have never been above 10 per cent, and we have broken through the glass ceiling that was limiting exports,” he said. “With total US protein now at levels we can’t consume all at home, the US dependency on exports is becoming increasingly important.”
And this will have a significant impact on Australia as an export-oriented producer, he said, with Australia exporting around 70 per cent of their production. Close, who has also toured key beef-producing regions in New South Wales, said while his presentation wasn’t as positive as the last time he was in Australia three years ago, the outlook for the global beef market remains fundamentally strong.
“While there will be downward pressure on global beef prices this year, the global beef market remains dynamic, with increased activity in trade and changing suppliers as global demand for beef continues to expand,” he said.
Responsible for analysing the beef and animal protein sectors for Rabobank in the US, Close’s wealth of experience spans high profile roles at Texas Cattle Feeders Association, AzTx Cattle in Hereford, Future Beef Operations and Pioneer Hi-Bred International.