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Thursday, August 06, 2015

Beef exports strong amid dwindling cattle supplies

By Augusto Semmelroth  |  Source: DAFF, MLA

Key points

    • Beef exports remain stubbornly strong mainly despite the slight contraction in slaughter levels of late.
    • The lower A$ and strong export prices have seen volumes to the US move above 40,000 tonnes swt.
    • Near-record export beef prices have allowed processors to continue lifting OTH and saleyard levels to keep supplies flowing.

2015-08-06 Beef Exports FIG 1

2015-08-06 Beef Exports FIG 2

2015-08-06 Beef Exports FIG 3

Despite the moderate, albeit consistent, contraction in eastern states cattle slaughter since June, beef exports are yet to show signs of slowing. This trend continues to be exacerbated by robust export demand from the US, a lower A$ and rallying beef export prices. At 121,568 tonnes swt, total Aussie beef exports in July were less than 2,000 tonnes swt off the record level set in March.

The driving force behind the stubbornly vigorous export demand from the US remains virtually unchanged. That is, a herd in full-swing rebuild mode. As US females are retained for breeding purposes and slaughter levels continue to track well below historical levels, lean beef production is unable to consumer demand requiring a constant flow of beef imports to fill the gap.

While tight US supplies have supported robust import demand for some time, the recent appreciation of the US$ has further bolstered appetite for imported beef. The good news for Australian exporters is that the favourable exchange rate scenario has coincided with the plunging exportable supplies from New Zealand to give Aussie exporters the upper hand in price negotiations.

This becomes clear when looking at the ongoing rally in beef export prices amid near-record exports in July, at 43,989 tonnes swt. The 90CL frozen cow export product remains at a 15% discount to US domestic prices at US240¢/lb CIF. Howver, export prices are slowly bridging the gap. In our terms, the lower A$ has seen the 90CL indicator reach 725¢/kg CIF last week, up 17% since early June.  

Moving away from the US, the trading environment with Japan remains cautiously positive. Beef exports to the country have largely been steady at around 24,500 tonnes swt since April, with July’s figure at 24,702 tonnes swt. Currency factors have also supported prices, with the A$ depreciating against the Japanese Yen and the stronger US$ hindering US exports to Japan.  

Other key export markets such as Korea and China are faring well this year. After a sluggish start in January and February, beef shipments to China have rebounded towards a 13-14,000 tonnes swt range since March to see year-to-date volumes surpass 82,000 tonnes swt, a 4% increase from 2014. Year-to-date beef exports to Korea have reached 93,826 tonnes in July, the highest level on record for the period.

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What does this mean?

As mentioned in previous articles and in our recent cattle webinar, the beef industry is now as export-centric as it has ever been with more than 75% of beef output being shipped overseas. This trend is unlikely to change much in the foreseeable future. This will see export demand and price fundamentals have a heavier weight on domestic cattle prices.

Up until May, there was little sense of urgency among processors to procure cattle as numbers continued to flow effortlessly. Right now, securing cattle supply is becoming increasingly harder, so the only way to keep the flow is by lifting OTH and saleyard prices.

Fortunately, beef export prices across all key markets are at, or near, record levels. The main difference, however, is that processors are quickly transferring price increases to the domestic cattle markets in order to get sufficient numbers to fulfil export orders. Going forward, this trend will become even more evident, wherein export prices will accurately flag potential downside/upside risk for the cattle market. 

Mecardo information is provided to assist in your marketing decisions. It contains a range of data and views on the current market. It is not intended to constitute advice for a specific purpose. Before taking any action in relation to information contained within this report, you should seek advice from a qualified professional. The information is obtained from a variety of sources and neither Mecardo nor Ag Concepts Advisory will be held liable for any loss or damage whatsoever that may arise from the use of information or for any error or mis-statement contained in this report. 

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