By Angus Brown | Source: MLA, DAFF
It was reported last week that continued strong beef exports to the US has seen the 85% quota trigger hit, with still four months of the year to come. Today, we update our analysis of what this might mean for beef and cattle prices for the rest of the year.
With Australia having exported 85% of its quota to the US, a trigger is hit whereby quota goes from being allocated on a first come first served basis, to quota being allocated according to how much each exporter has sent so far this year.
To add some confusion, quota allocation can be traded between exporters for the 10 days after the trigger is hit, which was on 31 August. As such, there is a couple more days where exporters might be unsure about actual quota allocation for the rest of the year.
The total US quota is 418,214 tonnes. Australian beef exports to the US were up to 311,305 tonnes at the end of August (figure 1), which is only 74.4% of the quota. However, the extra 10.6% has been allocated for exports being made in September.
Figure 1 also shows (red line) how far beef exports to the US will have to fall to fit within the quota for the rest of the year. Essentially, a 38% decline on last year’s exports is required to avoid paying tariffs on beef.
Once the quota is reached, Australian beef will be subject to a 21.12% tariff, payable by exporters. This effectively decreases the exporter’s returns by that amount.
The market dynamics are a bit hazy, but if processors have more beef that they would normally export to the US, than they can fit in their quota, they will have to find an alternative market or pay the tariff. This is likely to see prices for beef fall in alternative markets such as Japan, which will have an impact on processor margins.
If beef supply in the US remains tight, and they simply need Australian beef, they may have to pay more to offset some of the tariff impact for the last month or six weeks of the year before the quota resets in January.
On face value, it looks like Australian beef exports will hit the quota this year, and some beef will be subject to the 21.12% tariff, or will be diverted to other markets at a cheaper price. This is likely to place both downward pressure on local beef and cattle prices, but possibly upward pressure on imported beef prices in the US for a short period.
So far, we have seen little change in prices, with export values to the US largely steady last week (figure 1) and cattle prices stronger in general. This is because the way the quota is allocated hasn’t added any costs to exporting yet.
The main downside impact on cattle prices is likely to occur with finished cattle at a time when beef exports could be subject to the tariff, which would probably be in November and early December. Cows are likely to see the strongest pressure because of the proportion of the carcase that goes into the US market.
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