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Thursday, June 25, 2015

US herd rebuild to underpin long-term import demand

By Augusto Semmelroth  |  Source: USDA, MLA, ACU

Key points

  • The first year of the US cattle cycle has been marked by limited female slaughter, tight domestic lean beef supplies and a surge in beef imports.
  • USDA anticipates the herd rebuild will continue to gain momentum until the end of the decade to see female numbers gradually increasing while curbing domestic beef production.
  • US demand for imported beef is expected to remain robust in the foreseeable future to support firm export prices from Australia, particularly when supplies finally contract more substantially.
  • Developing markets will face ongoing competition with the US on price and are likely to struggle to secure enough supplies from Australia.   

2015-06-23 US Article Part Two FIG 1

2015-06-23 US Article Part Two FIG 2

2015-06-25 Lamb Survey FIG 3

Last week, we looked at the potential short-term impact of the US beef import quota on exports. This week, we investigate the long-term projections for the US cattle market and its implications for the beef trade. In a nutshell, the US herd rebuild will continue to curb US beef production, which will support strong demand for imported beef in the years to come.

As discussed earlier this year, the US cattle herd has been gradually liquidated over the last 40 years before bottoming in 2014 at very “uncomfortable” levels. A small herd, coupled with depressed female numbers, will continue to restrict beef production capability for at least another 3-5 years. Yet, it has already created a challenging short to medium-term lean beef supply deficit as large numbers of cows/heifers are retained.

Figure 1 shows the last four US cattle cycles and the USDA projections until 2024. After bottoming in 2014 at 87.7 million, the herd rebuild is finally gathering some momentum on the back of improved pasture conditions, lower grain prices and strong prices for weaners/feeders. However, the USDA still expects cattle numbers to remain below the 90 million mark until 2018. This puts into perspective the lead time to rebuild the herd to previous levels.

What is interesting, however, is that the USDA anticipates a surge in the number of beef cow numbers as a percentage of the total herd (figure 1). This reflects the USDA’s view that producers are rather upbeat about the cattle/beef market prospects, and will try to capitalise on this assumption by quickly rebuilding breeding stock numbers.

This trend is already well underway and has seen cow and heifer slaughter plunge in recent months, with year-to-date cow slaughter down 17% from 2014 levels. As a general rule, the first year of the cattle cycle coincides with the bottom of US domestic production and peak in beef imports (as % of total beef supply). After that, import demand will be largely dictated by the pace of the herd rebuild and overall female slaughter.

With that in mind, USDA’s projections foresee beef production to remain below 2006-2013 levels until 2020. This forecast implies female retention efforts will be sustained, limiting cow slaughter and supporting robust import demand in the next few years. The big question then relates to the ability for the US to secure sufficient beef imports away from their three key trading partners (figure 3), for which supplies will be much tighter going forward. 

Read the final article in this series - Using the US situation to forecasts finished young and cattle prices

What does this mean?

Although Australia continues to develop and diversify its export customer base into Asia and the Middle East, the US will most likely remain the largest customer of Aussie beef in the foreseeable future (currently absorbing 35-40% of total volumes). Furthermore, the last two years have also confirmed the ability for the US to compete other price-sensitive markets to see exports rapidly redirected to their shores.  

Despite the usual issues regarding long-term forecasts, the USDA projections still provide insight into the major supply and demand trends for the future. Looking at the estimates it becomes clear that beef production in the US will remain very limited until 2018 at least, particularly if favourable seasonal conditions continue to allow stock retention.

Sustained tight lean beef supplies, coupled with improving consumer demand and a strong US$, will continue to underpin the demand for beef imports going forward. Our view is that the anticipated contraction in exportable supplies from Australia and New Zealand in 2016 (and beyond) will support firm export prices and see current discounts to US domestic products shrink back to historical levels.

PS: Sourcing beef from countries with restrictive quotas such as Uruguay, Argentina, and soon Brazil and Ireland, may prove to be more challenging than many expect. As such, it’s still early to evaluate the potential supply availability (both in and out of quota) from those countries and their impact on US beef import prices.

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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