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Monday, August 11, 2014

Concerned at the US market pulling back? No worries, plenty of demand out there

By Gregorio Vial  |  Source: Trademap, MLA, Steiner Consulting

Key points

  • Australian frozen beef exports rose during 2014 are 19% up on 2013 - extra 85,000 tonnes
  • The top 3 (59%) and top 5 (76%) market shares are the lowest for at least 6 years
  • Emerging markets strongly compete for frozen beef with the US market


2014-08-11 Concerned At The US Market Pulling Back FIG 1

2014-08-11 Concerned At The US Market Pulling Back FIG 2

2014-08-11 Concerned At The US Market Pulling Back FIG 3

It’s top talk: soaring beef prices in the US. Years of drought, high kills, the lowest herd in decades, and breeding herd retention as paddocks flourish take the blame. Add high consumption and the results are eloquent: reference 90CL prices in July jumped 43% year on year to US¢634/kg. But how long can it last?

You could assume that the record prices would cause a drastic redirection of Australia’s processing beef to the US. However, this is not exactly the case. Yes, exports to the US have increased considerably in total volume terms, but not so as a share of total exports.

Taking into account the January-July period, frozen beef exports to the US jumped 57% to 154,000 tonnes swt. This rise is largely influenced by an extra 85,338 tonnes shipped in 2014. However, the US received 29% of total exports, a figure not dramatically higher than 2013’s 22%, and much lower than 2009’s 37%: a year in which a high US dollar and vast supplies from Australia influenced the large share (figure 1).

The fact is that demand from other emerging markets remains strong and competes with US demand, buying whole cuts that otherwise could be going to the manufacturing beef pack at processing plants.

During the calendar year to July, China maintained its 15% share of the total (despite recent trade restrictions due to HGP protocols), while percentages to other main markets such as Korea, Indonesia, Taiwan and the Philippines grew or remained stable.

In contrast, Japan continues to lose its share of total frozen beef exports, with only a 17% share, down from 30% in 2010. And Russia, a latent giant, has received little more than 1,000 tonnes swt of frozen beef this year due to access issues – a negligible amount when compared to 53,000 tonnes swt during the first seven months of 2008.

More graphically, while frozen beef import prices from the US’s main suppliers (Australia, Uruguay, New Zealand and Nicaragua) have followed the rise in 90CL wholesale prices (figure 2), average frozen boneless beef export prices from Australia have increased similarly, with a noticeable rise to China (figure 3).

Although a different product mix, it is an indication that China (mostly brisket) and other emerging markets are able to compete for lower value commodity beef.

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What does this mean?

As widely commented, the funnel at processing plants (large supply and full operating capacity) is the main factor deterring high international prices being passed to producers. However, the situation could be way worse if export markets were slow.

One of the most possible insomnia triggers for producers is the question: what if the US market crashes overnight and plants stop buying? That is far from happening. US end user demand is high and securing product through elevated prices. Consumer confidence is high, paying higher prices for beef, pork and other meats.

With regards to other suppliers, Uruguay is entering a seasonal decrease in supplies, already from a low base, added to a 20,000 tonne quota that limits its export capacity to the US. Similarly, New Zealand supplies are becoming seasonally short.

Apart from that, there’s not much else to fill the gap. Potential suppliers in central America (Nicaragua, Costa Rica, Mexico, Honduras), Canada and Chile account for a small percentage (around 15%) of total US imports and there is no base to believe this could largely change.

But most importantly, if demand from the US slows, high consumption in emerging markets is the one major factor providing a buffer. In addition to higher prices, China’s recent reallowance of Brazil as supplier after BSE issues is a sign of measures to increase beef sources as supplies struggle to meet demand. Middle East and South East Asian markets, on the other hand, follow growth and higher incomes.

Unless something extraordinary happens, producers will enter a seller´s market relatively soon. Just wait until it rains.

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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