January 6, 2015
US beef cattle: A slow turnaround and an awkward domestic market
Despite declining statistical indicators, market signals imply that American cattle inventories are finally reversing their long, 40 year decline. -Now can someone please tell the country's consumers that there's more to beef than just burgers?
By Eric J. BROOKS
An eFeedLink Hot Topic
Repeatedly breaking price records and offering high returns amid falling feed costs, US beef cattle entered 2015 on a strong note, up by 24% and at a higher price level than the previous year's opening for a fifth consecutive time. 2015 opened amid US cattle futures trading in the US$165/head to US$170/head range, with scope to climb higher shortly after this article reaches publication. While everything from output to America's world beef market share continues to decline, we are probably on the cusp of a profound, secular upturn in the industry's fortunes.
Good returns, improving weather, but recovery takes time
After forty years of constantly declining herds and seeing inventories sink to their lowest point since 1951, 2015 will probably be remembered as the year that cattle numbers finally started rising again, even if the USDA only forecasts a nominally flat, 0.02% increase, to 87.75 million head.
Partly due to cattle's relatively long growing period, like a large vessel changing its sailing direction, the industry cannot instantly reverse the inertia of a 40 year downtrend. But having said that, market signals imply that it is already doing so, even though some by some measures, things will get worse before they get better.
On one hand, the last year saw a return of moister, pasture-friendly weather, including in many regions that had been affected by long-term drought. As a result, for the first time since high cattle prices took hold, America's southern plains finally had green enough pastures to take advantage of the healthy returns offered by high cattle prices. It also means that if America's pastureland continues to get greener and cattle prices stay high, 2015 could see a much higher than expected increase in US cattle inventories.
On the other hand, with both the weather and cattle returns turning positive amid depleted herds, a high proportion of cows and heifers were retained in 2014. For the twelve months ending November 2014, heifer and cow slaughter rates ran 8.5% and 14.5% below the previous period's level, and this trend is expected to continue well into 2015.
Along with the historically low cattle inventory levels, this limits the quantity of cattle available for slaughter. -It means that despite the strong cattle prices, low feed costs and healthy returns, US beef production is declining for a fifth time in six years.
At 10.87 million tonnes, the USDA estimates that America's 2015 output will be below 2.3% below 2014's 11.12 million tonnes, which was 5.3% below 2013's output. In fact, if US beef production fell or stayed flat, Brazil will, within one or two years, overtake it to become the world's biggest beef producer.
Going forward, the first quarter was initially anticipated to bring lower, post-Holiday season cattle prices but this looks increasingly unlikely. The New Year began with a spell of exceptionally cold, Arctic driven freezing conditions expected to constrain finishing weights. By further constraining already tight supplies, the cold's impact on finishing weights will probably provide cattle prices better support than would otherwise be the case.
Once the seasonal early second market recovery occurs, it will probably coincide with the South American corn and soy harvests. That should deflate feed costs just in time for a seasonal cattle price recovery, making for healthy beef cattle rearing margins into the middle of this year.
Fanatic ground beef consumption destroys trade balance
But while returns are increasing and America's domestic beef consumption far outweighs that of any other country, US beef's domestic circumstances are increasingly awkward. America's low cattle population and awkwardly skewed beef consumption undermine domestic returns.
Since 1960, the proportion of US beef consumption volume accounted for by ground beef has nearly doubled, from a third back then to approximately 60% today. In fact, America's trend towards obsessive ground beef consumption is new for America. During this nation's first two centuries of existence this nation was a solidly steak eating country. Unfortunately, modern Americans do not eat beef the way their grandparents did.
From 1960 to 2015, overall US per capita beef consumption fell roughly 11%, from 26.5kg to 23.6kg -but this simple number hides huge far more radical consumption shifts. Over those same 55 years, per capita ground beef consumption actually increased 49%, from 8.2kg to 14.2kg -even though per capita consumption of all other beef cuts fell by 47%.
Even when measured from its mid 1970s consumption peak near 42kg, beef consumption shows this same pattern: Based on USDA data, from 1977 to 2015, overall US beef per capita consumption fell 43%, from 41.5kg to 23.6kg. Over these same 38 years, per capita consumption of ground beef only dropped 16% (and actually increased after the mid 2000s). -But all other cuts excluding ground beef saw their per capita consumption dive a whopping 62% over this same 36 year interval, from 24.4kg to just 9.4kg.
That makes Americans far smaller consumers of steak per capita than the citizens of Brazil or Argentina. These South American countries consume far more kilograms of high-end beef cuts per capita, even though their incomes are supposedly a fraction of what Americans earn.
Even though yield per carcass increased greatly over the intervening four decades, from their peak in 1975 through to 2014 secular bottom, American cattle inventories fell almost 35%. Over this same time period, aggregate domestic ground beef consumption increased by approximately 30%.
On one hand, with cattle numbers so low, it is not economically rational to turn a high enough proportion of cattle carcass yield into a sufficient quantity of ground beef to satisfy demand for this low-end cut. This does more than force the world's fourth largest beef exporter to be a net importer.
Most cattle breeds were designed to produce a large proportion of high end cuts and ground beef returns are low relative to steak. However, with steak-heavy exports accounting for only a tenth of production, it does not make economic sense to satisfy domestic ground beef demand's relatively low returns.
This does more than turn the world's fourth largest beef exporter into a net importer: Whereas historically, steaks usually sell at 2.5 times the price of ground beef, since the early 2000s, America's insatiable hunger for ground beef and declining interest has chipped away at this historic ratio. With the price ratio between steak and ground beef having sunk into the 1.5 to 1.7 range in recent years, it has been a windfall for countries exporting ground beef to the United States -at the expense of returns on US grown steak.
In an interview with Beef Magazine, Don Close, Rabobank Food & Agribusiness Research and Advisory's vice-president for animal protein stated that, "This hasn't happened with steak prices going down; it has happened with ground beef prices going up." Given the way American consumers have shifted their consumption even more strongly in favour of ground beef since the 2008 recession, Close expects the price spread between ground beef and steaks to continue narrowing.
Even at ground level in the United States itself, there are numerous ground level reports of supermarkets and food retailers cutting steaks into smaller sizes than has been usually been sold -in hope that the lower cost of smaller pieces will induce more consumers to buy them. This means that while exports are only a tenth of production, the fact they mostly consist of high-end cuts makes them lucrative and essential for US beef cattle rearing's economic health.
Lost export opportunities
As much as the years of drought the sector endured from 2009 to 2013, the domestic market's fixation on simple ground beef-based fast food undermines the incentive to expand cattle herds. This inability to economically expand cattle herds, in turn, means that while there is too much steak for domestic market, there is too little to take advantage of strong Asian beef demand.
On one hand, because it cannot make enough ground beef to even satisfy its own domestic market, Australia and New Zealand are in a far better position to satisfy the demand of East Asia's rapidly expanding fast food sector. On the other hand, until domestic demand makes it economical to consistently expand its cattle herds, it will also not have enough high-end cuts to take advantage of the growing demand for steaks in China and other rapidly growing Pacific Rim countries.
Along with high feed costs and drought that occurred from 2010 to 2013, the inventory restraining impact of America's ground beef consumption means that after a brief three years as a net exporter, the country is again a net importer. Although imports are nearly flat, with cattle numbers falling 6% from 2010 to 2014, it could not satisfy foreign demand for steak any more than it could ground beef for its domestic market. Moreover, its share of the world beef export market has fallen from 16% in 2011 to 13% in 2013 and a USDA estimated 12% this year.
Trade competition has also gotten more intense in other ways. America's free trade agreement (FTA) driven advantage in South Korea is being checkmated by Australia and New Zealand, both of whom recently signed FTAs with that country. Similarly, while the US continues to discuss liberalized beef imports with the Chinese government, China and Australia have already announced a comprehensive FTA. It will eventually see both Australian beef and also live cattle enter China tariff free.
All this is coming at a time when rising interest rates and crashing oil prices are boosting the value of the US dollar, which makes the country's beef more expensive.
The good news is that with nearly 90% of output consumed in the US, a combination of good spring time rains and a continuation of current prices and feed costs will encourage herd expansion and ensure profits.
Better still, the US has a ready domestic market of over 320 million consumers and the highest population growth rate of any wealthy country. Eating less than 10kg of high end beef cuts annually, their per capita consumption of steak has the potential to grow by 50% or more in just one or two decades.
The US Meat Exporters Federation has done daring, legendary work marketing US beef in Asia. Perhaps it is time to turn its sights on its home market -before the cooking of a large, juicy steak in one's own kitchen becomes an exotic custom to America's own people.
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