May 26, 2004

Australian Beef Exporters Enjoy Surprise Buoyancy

Australia's export-dominated beef industry is enjoying an unexpected windfall, courtesy of surprisingly strong demand and prices in the U.S, an industry official said Tuesday.
 
The sudden strength of the U.S. market has compounded the benefits for exporters from increased demand from Japan and South Korea, Peter Weeks, chief analyst at marketing concern Meat & Livestock Australia Ltd., revealed in an interview.
 
Add to that the benefits of a weakening Australian currency since February, exporters and processors have seen a sharp rise in their returns in recent months, he said.
 
But the relatively good time for processors and exporters comes after margins were squeezed late in 2003, he said.
 
Meanwhile, producers have yet to feel the full benefit of these influences in the market through sale yard prices, though prices are starting to pick up, he said.
 
"Demand across the board is pretty strong, the industry's going pretty well at the moment," Weeks said. "The only disappointment is that cattle prices haven't fully reflected that."
 
It has only been in recent weeks that cattle prices have moved back above late 2003 levels, despite the surge in export demand and a weaker currency, he said.
 
Australia is a major global supplier of beef, with annual exports valued around A$4 billion, making the beef cattle industry a cornerstone of Australian agriculture. About two-thirds of Australian beef production is exported.
 
U.S. DEMAND UNEXPECTEDLY STRONG AFTER BSE RUCTIONS
 
Weeks said Australian exports to the U.S. were expected to be weak after the discovery in late 2003 of a case of bovine spongiform encephalopathy, or mad cow disease, which resulted in import bans on U.S. beef by Japan, South Korea and many other nations.
 
But last week, U.S. import prices of Australian lean manufacturing cow beef surpassed 10-year highs, with frozen 90 CL lean cow beef climbing 6 cents to US$1.29/lb, estimated dressed weight, including carriage, insurance and freight, up 54% from US$0.84/lb a year ago, the MLA reported.
 
Weeks said prices for chilled Australian beef in the U.S. also are at high levels.
 
"That wasn't expected because the U.S. still isn't exporting and while they aren't exporting, we didn't expect prices to be anything like this high in the U.S.," he said.
 
U.S. domestic demand has been "exceptionally strong," rising 5% to 7% this year compared to a year ago, he said.
 
Also helping lift returns for exporters is a weaker Australian currency, now trading around US$0.7000, well down from a 7-year peak of US$0.8008 in February.
 
The free on board prices in Australia for 90 CL beef gained 16 cents last week to close at $3.73 a kilogram estimated dressed weight, up 51% from a year ago.
 
Australian beef exports to the U.S. in the first four months of this year of 89,741 metric tons were down just 11% from 100,902 tons in the year-earlier period, according to official data.
 
Weeks doubts there will be a major supply response from Australian producers to the high U.S. prices. Local producers are rebuilding herds, mostly retaining cows after a savage drought in 2002 and 2003 forced them to downsize, he said.
 
"Straight after a drought, if you've got the feed and the water, you really don't want to be killing your breeders, so" the U.S. won't attract too many extra cows for slaughter, he said, adding that herd rebuilding continues "largely untouched."
 
That is even more so as higher prices are yet to fully filter through to sale yards, he said.
 
In Australian sale yards last week, a national price indicator for cows suitable for the U.S. trade added 13 cents to A$2.56 a kilogram estimated carcass weight, up from A$2.12 a year ago.
 
MORE SUPPLY RESPONSE POSSIBLE AS PRICES JUMP IN JAPAN TOO 
 
Beef shipments to Japan and South Korea are well up in 2004 from year ago levels, as producers lift supply to capture slightly higher prices and meet the increased demand in those markets, he said.
 
Australian beef exports to Japan rose 33% in the first four months of 2004 to 115,186 tons from 86,855 tons shipped in the year-earlier period.
 
Prices in Japan for Australian chilled grass-fed fullsets held steady last week, closing unchanged at US$1.94/pound, including carriage and freight, up more than a third from US$1.45 a year ago, the MLA reported. A fullset comprises about a dozen different cuts of beef.
 
The estimated free on board price for this product in Australia closed last week at A$5.74 free alongside, up 29% from A$4.46 a year ago, it said.
 
Weeks said these large price increases, plus volume gains, suggest the Australian industry will increase supply to Japan to take advantage of the U.S.' continued absence from the market.
 
This is achieved through bringing forward fattening and marketing of beasts, plus diverting product from domestic and some other markets to Japan and South Korea, he said.
 
"They'll do everything to try and bring them forward and get the market this year before the U.S. gets back in," he said.
 
In Australia, a national price indicator for the type of heavyweight steer suitable for Japan closed 6 cents higher last week at A$3.03/kg, equal to the level a year ago.
 
Australian beef exports to South Korea in the first four months of this year totaled 28,558 tons, up 27% from 22,575 tons in the year-earlier period.