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COMMENTARY & ANALYSIS
 

July 10, 2017
 
Full speed ahead for US beef
 
Strong domestic demand, faltering world market supplies coincide with healthy cattle returns and a rising supply of exportable American beef.
 
By ERIC J. BROOKS

An eFeedLink Hot Topic
 
 
American beef and cattle are leveraging a year of market upheavals to their advantage. Supply-wise, several years of healthy prices, low feed costs and improved pastureland conditions have made for the strongest inventory rebound in several decades.
 
From a sixty-year low of 88.53 million head at the start of 2014, the national cattle herd will have risen a USDA estimated 7.1% in three years, to 94.8 million by the end of this year. After 2015's 3.5% rebound, it will be the second consecutive year that the US cattle herd rose 1.8% in 2016 and will finish 2017 1.3% larger, as a cooling dairy sector reduces the overall rate of increase.
 
Even so, beef cattle rebounded even more sharply in a shorter time, up 7.3% from 29.085 million head at the start of 2015 to a projected 31.210 million at the end of 2017, 3.5% more than 30.166 million at the start of this year. Expanding for a third consecutive year and with momentum to expand for at least four years, this is the longest sustained upturn in US beef cattle numbers since the eight year rise that occurred from 1988 and 1996. –Even so, today's 7.4% beef cattle inventory increase over the past three years is far steeper than the 6.4% rise that occurred much more slowly over eight years in the 1990s.
 
Moreover, amid sustained healthy cattle rearing returns and the prospect of more to come, we can expect growth momentum to continue and exceed initial expectations.  From a market bottom of US$97/cwt in October, US steer prices rallied 48% to US$145/cwt in May, their strongest showing since the record breaking (and drought driven) 2015 rally. As is usually the case in the second half of the year, July saw prices slump.
 
While it could not match the US$170/cwt to $180/cwt record peaks of 2015, the current rally has lower feed costs, better cattle pastureland conditions, growing inventories and healthy returns on its side.
 
In particular, Rabobank's Q2 2017 Beef Quarterly noted unusually strong, "Packer and consumer appetite for beef and attractive margins throughout the production chain." While the current US$115/cwt price is the weakest since the start of the year, US beef is riding a wave of long-term domestic and international market momentum.
 
Being seasonal and cyclical in nature, Rabobank's report noted that the current market downturn was anticipated and leveraged by cattle producers. Aware that rising cattle numbers would coincide with seasonally softer H2 prices, farms pulled forward their cattle releases.  The report states that, "Cattle feeders were willing sellers in an aggressive market that ultimately led to… sharply reduced carcass weights."
 
Although mid-year's soft beef consumption will cause prices to bottom out near US$100/cwt, US beef's long-term fundamentals are strengthening. The only top producer to be both a major importer and exporter, US beef is in high demand both in America and overseas, though in different ways.
 
At home, the strongest domestic demand growth in years is (as usual) skewed towards ground beef. Making up approximately half of consumption, not enough ground beef can be generated from even America's large cattle herd, forcing the country to import a USDA estimated 1.245 million tonnes of beef. That is down 9% from 2016's 1.368 million tonnes and 22.6% from the 2015 peak of 1.259 million tonnes, as rising domestic production pushes out foreign supplies.
 
While cattle inventory growth is decelerating from its post-2015 surge, because they take a long time to reach maturity, beef production growth is undergoing a sharp acceleration only now. It surged 6.3%
 in 2016 to 11.502 million tonnes, from the previous year's 10.817 million. Supply will keep expanding rapidly in 2017, rising a USDA estimated 5.1% to 12.086 million tonnes.
 
With supply surging, domestic consumption also increased at its fastest rate since 1994, rising by 3.5% in 2016 and a booming 3.8% in this year, the first-time consumption growth. Prior to 2016, consumption growth had only exceeded 3% two times in the previous 30 years. While that is an impressive domestic consumption increase for a mature market like America's, it does not absorb the even larger cattle inventory and beef production turnaround of recent years.

Fortunately for the industry, after falling steeply during a harsh southern plains drought earlier this decade, beef exports are rebounding strongly. They are projected at a record high 1.27 million tonnes, up 9.8% on last year's 1.157 million tonnes and 23.5% on 2015's secular low of 1.028 million tonnes. Moreover, there is plenty of evidence to suggest that this forecast will be exceeded and that America will return to being a new beef exporter for the first time since 2013.
 
Moreove, a confluence of trends is creating a world market supply vacuum and pushing up international beef prices just as America's surplus of exportable high-quality cuts is increasing. India, the world's top beef exporter is watching a new law that bans slaughter of not just cattle but even buffalo wind its way through the country's court system. This has profoundly disrupted the leading beef exporter's production forecasts.
 
Brazil, the second ranked exporter was rocked by beef inspection, sanitation and bribery scandals. Reaching all the way to the prime minister's office, these scandals saw major importing countries including China temporarily ban Brazilian beef exports. Brazil's prime minister, Michel Temer, has been formally charged with taking bribes from JBS, a leading beef exporter. All these have damaged Brazil's ability to deliver its beef exports in a timely manner and put its reputation in doubt.
 
After several years of drought and dairy crash induced culling, top exporters Australia and New Zealand now find themselves short of cattle and cannot maintain their previous export volumes. Rabobank's report concluded that, "Reduced supply from Australia and New Zealand, together with potential shocks from Brazil and India, could see the balance in the beef market shift back to a supply limited market" –just as rising US inventories enable American beef to replace faltering supplies from all these other top exporters.
 
In mid-June, US beef exports were allowed back into China, the world's top beef importer, for the first time in 13 years. While it has potential to become a top export destination, US beef must first re-establish its Chinese market position from scratch, having been blocked since the mad cow disease outbreak of 2003. Furthermore, regulations for exporting US beef to China will reflect unique characteristics of the new arrangement. Whereas Chinese beef imports require full farm-to-fork traceability, no supply-chain spanning monitoring system exists in the US beef and cattle sector. Under these circumstances, US beef exports will require third party origin and feed yard verification.

Moreover, no US beef from cattle raised on ractopamine or growth hormone injections will be allowed into China's market.
 
On the other hand, whereas Chinese inspection and certification of individual meat processing plants in Brazil, Australia are required before they can be allowed to export, China will allow all USDA-inspected plants that have not broken the country's beef import laws automatic access to its market.
 
While initial exports are only of lower end variety meets, automatic certification of USDA-inspected plants will reduce the time required to boost US beef shipment volumes. With China enabling an accelerated penetration of its import market by US beef, Rabobank's Q2 Beef Quarterly concluded that, "Three of these beef exporters are currently facing supply limitations or market disruptions that could greatly accelerate US beef shipments to China."
 
With several years of cattle inventory growth that exceeded expectations amid strong external demand growth, US beef is becoming noticeably more export-oriented. Even when it was briefly the world's largest beef exporter at the turn of the decade, foreign shipments never exceeded 9% of output. The USDA however, notes that January to April exports amounted to 10.7% of production volume and for 2017, are expected to absorb 11.4% of the sector's output.
 
All this is helped by a US dollar that has peaked and is poised to trend down, even as faltering supplies from rival exporters creates a world market vacuum that can only be filled by American beef. Amid recovering pastureland, healthy profit margins, the strongest sustained domestic consumption growth in decades and even stronger export demand, market prospects for US beef have not looked this bright since the 1970s.
 


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