September 12, 2013

 

Declining Mexican cattle pushes US beef prices higher

As the number of cattle imported from Mexico continues to plummet, steak and hamburger lovers will pay more to eat beef in the coming year.

 

Caught in the middle are beef packers like Tyson Foods that rely on Mexican cattle imports to keep a tighter lid on fed cattle prices in the US which they procure, slaughter, process and sell.

 

"I project that we will import roughly 800,000 head of Mexican cattle for 2013, down from 1.46 million head in 2012. Mexican imports of less than one million head are likely for the next two to four years," said Derrell Peel, livestock marketing specialist at the Oklahoma State University.

 

He said roughly 1% of the projected 6% decrease in steer and heifer slaughter in 2014 will result from the lack of Mexican cattle.

 

Peel said that he expects to see cattle slaughter decrease by about 7.5% in the fourth quarter of 2013 and to drop by about 7% for the entire year of 2014. He added that the loss of Mexican cattle contributes to overall declining feeder cattle supplies that will be quite severe from this point on.

 

Discounting for cow slaughter, Peel expects steer and heifer slaughter will be down roughly 6%, which is about 1.5 million head less in 2014 compared to 2013.

 

The impact for packers like Tyson Foods or Cargill, is that reduced volumes of fed cattle are sure to push up cattle prices, which brings down packer operating margins. Peel estimates fed cattle prices are likely to exceed US$135 per hundredweight in the spring of 2014, noting that US$140 is possible.

 

In the past two weeks, beef packers have already started to see their margins slowly decline, falling another US$4.17 per head last week to US$14.10, according to the Sterling Beef Profit Tracker. While margins are slim, Packers are faring better than this time last year, when they dealt with losses of US$33.34 per head, according to Sterling Marketing Inc.

 

According to Peel, the reason behind fewer Mexican cattle imports is two-fold: first, Mexico is processing more of its own cattle and selling that product as boxed beef into the US; secondly, the severe liquidation of cattle in Mexico in recent years has resulted in a decrease in Mexican cattle available for export to the US and it appears that the shortage of cattle in the Mexican market is very acute.

 

The underlying economics in the beef industry are complicated as the US relies heavily on beef imports to satisfy its huge demand for hamburger meat and at the same time relied on export markets for higher margin beef products from prime rib to tanned leather.

 

Peel added that most of the hamburgers consumed at restaurants in the US come from cows raised in Australia and New Zealand, processed into frozen boxed beef and shipped via container to the US Meat sold in food service outlets is subject to country of origin labelling that is required in retail sales.

 

He said if the US were to try and meet the ground beef demand with only US beef that would be grinding higher value cuts into hamburger – certainly possible but a waste of value.

 

Peel said the Mexican cattle imports and continued trade with all of the US export partners are crucial to maintaining the balance between supply and demand which keeps packers in the green and consumers buying beef.

 

Choice beef set a retail high price in July at US$5.35/pound, according the Bureau of Labour Statistics. The retail price rose 6.86% from a year ago and it's up 9.95% from two years ago.