February 1, 2019

Riding the crest of a wave: US beef enjoys one more solid year

A five-year upturn in cattle inventories is over but output and exports will rise for at least another year. Provided wet pastureland conditions return, productivity is high and there will be no shortage of domestic and foreign customers.

By Eric J. Brooks

An eFeedLink Hot Topic
While America's five-year cattle herd expansion is topping out, US beef is expecting another banner year, and possibly two of booming production and exports.
On one hand, while both domestic cattle prices (-30%) and international beef prices (-20%) are below their 2015 secular peaks, the coincidence of wetter pastureland conditions and low feed costs endured until 2018, when US grassland conditions again turned arid.
Consequently, from their 60-year bottom of 8.5 million head at the start of 2014, US cattle inventories rebounded 7.3% to a USDA estimated 95.0 million tonnes at the start of 2019. Beef cattle increased a sharper 10%, from 29.1  million head to 32.0 million head over these same five years.
For now, arid pastureland conditions and lower returns have caused America's five-year cattle herd expansion to level out. Overall cattle numbers are projected to open 2020 up only 0.2% to 95.2 million head, with the number of beef cattle remaining constant near 32 million.
Due to cattle's multi-year grow out time, the biggest rises in beef production are occurring now, as cattle from the rapid herd expansion years reach maturity. In a stroke of fortune, America's booming economy dovetailed with high export demand and faltering production in rival beef exporting nations: Australia was afflicted by drought. Indian beef exporters are falling victim to constantly tightening restrictions on cattle slaughter and flat, low weight herds.
By comparison, America enjoyed several years of steadily improving pastureland before dry conditions returned in 2018. From 10.82 million tonnes in the low cattle inventory year of 2015, US beef production jumped 13.6% in three years to 12.29 million tonnes in 2018, up 2.9% on the previous year. With farmers eager to bring the last cattle from inventory expansion years amid strong demand conditions, the USDA projects beef output to rise a further 3.6% in 2019. The 12.750 million tonnes projected for 2019 will break America's all-time beef output record of 12.3 million tonnes, which was set in 2000.
The near 3% annual expansion in US beef production of the last five years is the strongest supply increase since the 1980s. Best of all, this supply surge dovetails with the fastest demand growth seen in decades.
Despite an 8% consumption drop from 2014 and 2015 (when cattle numbers bottomed out), the years from 2014 through 2019 inclusive are seeing an average 2.9% annual increase in domestic beef consumption, the fastest five year increase in domestic demand since the 1980s. Even after rising 13.6% from 2016 through 2018 inclusive, America's recent tax cuts and subsequent rapid economic growth created momentum for a 3.6% consumption increase in 2019,  to 12.66 million tonnes.
Beef also has the distinction of being the meat line least impacted by America's trade war with China and Mexico. While 2018 saw US beef lose the chance to enter China's market for the first time, the new USMCA trade agreement's ratification promises better times ahead for beef exports to Mexico.
At the same time, while world beef exports staying flat near 10.57 million tonnes for a second consecutive year, US beef exports are surging at the expense of rival beef producers. -From 2014 through 2019 inclusive, world beef exports from Australia (-341,000 tonnes) and India (-457,000 tonnes) will have fallen a collective 798,000 tonnes.
American exports did much to fill the resulting supply vacuum, rising a USDA estimated 333,000 tonnes or 28.5% over the five years, from 1.167 million tonnes in 2014 to a USDA estimated 1.435 million tonnes in 2018 and a record 1.5 million tonnes this year. The 4.5% projected growth in 2019 export volumes comes on top of 11.8% and 10.6% export growth in 2017 and 2018 respectively.
Value-wise, American beef's export performance is even more impressive. From 2008 through 2018, export volumes increased by 45.6%, from 0.985 million tonnes to 1.435 million tonnes -but their value jumped approximately 121%, from US$3.62 billion to at least US$8.0 billion. While this is partly due to higher world beef prices, it also reflects the fact America increasingly tends to export expensive high-value cuts while mostly importing lower-end ground beef.
The 5.1% average annual rise in export volumes from 2014-19 inclusive is actually healthier than the 5.9% increase in exports that happened from 2009-14. (Note: The previous 2004-09 33% annual growth in exports is merely due to a recovery from Mad Cow Disease and not genuine trade expansion).
This is because 2009-14 previous export surge occurred when the industry was in deep recession. At that time, consumption (especially of expensive, high-value cuts) fell more rapidly than production, making more available for export.
By comparison, the current export surge is occurring with both output and US beef consumption rising rapidly. From 40kg in the mid-1970s, US beef per capita beef consumption fell nearly 40%, bottoming out at 24.5kg in 2014. It has since rebounded 11% in five years, to an estimated 27.2kg this year. The increase in domestic consumption reduces by over 600,000 tonnes the quantity of US beef available for export -otherwise, America could have exported approximately 2 million tonnes or more of beef this year.
With domestic demand growing at its fastest rate in decades, imports which had fallen 10.5% from their 1.53 million tonne peak in 2014 (to 1.37 million tonnes in 2018), are rising marginally, to 1.40 million tonnes this year. It does mean however that America has returned back to being a net beef exporter. Given its growing comparative advantage in beef production, the US will become the world's second-largest beef importer (after China) but retain its beef exporter status in years to come. While other nations lead by volume, America puts in a more impressive performance with regards to the unit price of its exported beef.
Trade-wise, America's advantage in beef cattle production comes from more than its abundance of pastureland or the fact that no other exporter is insulated by such a large, high consumption domestic market. America leads in both the development and real-world implementation of cattle genetics.
Averaging nearly 370kg, US cattle finishing weights are far higher than the 285kg seen in Australia or 235kg that's the norm in Brazil. Despite freely exporting its cattle genetics to the rest of the world, America has maintained or increased its advantage in cattle finishing weights over rival beef exporters. -But America's large advantage in cattle productivity and farm management techniques will only be fully actualized when pastureland conditions return to normal, which should occur sooner or later.

Beyond 2019, the last cattle from the five-year expansion will be released to market next year. The higher supply of finished cattle and steadily increasing carcass yields should push 2020 beef production up approximately 2%, to a new record near 13 million tonnes.
For 2020 and beyond, with feed costs poised to stay low for a few more years, much depends on US pastureland conditions during 2019 and the early 2020s. A return to normal rainfall or even slightly wetter than average conditions that prevailed from 2015 through 2017 could stimulate steady 2% annual increases in US cattle numbers.
From 4.3% in the year 2000, US exports rose to 15.6% of world beef shipments in 2011. Drought made them retreat to 10.7% of world beef exports by Improving pastureland and good cattle rearing returns made them rise to 13.6% of world beef exports in 2018 and a USDA estimated 14.2% this year. With Asian beef demand beckoning, good pastureland weather could enable America to supply nearly 20% of world beef exports by the mid-2020s, and possibly more if the trade war with China ceases.

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