All eyes are on the United States, as increased supplies of beef, pork and poultry and potential trade fallouts create uncertainty and market volatility, according to the latest Rabobank Global Beef Quarterly report.
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While US prices have been holding up remarkably well, there are some moving parts in this important market that could affect global beef trade over the rest of the year.
The report cites increased supply of US beef and also pork (the latter the main driver of expanding US protein supplies) as a key factor to watch, along with trade uncertainties, the risk of herd liquidation with ongoing US drought conditions and how beef demand is holding up in the saturated US market.
“We have been flagging these watch factors for several months now, but the potential impact posed by growing US beef supply is bigger now, given the dry conditions and increased slaughter numbers here in Australia,” said Rabobank senior animal proteins analyst Angus Gidley-Baird.
“Any downward pressure on US prices from increased protein supplies will have an impact on US demand and the price they are willing to pay for Australian beef, all at a time when there could be more Australian cattle coming onto the market from worsening drought pressures.”
US beef production is currently up by three per cent, with a similar growth rate expected in 2019.
“While this is less than the five per cent growth anticipated earlier in the year, the risk of US cow herd liquidation remains high, with half of the US beef cow herd residing in states facing ‘extreme’ to ‘excessive’ drought conditions,” he said.
If the US starts generating larger volumes of lean trimmings by the slaughter of more beef cows, Mr Gidley-Baird said this would impact US demand for Australian lean trimmings – one of the largest product lines Australia sends to the US – and ultimately our domestic prices.
“But it is not only US supplies of beef that are growing, pork production is expected to see growth of between four and five per cent in 2019. While some of this protein growth is being absorbed by the US consumer, exports are increasingly important across all protein categories.”
US beef exports have increased by 14 per cent (year-to-date to June 2018), with a significant increase to South Korea (up by 41 per cent) and Hong Kong (up by 11 per cent).
“The US is a key competitor in some of our biggest markets – Japan and South Korea,” he said.
“While Australia’s exports to these markets have also increased this year, any additional volumes from the US will lead to competitive pressures in these markets.”
Trade wars
In the trade war between China and the US, beef has been less affected given the low volumes of US beef going to China,” Mr Gidley-Baird said.
“However, perhaps a bigger worry for US beef exports is the slow process to renew the NAFTA with Mexico and Canada, although we have seen some progress in these talks in recent days,” he said.
African Swine Fever
Another key development is the outbreak of African Swine Fever, according to the report.
“Several outbreaks have been recorded in China in recent months, which raises the possibility of China – the world’s largest consumer of pork – being caught short,” Mr Gidley-Baird said.
“While the extent and timing of any herd liquidation remains uncertain, if it does take hold it is likely China will increase imports of pork – and potentially other meat such as beef. And this would impact beef supply chains in other regions.”
Australian outlook
The dry season continues to bite, with the Eastern Young Cattle Indicator falling to a three-year low of AUD 4.50/kg in mid-August, the report said.
“The forecast for drier-than-average rainfall is expected to keep downward pressure on prices for younger, lighter classes of cattle and cows, with the potential for a more dramatic drop in spring if the season doesn’t improve,” Mr Gidley-Baird said.
“Without significant rain, many producers calving in spring will face limited feed, forcing increased turn-off. Year-to-date slaughter is already up by nine per cent on 2017 levels.”
In the year-to-date, Australian beef exports have increased by 13 per cent, with strongest growth to China (up 48 per cent), South Korea (12 per cent) and Japan (11 per cent).
“Despite the higher cow slaughter resulting in higher volumes of lean trimmings, shipments to the US are only up one per cent so far this year,” he said.
