Supply pressure building in major world beef markets

Blake Holgate, Rabobank
Blake Holgate, Rabobank

It’s been a positive start to 2018 for the global beef sector – with production and consumption up and prices generally favourable – however, building pressures in some of the world’s major beef-producing nations have the potential to change export market dynamics, with implications for New Zealand, according to a recently-released industry report.

In its Beef Quarterly Q2 2018 – Production continuing to Grow, but Supply Pressure Starting to Mount, agribusiness banking specialist Rabobank says supply pressure is growing in global beef markets due to dry weather conditions in the US, a surplus of animal protein in Brazil and changes in live cattle trade out of Australia.

Report co-author, Rabobank New Zealand animal proteins analyst Blake Holgate says the degree to which these supply pressures continue to build will determine the extent of their impact on global markets.

“Each of these factors has the potential to cause major disruption to global beef trade flows and to drive global beef pricing lower. In coming months beef producers here in New Zealand and internationally will be hoping for developments that relieve these pressures and ensure beef markets remain balanced moving into the second half of 2018,” he said.

Pressures building

The report says dry weather conditions have been a major disruption in the US cattle market since last northern hemisphere autumn, with 70 per cent of US beef cows now under measureable drought stress.

Holgate says US cow slaughter numbers were already higher than in previous years, and the likelihood of some degree of forced liquidation during the coming season was very high.

“The next few months will be crucial with continued dry weather likely to see a liquidation around August. This will create a scenario where there are too many beef cattle in the US system and will lead to increased volumes of US beef in their domestic market as well as greater volumes being pushed onto the international market,” he said.

The large amount of available animal protein in Brazil is a further factor which has the potential to create additional competition in international beef markets, according to the report.

“The beef supply in Brazil has grown, while at the same time there has been a decline in poultry and pork exports due to restrictions in the international market. This has resulted in greater volumes of meat being directed to the local market and has placed downward pressure on prices for all animal proteins,” Holgate says.

“If low domestic protein prices continue, it could push the Brazilian beef industry to try to find other export destinations for their product. We have already seen Brazilian beef exports increase by 20 per cent in the first quarter of 2018 and unless the pork and poultry industries reduce their supply, we are likely to see Brazilian beef exports grow even further.”

Trade changes in live cattle exports are a further factor which may impact global beef trade.

The report says live cattle trade between Australia and China commenced in January with some commentators believing up to 100,000 cattle could be transported in 2018.

“While 100,000 head is a small volume in the context of total Chinese beef production, the potential flow-on effects of redirecting Australian cattle from other South East Asian markets may set in motion a shuffle of South East Asian Beef procurement,” Holgate comments.

“Indonesia’s announcement it will import 100,000 tonnes of carabeef from India in 2018 would easily account for the loss of 100,000 Australian live cattle diverted away from Indonesia to China and potentially establish a more permanent supply chain between the two countries.”

New Zealand

Of the supply pressures outlined in the report, Holgate says the big dry in the US was most likely to impact on New Zealand given the significance of the US as an export destination for New Zealand beef.

“Since April we’ve already seen weaker US beef import prices contribute to domestic cattle prices falling by two percent in the North Island and three percent in the South,” he says.

“We do expect the depreciation of the New Zealand dollar against the US dollar to limit further softening of schedule prices over the coming months, however should the US imported beef price drop further, it is likely New Zealand beef prices would follow.”

While Monday’s announcement by the New Zealand government to cull a further 126,000 cattle over the next one to two years will increase New Zealand’s domestic beef supply, putting some downward pressure on prices, the long-term influence on the beef schedule is not expected to be significant.

“Given the number of cattle to be culled represents approximately only five per cent of New Zealand’s annual beef slaughter, and the cull is occurring over a prolonged period of time, the negative impact on beef prices should be limited when compared to external factors like export market demand,” Holgate explains. “However, if the bulk of the cattle culling happened to coincide with either a seasonal influx from the beef industry, or adverse weather conditions, we would then expect to see the cull have a more substantial bearing on prices.”

Despite New Zealand beef export volumes rising significantly in the last quarter of 2017, they rose by only one per cent in the first quarter of this year, Holgate says,

“In comparison with the first quarter of 2017, export volumes to key Asian markets such as Taiwan, South Korea and Japan were all down. This was, in part, due to increased competition from US and Australian beef exports, while Japan’s temporary tariff hike also played a role.

“Drops in export volumes to these markets have been offset by increased beef exports into China. China is our largest Asian market and during quarter one we saw export volumes of beef into China rise by nine percent.”

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