A much-needed softening in the value of the Aussie dollar – falling below parity against the US$ for the first time in a year over the weekend – could be one of the catalysts for a rally in imported grinding beef prices in the US in coming months.
As illustrated in Beef Central’s home-page 90CL graph, pictured here, prices for imported Australian lean grinding beef in the US continued to descend last week, down 8.5 percent in A$ terms since February.
But the feeling is the bottom of the cycle may be close, and upside not far away.
Sydney non-packer exporter, Stewart Hanna, a director of Sanger Australia, said the 12-month low for the value of A$ would certainly help build a case for some price recovery into the US.
“It feels like we might have hit a bit of a base in the US grinding meat market last week,” Mr Hanna said.
“It’s been slipping for some time – a lot of US customers have been telling us they had plenty of stock, and were not looking to buy now until July or August delivery.”
“That’s always a bit scary, especially in view of the extreme high rates of kill out of New Zealand due to drought, and the very large kills in Australia, and the US,” he said.
“But there’s still not massive amounts of Australian beef going to the US, so I don’t see that it’s the supply side of the equation that’s been stifling the market. It’s just that lacklustre burger demand in the States recently, and stocks have built up as a result.”
“That’s led to US buyers saying, I’m not going to purchase unless I can buy it cheap, and buy it out front,” Mr Hanna said.
But as food service and retail business starts to grow, coming into North America’s warmer months, users were now starting to get through those cold storage stocks, and perhaps a little quicker than they might have expected.
“We have US customers who had been saying, ‘we don’t need to purchase until July or August’ who are now saying, ‘we can handle a bit of meat in June’,” Mr Hanna said.
“But does that mean we will see another 5c/lb on the bottom of the market today because that is what Australian exporters are asking? Probably not, but it is a positive sign for out-front, if there is not a lot of selling into the US at current levels,” he said.
Mr Hanna said there was certainly some Australian exporter resistance to prices being offered out of the US for 90CL grinding meat.
“The US customers are wanting to pay levels for Australian 90CL that are not all that different from what other overseas customers are paying for 85CL, or less,” he said. “The Middle East last Friday paid much the same price for 85s that the US wanted to pay for 90s.”
“The US will always be a big customer for Australian meal grinding beef – it’s just a matter of when – and perhaps depends on a few of the bigger boys letting go. If they take some orders that will see them through for the next few weeks, we might be in very good shape and start to see the big US burger grinders get a bit keener.”
A further pointer to potential for improvement in Australian manufacturing beef prices into the US comes from the seasonal decline in New Zealand beef production, following a period of huge production due to drought across the North Island, and parts of the South, which has competed strongly with Australia for US market share since January.
The US itself is also expected to struggle to maintain its cow slaughter at its current high rate. US cow slaughter is sitting at or above 2011 figures as a result of the late winter, limited hay supply and escalating drought conditions in Texas. That has also effectively robbed Australian grinding beef exports of demand from US customers to this point.
US demand on rise
Writing in his US Cattle Buyers Weekly last week, analyst Steve Kay said the demand side of the US beef market was also looking more positive.
“Recent cold, wet weather in some places continued to delay the full onset of the barbecue season, so pent-up demand remains,” he said.
“May and June are the two strongest beef demand months of the year in the US. The industry designates May as Beef Month and mounts numerous Beef Checkoff-funded promotions. Retailers are rolling out their most aggressive beef features in two years. The economy is slowly improving, unemployment levels are declining and fuel costs are lower,” Mr Kay wrote.
“All these factors suggest Americans will buy a lot of beef in May and June.”
Why has the US grinding meat market fallen away?
In their weekly US imported beef report last week, analysts Len Steiner and Steve Meyer, said there were a lot of theories floating around about reasons for the sharp decline in the lean grinding beef market in the US in recent times.
“For some, this is a story about the effects of Country of Origin Labelling on ground beef business in the US retail meat case,” Mr Steiner said.
The increased regulations associated with COOL in the US implied a higher compliance cost burden on the part of retailers, and subsequent reduced demand for ground beef.
“While we think COOL is having an impact at the margin, it is unlikely that it can be blamed for the 9pc decline in US domestic lean grinding beef prices in a matter of eight weeks, especially during one of the best demand times of the year,” Mr Steiner said.
Another theory was the impact that cold, wet weather had had on US foodservice and retail sales so far this year. Compared to a year ago, weather in the US has been particularly harsh, with some areas recording unusual May snowfall.
“At the margin, we agree that weather also plays a role and it likely has contributed to the flat sales environment in the first four months of the year,” Mr Steiner said.
“In our view, however, the story behind the break in lean grinding beef values is more complicated.
“It is often said that the cure for high prices is high prices, and we firmly believe in that. After all, high prices provide consumers with a signal that supplies are tight and they need to reduce consumption of a scarce commodity. But in the real world, the reduction in consumption does not come immediately.”
“This is especially true for restaurants, which have printed menus and need to schedule TV and print promotions months in advance. Last year, US food service operators were faced with record high lean grinding beef prices.
“More importantly, most market watchers and analysts expected prices to continue to rise in 2013, on even tighter cow slaughter numbers, and the need for the US to ‘buy’ market share away from competing Asian buyer markets.”
These price signals appeared to have energised US foodservice operators and caused them to make significant changes in the way they did business.
An example, discussed yesterday on Beef Central, has been McDonald’s dropping its Angus burger range in favour of chicken promotions, where raw material costs are lower. Read yesterday's report here. The idea was to bring to market a product with a lower price-point and better margins than current beef hamburger offerings.
“As a result, the quantity of grinding beef demanded from foodservice coming into 2013 declined, in order to match the expected cutbacks in supply,” Mr Steiner said. “And as is usually the case, such plans tend to overshoot: that is, the decline tends to be bigger than most expect.”
One indicator of this shift in quantity demand is the activity in the chicken market. Chicken breast prices which were trading in the US in the low US$1.30s early in the year were last week approaching US$2.00/pound and prices in the spot market were even higher.
The flip-side had been a very weak grinding beef market, Mr Steiner said.
This ‘planned’ demand rationing was further impacted by the cold weather, which reduced foot traffic in restaurants and the challenging US economic environment, which also reduced spending and foot traffic.
As demand has struggled in the US because of changes in promotions and the economic/weather effect, domestic cow meat supplies in the US have increased.
“Earlier in the year, the increase in supplies was driven by more cows coming to the US from Canada, as the lack of Canadian processing capacity has driven more cattle coming to the US for slaughter,” Mr Steiner said.
More recently, however, there had been an increase, also, in the number of US-born cows coming to slaughter. Dry conditions in some key areas, including Texas and the Great Plains, have pushed more beef cows to market than a year ago.
Rather than facing double-digit year-on-year declines in cow slaughter in April and May, the US market was now actually having to absorb significantly more domestic cows.
Latest data shows US bull/cow slaughter is running 20pc higher than a year ago. Even when adjusted for the increase in Canadian cows in the mix, US domestic cow slaughter is up 10-12pc from a year ago, since April.
“The bottom line in all this is that the market was leaning on rationing grinding beef demand in order to contain costs,” Mr Steiner said.
“At the same time, the number of cows coming to market is significantly higher than a year ago. We think this is the reason why end-users are not bidding on meat: they already have enough inventory around them and they are promoting chicken. Eventually this will change, but in the short term, lean grinding beef values will likely remain under pressure,” he said.
Depending on the pace of US domestic cow slaughter in July and August, there could be further weakness in domestic prices, or a modest recovery going into the new financial year, he suggested.