COVID-19 is starting to exert heavy and unusual pressure on the value that can be extracted from any given beef carcase, as consumer behaviour continues to distort market demand for red meat in previously unseen ways.
Such is the pace of change in many markets at the moment that it is proving difficult to keep up with developments – even for stakeholders directly engaged in the international meat trade.
What is currently being seen in most key export and domestic markets is a fundamental re-shaping of the way beef consumers operate. Online sales of red meat, for example, have exploded in the past two weeks, to the point where many suppliers are struggling to keep up with delivery challenges.
The collapse in restaurant and other food service activity as consumers avoid public contact and travel has sharply impacted the higher-value loin cuts, commonly used for grilling.
Conversely, beef trim, knuckles and other lean secondary primals cheap enough to go into the grind have attracted sharply elevated demand.
As Beef Central wrote on Monday, mince has become the red-hot go-to item among consumers in many countries, looking to freeze-down and stockpile foods in preparation for enforced isolation. In contrast, nobody in their right mind wants to freeze down a more expensive premium tenderloin or sirloin steak.
Meat traders are deeply concerned about demand prospects for barbecue type loin meats in coming months, in the absence of a food service trade across large parts of Asia, North America and Australia.
One large wholesaler/portion cutter targeting the food service market has seen sales decline 40pc this week alone.
Most meat wholesalers dealing with restaurant and café clients work on credit, with the customer typically owing a month or two’s worth of inventory to their supplier. Wholesalers are getting increasingly edgy about what happens when restaurants and cafes start to go out of business, as they already are. That has potential to echo further up the chain, putting wholesalers, portioners and even meat processors under financial pressure.
“The direct impact of the virus is one thing, but what we all have to be careful of next is surviving the inevitable economic fall-out that follows,” a large processor contact said.
While these barbecue ‘sweet cuts’ represent around 17 percent of any carcase, they have a profound impact on carcase value given their premium $/kg price, and any normal market conditions.
However current meat trading conditions are anything but ‘normal.’ Tenderloins – typically the single highest priced item in any carcase breakdown – in some programs are said to be almost unsaleable this week. It is estimated that up to 90pc of tenderloins in many processors’ production runs go to the food service market. One trader suggested tenderloins have fallen 30pc in value in a week, and could ultimately drop by 40-50pc on values seen in early March.
Concerns over higher quality meat
There are also mounting concerns within the industry about what happens under COVID-19 about higher quality beef in general – especially as global economies come under increasing pressure and disposable income retracts.
High quality, more expensive products like longfed Wagyu and Angus could be particularly exposed to changing consumer demand – just as they were during the worst of the Global Financial Crisis in 2008. High-end food service markets like restaurants in Saudi, Dubai and Japan have ground to a halt this week, beef Central was told.
Even items like offals are being affected. Some of Australia’s bigger offal customers are specialised restaurants in markets like Japan and Korea, but COVID-19 has seen the restaurant trade right across Asia struggle for customers, pushing offal demand sharply lower.
“In times of crisis, consumers revert back to good sustainable protein – something that keeps them alive, but is not extravagantly priced,” a trade source said yesterday. “Who is going to spend $100 on a steak in the current uncertain environment? That’s if they can find a place that’s open that’s serving it,” he said.
Short lived retail buying frenzy
While the Australian domestic beef market remains a ‘safe-haven’ for red meat sales this week – in the retail market at least – nobody in the trade sees the current retail buying frenzy as sustainable.
“Once everybody’s tuckerbox freezers are full, it all stops. And at the other end, there will be a mountain of home-stored frozen meat to be consumed, when disease conditions start to clear. What happens to domestic retail sales then?” a wholesale trader asked.
“All we are doing currently is sucking-forward a massive amount of domestic demand. The market will stop like it’s been shot, when this cycle is over.”
Processors slash cattle offers
Major meat processors are reacting rapidly to the dramatic changes in consumer and customer sentiment this week. The nation’s two largest processors have now dropped their Queensland grids 50-60c/kg since Friday last week. More on that in next Tuesday’s weekly kill report.
While dramatic currency movements this week will inevitably provide some cushioning effect in export markets where demand is flat, the fact is that the CIF value of beef in most markets remains in sharp decline, which is offsetting any benefit.
US competition grows
One exporter thinks current Australian CIF values have a long way to fall yet, because the US is about to push heavily into Australia’s premium north Asian export markets.
“The US is in exactly the same boat as Australia, with restaurants and food service grinding to a halt. That inevitably means a lot more good quality US grainfed beef – especially sweet cuts – being pushed into Japan and Korea, competing with Australian product, and pressuring prices,” he said.
“Those cuts – striploins, cube-rolls, tenderloins – are going to come under enormous pressure in the international market. In fact, people are going to have to find new applications for them, it’s that bad. It’s unprecedented – the GFC has nothing on the current trading outlook for beef.”
While ‘bright lights’ are hard to find in the current environment, retail trade in China is now showing encouraging signs of getting back on its feet – at least back to paying ‘world parity’ prices for chilled meat, having fallen well below that earlier. Volume still has a long way to recover, however, and will be better reflected in March export figures due out in ten days’ time. Frozen meat is still much further behind, with alternate cheaper supply out of South America driving the ship.
If there is a shred of consolation to come out of the COVID-19 episode, it is that agriculture generally, and red meat, more specifically, is better placed than most other sectors to ride out the maelstrom.
As bad as things get, the beef industry will be a lot less affected than food service, tourism, travel and many other sectors.
“Agriculture retains an intrinsic value in the current environment,” a processor contact said.
“The value might drop somewhat, but we are still going to kill it, trade it, sell it, and do what we do to keep people fed. Farmers and processors aren’t going to go out of business, because people everywhere have to eat.
“The premiums on certain items might not be there, and people are going to have to re-calibrate what things are worth, and how things are going to trade. But in contrast, sectors like tourism have zero value in the current environment.”
US market reflects similar trends
In the US, imported beef markets remained in disarray last week, as demand from major customers appeared to have dried up overnight, Steiner Consulting said in its latest weekly market commentary.
“Demand in China and other Asian markets remains weak and overseas packers struggle with the effect of weather-induced shortages and restrictions imposed to control the spread of Coronavirus,” Steiner said.
US livestock futures were in free fall last week, largely following the sharp drop in equities as well as ongoing speculation about consumer demand and especially production.
One common line of speculation among futures traders was the potential impact that COVID-19 could have on meat production, Steiner said.
“The US government has been rather slow in testing for the disease and there is a fear it could soon blow up by growing geometrically. Could this result in major packing plants being closed? If so, what would this do both to the supply of beef going from the packer to the consumer (lower thus higher prices) and from the producer to the packer (lower thus lower prices).
At this point this remained in the realm of speculation but it was one more reason for the selling pressure that had developed, Steiner said.
At the time the report was filed, June US fed cattle prices were trading under $90/cwt, the lowest in over a decade and about 30pc lower than where summer futures were trading in early January.
“Such prices would indicate that market participant now think the US economy is headed for a sharp contraction. The potential for supply disruptions makes price discovery even more difficult to realise,” Steiner said.
“For meat buyers, the situation varies greatly depending on what channel you are buying for. Retail buyers are struggling to keep up with orders. Consumers are rushing to stock up for fear of further restrictions on movement. Invariably the meat department is stripped bare. The ‘you never know’ type of buying has resulted in especially strong demand for retail items.”
The price of many US beef items, especially steak cuts, remains well below year ago levels, however. Wholesale beef prices and fed cattle values are also lower.
As described in the above report, the items that have seen the biggest declines are products that benefit from strong US food service demand.
“Restaurant business has just started to be affected,” Steiner’s report said. “We expect to see a dramatic decline in business for sit down restaurants as consumers stop travelling, stop going on vacation and generally hunker down at home.
“Fast food business may benefit from drive-thru’s, however, as more people work from home that part of the business may struggle as well. Fast food operators that do not have drive-thru’s will look to offset this by doing more delivery business. Some are better set up for this than others.”
In Asia, fast food delivery business has seen an especially big jump, Steiner said.
Chipotle, for instance, recently sent an email to all US customers that delivery is now free.
All this uncertainty had caused foodservice buyers to adopt a wait and see attitude, Steiner said.
“Domestic lean beef prices (used for grinding beef) were higher this past week and they are one of the two beef items that are trading above year-ago levels. Could imported lean beef benefit from this? At this time we do not think so,” it said.
The reason for the higher domestic fresh prices was due to ‘exceptional’ retail ground beef sales.
“Only a very limited amount of imported beef is sold in the fresh retail case,” Steiner said.
“Some imported beef sold by large warehouse stores in the form of frozen beef patties will likely benefit, but much of the imported product still goes through foodservice and demand uncertainty has negatively impacted that part of the market. Additionally we continue to see more lean grinding beef than a year ago. Offerings from New Zealand have declined and shipments from Australian in February were down only 2pc from a year ago.
Central American countries are shipping more beef to the US at this time, and are now fully exempt from US tariffs. US imports from Argentina remain limited, but they are currently above 1000t/month, several times higher than this time last year. Brazil has yet to ship fresh beef to the US but a number of Brazilian plants are now approved to ship.
CCA: Cattle producers committed to keeping beef on shelves
Cattle Council of Australia issued a statement yesterday saying red meat production in Australia was ‘business as usual’ as shoppers rush to stock up on staple foods including beef.
CCA President Tony Hegarty said the nation’s cattle producers were committed to keeping supply lines open as the government works to manage the onset of the coronavirus.
“Beef producers take their responsibility to help feed the nation seriously,” Mr Hegarty said.
“Our supply chains and marketplace are open for business. We have the capacity to supply high-quality and nutritious red meat to all our customers both at home and overseas.
“There are about as many cattle in Australia as people, so we won’t run out of beef anytime soon.”
“The health and safety of our staff and customers is our number one priority. We have world-class biosecurity standards and practices to make sure consumers can depend on Australian beef.
“Cattle Council and other parts of the supply chain are committed to working together through the Red Meat 2030 partnership in the COVID-19 response.”