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Exciting opportunities for Australian beef exports to US, but when does it really kick-in?

Jon Condon, 19/03/2024

Panelists during last week’s risk management forum in Brisbane

 

THERE’S now broad agreement that the United States presents the best demand opportunity for Australian beef in the medium-term, but the key question remains, when does it really start?

The topic came into focus during a panel session held as part of an Argus risk management seminar in Brisbane last week. Panellists included NSW beef processor Andrew McDonald, analyst Robert Hermann from Mecardo, and Varoon Rai, senior vice president of agricultural commodities with Macquarie Bank, based in New York.

“We’re all pretty excited about the beef export opportunities that lie ahead,” analyst Robert Hermann told the gathering.

“We’re coming into a time when there is plenty of production. But we’re also coming into a time when other markets are coming under pressure,” he said.

“The US has been degrading its herd quite consistently for a long time. Like many others, we’d been expecting the rebuild phase would have happened quicker than it has. But we can say with some confidence that every day, we’re a day closer to when that starts, and the impacts of that will be quite significant,” Mr Hermann said.

“Fortunately, it will come at a time when Australia has a lot of supply. That’s not a bad place to be in, if you’re in the Australian beef market.”

Different customer responses – switchability

Macquarie’s Varoon Rai said since the COVID era, the export beef industry had seen different responses from US clients.

“Certain clients (ie large food service and retail customers) will never buy (imported) frozen manufacturing beef. But for most, there is a level of switchability between Australian and US beef, and trimmings,” he said.

“If you can make it through the Panama Canal without delays, Australian product can be landed in Philadelphia or anywhere on the US east coast pretty easily.

“But there would be a level of tolerance – US stakeholders would not switch to Australian beef if there was only a 2c/lb difference in price. But if we do start to see Australian beef at considerably cheaper prices than US domestic, switching will happen – and it will happen in decisive volumes,” Mr Rai said.

He said the US Cattle Futures market had seen the effects of the US beef herd liquidation coming.

“We saw placements go up, and then there was a 20pc drop in the market. All of a sudden, the market stepped back, looked at calf growth numbers for last year, replacements this year that have not really shown a herd pickup, and on top of that, severe winter and crazy wildfires in Texas.”

“Who can say with any certainty that US pasture conditions will be great when it comes time to make those decisions? Cattle margins in the US have been terrible, so that herd replacement incentive is on the margin,” he said.

There was a lot of uncertainty in the US market that would lead to stakeholders watching the Australian and US beef trim prices very closely, before making production decisions, Mr Rai said.

“Maybe what it means is that people are unwilling to lock-in more than a six month-strip, or an eight-month strip. Or what it might mean, given all the uncertainty, is a customer with an infinite amount of switchability, a large quick-service restaurant chain might say: I don’t want anything to do with the US cattle herd impact, the Aussie trimmings are cheap right now, let me just lock that it for 12 months and be done with this.”

Delayed impact

Export beef processor Andrew McDonald, chief executive of Bindaree Food Group, told the gathering he was not as optimistic about US export prospects for 2024, as what some others had suggested.

“We have not yet seen the herd in the US start to pick up. There’s no doubt there has been a little pick-up in the imported 90CL price more recently, but I’m of the view that if we are to see any significant changes in the US, it won’t happen until late in the year.

“There are still high numbers of US cattle on feed. The delay in US herd rebuilding has lasted much longer than what many expected, and that delay will only continue,” Mr McDonald said.

“As a result I see the really strong year for Australia being 2025, and into 2026. In the meantime, I see plenty of headwinds in 2024, still.”

In other markets, Mr McDonald referred to the weakening trend in the Australian domestic beef market. While cold storage inventory levels were dropping, Japan and Korea “could not seem to find their legs”, and China was still very weak, he said.

“We are sitting there with a huge opportunity in the UK, but we cannot take advantage of it, while ever we have the EUCAS (European Union Cattle Accreditation Scheme) supply chain still in place.”

“I’m sitting here at this point looking around the world at beef importing nations, asking: Where is the opportunity? There’s no doubt that the one big opportunity is going to be when the US finally goes into herd rebuild, and we see the six-month lag for cattle coming out of the US feedlots.”

“Once that happens and US demand for Australian beef rises, we will then start to see improvement in Japan and Korea, because the US will have less of its own beef to send into those countries.

“We may have to wait for a while yet, but I think in 2025 and 2026, we will see some extraordinary prices for Australian lean trimmings – but we’re obviously not seeing them just yet.”

Robert Hermann agreed with that sentiment, but said Australian beef producers were still going into their fourth consecutive good-to-excellent season in some areas.

“We’ve noted from producer business models that production is the key driver of their success. That’s going to continue to see Australian beef producers remain bullish in keeping their numbers up. That’s good for processors, but also, the timing of Australia’s big turnoff is going to happen during a period of really good demand being directed at Australia,” Mr Hermann said.

Exchange rates have big impact

Asked what impact exchange rates were having on global beef trade, Varoon Rai said there were three or four currencies worth keeping an eye on.

Looking at the Korean Won as an example, Korean beef import volume had stayed in a tight 15pc range between 2018 and 2022. But between 2022 and 2023, US beef exports to Korea dropped by 50,000t, while at the same time Australian exports increased by 20,000t.

“What drove that?” he asked. “If you look at the Aussie versus Korean currency, it stayed very stable. But if you look at what happened with the US$ versus the Korean Won, the US$ absolutely took off, making US product very expensive.”

But FX strategists were forecasting the US$ to weaken by about 3pc versus the Won, at the same time as the A$ is forecast to weaken by 1.7pc versus the Won.

“Obviously the US$ is weakening more under this scenario, but the gulf is still so big, it doesn’t matter. Australia will win market share when it comes to Korea.”

Japan was an even more interesting story, Mr Rai said.

With beef cold storage inventory declining as it has, it meant Japan becomes a marginal importer of importance.

“The US$/Japanese Yen curve had gone ‘absolutely ballistic right now’, meaning there is no US product that would win that marginal, price-sensitive share,” he said.

“But looking at currency forecasts one year forward, that price is expected to drop 5pc; look two years forward and it is expected to come off 10pc. So if I was an Australian exporter, I’d be a little more concerned about Japan prospects, than Korea, at present.”

In China, the collapse in the Chinese property market would be a drag on the national economy.

“We have to be very careful it does no drag down the rest of the economy. We’ve seen that in other commodity markets – in the dairy market, when China goes away as a customer, all dairy starts collapsing.”

“China swinging either way could affect Australian exports in a massive way,” he warned

Slaughter capacity

In a discussion around capacity for slaughter heading deeper into 2024, Andrew McDonald said with a national herd capacity at around 27.5 million (MLA’s figures) in 2023, the industry delivered 7.5 million head of cattle for slaughter for the year.

“When we have 7.5 million head for slaughter, that basically fills the industry’s processing capacity on the East coast – even with the recent additions of second shift at Dinmore and other adjustments.”

“Once the kill (or slaughter cattle supply) goes above 7.5 million, the pendulum swings in favour of processors – there is more cattle, and less strong competition.

“We’ve obviously also witnessed the reverse of that, with annual kills as low as six million, forcing the cattle price to do what it did in 2022-23.

“I see 2024 as the change-over period, where the cattle slaughter is predicted to rise again to 7.5 million. The weather, along with the number of cattle available for slaughter, are the two main contributors to Australian slaughter cattle prices. Beef prices are the third point.”

Robert Hermann said the processing industry’s ability to cope with larger numbers, coming out of COVID, had surprised many.

“That was a credit to the industry. At the time there were some dire predictions about having to shoot sheep, because of the inability of processors to handle them. That never saw the light of day.

“However we are going to see an elevated slaughter number for quite some time now, because the seasonal incentive for the producer is to keep this herd number high.

“But if the expectation that later this year or early 2025 we do see some really strong demand for Australian beef, then we are going to see that continued expansion, or at least maintenance of the current high cattle number.

“I guess I’m sounding quite optimistic about the market, but it’s amazing how many times in the past, somebody else (an export customer) has stepped up the plate when another market has fallen over.”

However Mr Hermann cautioned over the development of another dry period.

“We saw what happened in the spring of last year, when the whole production sector basically lost confidence, choosing to destock because weather forecasts weren’t looking good. Restockers also stepped back from the market, producing more volatility than we’ve ever seen before – and more than what was reasonable.

“So the market now has short-term history of being very emotional. With the build-up of the herd in the north, while the good seasons are there, everything ticks along, but it may not last forever.”

 

 

 

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Comments

  1. Andrew Dunlop, 20/03/2024

    The premium for producing high quality table beef for the domestic market (heavy steer at $2.69/kg) has fallen to just over 50 cents per kg compared with cows for manufacturing beef production (Medium Cow $2.12/kg). Higher input and management costs for the table beef destined heavy steer makes me wonder whether I should be targeting the US manufacturing beef market and pivot production!

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