A monthly column written for Beef Central by US meat and livestock market commentator, Steve Kay, publisher of US Cattle Buyers’ Weekly
THOSE of us who write about the beef industry, from Australia to North America and beyond, rely on a steady stream of news, good or bad, to stay in business.
No one enjoys writing about natural disasters, like Australia’s catastrophic droughts or floods, or about disease outbreaks that threaten animal agriculture. We would much prefer to write about the good news, such as the growing global demand for beef and other proteins that will keep everyone in business.
Journalists cannot be choosy however. All we can do is report on the good and the bad, and seek analysis and opinions that will help inform our readers as to what all that news means. For me, I always focus first on what it means to producers, as they are the bedrock of the beef industry. I then focus on consumers because without them buying beef, there literally is no industry.
Strong US demand
With that in mind, I’m happy to report that demand for US beef at home and abroad is remarkably strong. The steady performance of the US economy, from solid GDP growth to job creation, rising wages and low unemployment rates, has put more money in consumers’ wallets than for at least a decade.
The classic definition of improved demand – larger volumes sold at higher prices than a year ago – is playing out almost every week.
The result is that beef remains king of the grocery store meat case. The classic definition of improved demand – larger volumes sold at higher prices than a year ago – is playing out almost every week.
USDA’s All Fresh retail beef price in March averaged US$5.78 per pound, up 3.0pc from March last year. The USDA Choice grade beef price averaged US$6.07 per pound, up 3.4pc. That’s especially significant, as Choice accounts for 70pc or more of all the beef that is quality-graded in the US.
US beef exports are down slightly on last year, in part due to tariff pressures in Japan. For the first quarter, exports were slightly below last year’s record pace.
“US beef cuts are still subject to a 38.5pc tariff in Japan while our competitors’ rate is nearly one-third lower at 26.6,” notes Dan Halstrom, president and CEO of the US Meat Export Federation.
“This really underscores the urgency of the US-Japan trade negotiations, which must progress quickly if we are going to continue to have success in the leading value market for US beef and pork,” he said recently.
Revenge of the ‘Funny Money’
On the supply side, US cattle feeders are battling both packers over cash prices and collapsing futures prices caused by pension funds’ liquidating their live cattle contracts.
Some analysts have dubbed this the “Revenge of the Funny Money.” The plunging futures market last week caused hedged cattle feeders to sell cattle early in the week at lower prices for the second successive week. Prices are likely to keep going lower because of the large basis difference between cash and futures prices. It is challenging at this point to know what factors will come into play to stabilise cash prices, say analysts.
Record profits for Tyson
Meanwhile, Tyson Foods, the largest US processor of grainfed cattle, continues to rack up record quarterly beef profits. It reported operating income of US$156 million in its fiscal 2019 second quarter ended March 30. This was its beef segment’s fifth record quarterly profit in a row.
The achievement came in what Tyson calls its most volatile quarter. Beef for the first six months earned US$461 million, versus US $348m in 2018’s first half. So the segment is on target to beat its full-year record of US $1.014 billion set in fiscal 2018.
Now throw in the potential impact of African Swine Fever on the global protein industry and anything could happen to beef prices. Tyson president and CEO Noel White says that in his 39 years in the business, he has never seen an event that has the potential, as ASF does, to change global protein production and consumption patterns.
Court challenge full of factual errors
Not all is rosy for US beef packers, though. They face a class action lawsuit filed on behalf of producer activist group R-CALF USA and four cattle feeding ranchers. The suit alleges that the Big Four packers violated US antitrust laws, the Packers and Stockyards Act and the Commodity Exchange Act by unlawfully depressing prices paid to ranchers from at least January 1 2015 to the present. It alleges that the packers conspired to depress the price of fed cattle they purchased from ranchers, thereby inflating their own margins and profits.
The lawsuit, though, is full of factual errors and misstatements. The complaint alleges that the packers collectively reduced their slaughter volumes and purchases of cattle sold on the cash market in order to create a glut of slaughter-weight fed cattle.
The facts contradict this claim. In 2015, 21.5pc of all live cattle nationally sold on the cash market, an all-time low. The percentage increased to 25.6pc in 2016, to 25.7pc in 2017 and to 26.7pc in 2018. This was entirely due to cattle feeders wanting to boost the cash market and had nothing to do with packer behaviour, say observers.
The suit also alleges that packers transported cattle over uneconomically long distances, including from Canada and Mexico, to depress US fed cattle prices. But the only slaughter cattle that enter the US are from Canada for direct slaughter at northern plants such as Tyson’s Pasco, Wash., plant. The packers do not import any slaughter or feeder cattle from Mexico.
Another allegation is that packers deliberately closed slaughter plants to ensure the under-utilisation of available US beef packing capacity. This ignores reality and is a contradictory claim.
Cargill closed a Texas, plant in 2013 due to lack of cattle supply because of the extreme 2010-2012 drought. National Beef closed a California, plant in 2014 also because of supply issues. Tyson closed an Iowa plant in 2015 because it was a slaughter-only plant, but it increased slaughter capacity at its Dakota City, Neb., plant. Besides, closing plants boosts plant utilisation, not the other way round.
The suit’s allegation about live cattle prices ignores the basic laws of supply and demand. Prices (basis USDA’s five-area region) averaged a record US$154.56 per cwt in 2014 as a result of tight cattle supplies. They averaged a record US$162.43 per cwt in 2015’s first quarter and US$148.12 per cwt for the year. They averaged US$120.86 per cwt in 2016 but increased in 2017 to average US$121.52 per cwt. They declined to average US$117.12 per cwt in 2018 but in the first quarter this year rebounded to average US $125.58 per cwt.
Contrary to what the lawsuit claims, the lower prices after 2014 were due to a steady increase in live cattle supplies as the US beef herd and calf crop grew.