IMPORTED Australian 90 CL grinding beef prices into the US have soared to all-time record levels over the past month, driven by global demand for meat protein, a sharp seasonal decline in NZ beef production and favourable currency trends.
International competitors have provided increasingly stiff opposition to US customers intent on sourcing lean Australian frozen manufacturing beef, and as discussed in greater detail below, a global realignment in manufacturing beef trade flows appears to be taking place.
Lean 90CL frozen grinding beef into the US this week is quoted at A765c/kg CIF, and the market has traded above A740c/kg throughout October (see Beef Central’s home page ‘Industry Dashboard’ graphs here).
The previous high water mark for 90CL beef into the US, in Aussie dollar terms, was 739.5c/kg achieved for a short period in September 2015.
The market has now risen almost 70c/kg in the past four months, and more than 140c/kg since the beginning of the year, as China has increasingly bid Australian lean manufacturing beef away from its traditional home in the US.
Recent pricing movements for imported 90CL manufacturing beef in US$ terms are equally significant, reaching US237.5c/lb this week – the highest prices ever recorded, except for a short window in August 2015 when prices sat briefly between US240-243c/lb (CIF) as US domestic supply tightened sharply during a period of US beef herd recovery after drought. Currency at that time was not that different from today, with the A$ worth US72-73c, compared with US68-69c today.
NZ supply has exacerbated shortfall
In its weekly US imported beef report, Steiner Consulting says imported manufacturing beef supplies in the US spot market are currently at their annual lows and the dramatic decline in availability of New Zealand product for November/December had further exacerbated the shortfall.
“Given the extremely thin spot market, buyers or importers caught short have had to bid aggressively on whatever product they can find,” Steiner said. “Lean and extra-lean product is now as much as US25c/lb higher than where it was just a few weeks ago.”
The current spread between fresh domestic and frozen imported 90CL beef is +US30c/lb – as high a spread as Steiner has ever seen.
“It is clear that users will need to rethink their processes in order to limit the use of frozen product going forward,” the weekly report said. “New Zealand is not expected to have much product to show until early 2020, and even then product may not be available. Those New Zealand or Australian suppliers that sold beef forward at what they thought were good prices now are finding that they left 10-20c and sometimes even more on the table.”
“If you are a processor in Australia or New Zealand, the tendency now is to limit how much you show on a forward basis – in large part because you are not sure how aggressive China will be in their bids -but also because weather remains a critical factor in terms of cattle supply availability,” Steiner’s report said.
Current baseline forecasts are for a significant decline (10pc) in Australian beef production next year (see MLA’s latest quarterly projections issued this morning) and no supply growth in New Zealand.
“China demand for beef had been explosive in the last three years, but it was also important to remember that the increase in China beef purchases started before the African Swine Fever outbreak, reflecting shifts in Chinese consumer beef demand,” Steiner said. “We think it is fair to assume that China demand will persist going forward, and US end-users need to recognise the realignment in global beef flows.”
How high will US domestic lean beef prices go in 2020?
While the shortfall in imported beef prices is expected to continue in 2020, Steiner believes that the spread between US domestic and imported beef will be constrained by the value of domestic product.
“At some point the spread becomes wide enough to make it economical to a) freeze domestic lean beef and offer the benefits of imported product; b) use more fresh domestic; or c) pull more fed cuts into the grinder,” it said.
The latter was particularly important.
“There is a strong relationship between the price of 90CL beef and fed cattle prices, even though 90CL beef is derived from cull cows rather than fed cattle. The reason is that the cull cow value/availability reflects the value of fed cattle. Also, if fed cattle prices are low enough, this means more lean cuts from fed cattle can go into the grinding supply, alleviating spot shortages of lean cow meat.”
The price of 90CL US domestic beef jumped to $300/cwt in 2014, but this was due to US fed cattle prices trading over $170/cwt. Currently US fed cattle futures for next (northern hemisphere) spring are trading in the low $120s and summer fed cattle prices are trading in the mid to low teens.
“The implied value of lean beef cuts for that time of year is below $250/cwt,” Steiner said. “We think this will help contain price inflation for domestic 90CL product (more ground beef made from cuts) and thus the premiums for imported product.”
Extreme shortages of imports from Australia and NZ could keep the spread near historical high levels, although it would be difficult to keep the spread at US30c/lb in the first half, Steiner said.
“At this point the biggest risk for prices appears to be in the January-March period. That’s because we expect to see the seasonal decline in cull cow slaughter, less dairy cows than a year ago and relatively high prices for end cuts.”
US fed beef supplies will be tight into the (northern hemisphere) winter months, a function of lower placements last summer and normal winter weather effects. However, Steiner expects to see a big increase in feedlot placements during October and November, which should bolster fed cattle availability into the spring and early summer.
Other potential suppliers
In addition to more domestic fed beef going into the grinder, another consideration could be the potential increase in imports from other supplier countries. Currently, a number of large US customers still do not accept Mexican grinding beef in their formulations. This could change given the current wide spreads between Australian/NZ and Mexican product, Steiner said.
“The strong US$ makes imports from Mexico and even Canada very attractive. However, we do not expect to see much supply available from South America going forward. Additionally, political change in Argentina is a wild card for global beef supply availability in 2020.”
Global manufacturing beef market dynamics shifting
MLA yesterday provided this valuable summary of the current global manufacturing beef supply and demand dynamics, agreeing with Steiner’s views over a potential realignment in global beef flows.
Why are imported Australian trim prices to the US at record highs? Part of the answer is an Australian dollar trading at close to its lowest level (relative to the US$) in over a decade, and limited offerings out of New Zealand. But it is also closely linked to rising demand from Asia competing with a strong US consumer market, MLA’s report says.
The rise of Asia as a manufacturing market is not a recent phenomenon, but has accelerated due to growth from China in the last two years. Between 2000 and 2005, Japan, Korea, China and South East Asia accounted for just 30pc of Australian manufacturing exports. This share largely grew over the following decade, but swung back to 34pc in 2015 when acute shortages in the US pulled a lot of product away from the region.
However, exports to Asia have since recovered and the region represented 56pc of Australian manufacturing exports last financial year.
Beef trim accounts for a significant portion of a carcase and manufacturing beef represents about one third of Australian exports. As such, global manufacturing beef prices underpin the value of a large part or, in the case of cull cows and bulls, the vast majority of each animal.
As Australia’s largest buyer of lean grinding beef, historically the US has been the primary driver of that market. However, cyclical and structural changes are underfoot that may see the drivers of the global manufacturing beef market shift in coming years.
- As the US herd passes its cyclical peak, imported lean trim demand will likely diminish
- Australian manufacturing beef exports shifting to Asian markets
- Growing competition from low-cost exporters and rise in meat-alternatives
- US herd cycle to reduce demand for imported trim over coming years
Over the last decade, the US has imported about 20-35pc of its annual domestic lean manufacturing beef requirements (in contrast it has imported 8-14pc of overall beef consumption).
More than half of US beef is consumed as ground product, typically as a burger through the vast array of fast foods chains that stretch across the country. Over the decades burgers have remained a mainstay of the US diet and underpinned the beef trade from Australia. Trim from US fed cattle is typically too fatty to simply grind into a desirable chemical lean (CL) burger mix, and requires blending with leaner product.
The primary source of lean grinding beef in the US comes from cull cows (including dairy) and bulls, but is supplemented by imported product depending on domestic availability. There is almost a one-for-one relationship between domestic US cow and bull beef supply and frozen imported boneless beef.
For almost three decades, the total lean beef supply has remained around 1.8 million tonnes boneless weight. Imports have acted as the pressure valve to supply, expanding during periods of US herd growth and declining during herd liquidation as production increases.
Australia is the primary source of frozen boneless beef imports (accounting for 44pc of overall volume over the last decade), followed by New Zealand (38pc, principally dairy beef) and Nicaragua (7pc) and Uruguay (5pc).
Cow and bull beef production has been rising in the US over the last three years – with elevated dairy cow slaughter fuelling growth of late – and is expected to continue on that path over the next few. As such, US appetite for imported lean grinding beef may be subdued, reflective of the dynamics witnessed amidst the previous US herd liquidation in 2011.
The pivot of Asia
The use of manufacturing beef across Asia varies between markets and channels, but ranges from western burger chains in Japan, to dumplings in China, to canned corned beef in the Philippines. Australia’s share in each market depends on price point and access from often cheaper competitors, such as Indian buffalo or Brazilian beef (neither of which has access to Japan or Korea due to FMD status and India doesn’t have direct access to China).
However, Australia’s food safety and hygiene credentials also position it well in attracting large key accounts, such as multinational fast food chains with high reputational risk exposure.
More recently China has significantly expanded its market presence, buying manufacturing product but also lower value hindquarter cuts that would often be thrown into trim combos if destined for the US market. Australian manufacturing exports to China have increased 91pc year-on-year in the first nine months of 2019, while hindquarter primal exports – namely shin shank, knuckles and outside flats – have expanded 86pc over the same period.
However, it’s not just Australian manufacturing and secondary cuts to China experiencing growth. Australian loin cuts are up 61pc year-on-year so far in 2019 and chilled primal shipments have more than doubled.
Meanwhile, Chinese beef imports from South America surged in the first seven months of 2019, with Argentina up 122pc, Brazil up 6pc and Uruguay up 36pc, while shipments from New Zealand have risen 90pc year-on-year.
As widely discussed, ASF is adding fuel to Chinese demand, but this growth also reflects a maturing of the market and strong consumer demand from a fast emerging affluent consumer class.
A severe economic slowdown in Asian markets could subdue this strong demand growth – which could create a particularly challenging trading environment with the current high volume of cheap commodity beef entering the region. However, consumer markets in Asia have so far proven resilient to ongoing trade tensions and future medium-to-long term demand growth is projected to remain positive across the region as the middle-class populations swell.
Nonetheless, the US will likely remain Australia’s single largest manufacturing market, even if its domestic supplies ramp up in coming years, MLA says.
Moreover, the US still has deeper pockets than many Asian buyers and the rise of Chinese competition has more been felt by developing regional neighbours, such as Indonesia and the Philippines.
Competitors nibbling market edges
The tricky part of using past trends to forecast the future is that they cannot capture underlying changes in the market, MLA said. And you only need to pick up the newspaper to feel like a lot of change is afoot in the global grinding beef market.
Last year, McDonalds in the US joined other chains, including Wendy’s, Shake Shack and In-N-Out – in featuring fresh-never-frozen beef in their range of quarter pounders. The entirety of Australian manufacturing exports to the US are frozen – on top of greater ease and safety assurances in shipping trim in frozen form, it also supports US grinders in cooling product through the manufacturing process as it is blended with fresh local beef.
While the fresh-never-frozen shift threatens the trim trade with Australia, frozen beef still remains critical to the vast majority of US burger manufacturing – McDonalds is yet to roll out fresh across its entire range – and the economics of the entire US industry moving to fresh don’t stack up, especially when it comes to producing burgers at an affordable price point.
The other major shift in the US burger market has been the arrival of plant-based alternatives on menus. Most notable has been the nationwide launch of Impossible burger in Burger King and Beyond burger in Carl’s Jr, but a range of other chains are testing the market, or planning to, and a series of new products are also in development.
These plant-based burger alternatives are hitting the market at an affordable price point – typically a small premium to beef burgers – but are yet to win wide-spread approval by customers or businesses to have a noticeable impact on beef demand. Although growth is strong, plant-based burgers of all varieties are estimated to still only represent a tiny portion of the food service burger market by value and they remain very much a niche product in the broader protein mix.
Potentially masking any displacement of beef products has been a humming US economy and a strong consumer market supporting foodservice demand, particularly in quick service restaurants and casual dining. Overall the size of the national burger prize has likely grown in the last couple of years, absorbing both increased beef and any plant based sales. A slowdown in the US economy, which remains a real risk, may see the competitiveness of the market come to the fore.
The other threat comes from cell-cultured meat however the price of these products remains well-above commercial viability. In addition, consumer’s still need to come to grips and accept these lab-grown products and they are yet to pass regulatory approval. Cell-cultured meat may compete just as much with their plant-based counterparts than real beef and have many challenges to overcome.
US market may trim down
Cyclical shifts in the US herd are underfoot which will limit demand for imported lean beef trim in coming years, MLA says. “This has happened before, and will happen again,” it said.
At the same time, demand is growing in Asian markets, propping-up prices, but competition was also rising from lower cost competitors, namely from South America and India.
While manufacturing beef shipments to the US may ease off, this will be driven by imported beef demand on both sides of the Pacific and not the rise of alternative proteins – or, at least, not at this stage.
Regardless, the US will likely remain Australia’s single largest destination for manufacturing exports, as it has for the good part of three decades, MLA’s report said.