Meat price volatility leads to uncertainly among US grinders

Beef Central, 28/04/2014

THERE’S been plenty of uncertainty in the US grinding beef business recently, with extreme volatility leaving many end-users uncertain in trying to book meat out front, analysts report.

The weekly quote for 90CL grinding beef (in A$ terms) published by Beef Central has fallen almost 8 percent since its recent record high of 495.8c/kg a little over a month ago, to reach 456.9c/kg just before Easter. No quote was provided last week.

The A$ has had something to do with that, rising more than US4c, or 4.7pc, over the past two months. But demand and buying patterns in the US are also part of the equation.

Spot supplies of imported grinding beef are thin, analysts reported recently, but they are expected to become better supplied in the coming weeks as big shipments out of Australia show up.

“It is important to keep in mind, however, that a larger portion of those shipments will likely never come into the market, as they go directly to end-users, Steiner Consulting said in a recent US imported beef summary.

Australian and New Zealand packers are still are looking at US cattle/beef prices at all-time record highs, and the likelihood of ongoing tight supplies of cow meat in the US this spring and summer.

Despite record high slaughter in Australia for the last week of March, there is no urgency to try and push more beef into the US, Steiner said. Demand from China remains strong and other Asian markets also are taking a decent share of total production.

Both end-users in the US and overseas packers appeared willing to go slow to see how business developed heading into Memorial Day holiday, being celebrated in the US today.

The market for imported beef in the US continued to drift lower heading up to Easter, even as offering prices from Australia continued to remain quite firm. New Zealand suppliers appeared more willing to entertain lower bids and some Australian business was apparently done at lower levels back around mid-April. Consequently, the range in current quotes is quite large.


Outlook for May:

The decline in the US beef cutout and lower lean beef prices (from recent record highs) has been a negative for imported beef prices, Steiner’s recent report said.

The price of beef fat trimmings was quoted at a little under $1.12/lb just before Easter, the lowest level since mid-February. Fat trim prices are still higher than a year ago (+17pc) but they are far from the ridiculously high levels established at the end of March around $1.65.

Current levels are more consistent with the volume of fat beef trimmings coming to market, the report said.

“The weakness in the price of fat trimmings can be traced back to both the surge in price at the end of March, which likely caused some processors to sharply increase prices and cause end-users to back off. It also reflects the steady increase in fed slaughter numbers since the middle of February.”

Also, tight lean beef supplies implied that end-users did not need to chase fat trimmings. Round cuts in the US continue to be quite expensive, relative to history, and consequently are not going into the grinder. Ground beef prices have declined from levels established in early March.

“For now, both lean and fat trim prices have backed-off, but we think that lean beef has more upside given tight cow supplies and record US feeder prices,” Steiner said.


Weather again a factor

Weather remains as a key wild-card for US cow meat supplies in the next few months.

Recent reports indicate that the probability of El Nino is quite significant this year. Usually El Nino tends to lead to more dry weather in Australia and wet weather in the southern part of the US.

“To us, this is a key risk for lean beef prices in the US domestic market,” Steiner’s report said.

“Already domestic US cow slaughter numbers are running 8-9pc below year-ago levels and we expect second quarter cow slaughter numbers to be about 13pc lower than a year ago,” it said.

Both US beef and dairy cow slaughter numbers are well below year ago levels. Dairy numbers have declined following the sharp spike in US milk prices, which hit record high levels in March.

“At this point dairy producers have the ability to lock-in milk prices above breakeven costs through the end of the year and there are strong incentives to limit the number of cull cows going to market,” Steiner reported.

As for US beef producers, they were looking at some of the best profits in decades. Pasture conditions are the only impediment producers this northern hemisphere summer.

“We’ve already seen a notable reduction in the number of heifers coming to market, an indication that producers are willing to expand. In past years, heifer retention has not led to expansion as drought conditions have forced producers to sell cows. Should weather conditions permit, this year could see a dramatic shortage of cows coming to market during the summer and fall months,” Steiner said.


Extreme volatility in US beef and pork markets

One of the puzzles for end-users, traders and other participants in the beef and pork market is the dramatic rise in prices for some products in the first quarter of 2014. For instance, the price of 72CL pork trim was quoted by USDA at almost $140/cwt recently, a 170pc increase over year-ago levels.

Ground beef, beef rounds and other beef products had also shown significant spikes in value in the three months ended March 31.

What’s driven it?

“Red meat supplies are down, but not enough to justify such prices,” Steiner said.

“Weekly pig slaughter in March was down 6.8pc but the heavier pork carcase weights offset almost half of that decline. According to USDA, weekly pork production for the five weeks ending April 5 was down only 3.3pc from a year ago.”

Fed cattle slaughter was lower in February, but March and early April slaughter was about 3.6pc below year-ago levels.

“Simply looking at slaughter numbers and weekly beef and pork output does not explain why prices for some items have more than doubled compared with last year. The issue of stockpiling has been discussed. Fearing a shortage of supplies in the spring and summer, market participants have sought to build inventories in a hurry.”

This probably does help explain some of the more dramatic moves we have seen. The price of 50CL beef trimmings, a key benchmark for US fat trim values, jumped to as high as$163/cwt in late March, a $40 premium to the highest price ever paid for this item, only to drop to $115/cwt a couple of weeks later.

“Panic buying can produce crazy results,” Steiner said. “But there is more we think to the dynamic in the market and it has to do with the shift towards booking an increasing share of sales on a formula basis.”

“Formula buying is good for buyers as they don’t need to spend all their day hitting the phones and trying to bid on product. It’s good for packers as they don’t need as big of a sales staff in order to clear the market. However, as volumes in the spot market decline, price discovery becomes increasingly difficult and prone to breakdown.”


Food price Index trending strongly up

Meanwhile, the USDA’s monthly Food Price Index released yesterday reported beef and veal prices in March up 7.4pc from a year ago, while pork prices were up 5.3pc and poultry up 3pc.

USDA reported both beef and pork prices jumped nearly 2pc in a month from February to March, while poultry prices rose nearly 1pc.

Overall, food consumed away from home in the US cost 2.3pc more in March than a year ago, while food at home cost 1.4pc percent more.

USDA is forecasting during all of 2014 that beef, veal and poultry prices will rise by 3-4pc, with pork prices rise 2-3pc from year ago prices.


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