Market observers on both sides of the Pacific are starting to point to the prospect of record-high grinding meat prices in the US next year, as the current cycle of high domestic US cow slaughter driven by drought conditions across the continent starts to wind-down.
US analyst Len Steiner from Steiner Consulting made reference to the likelihood of record high prices in 2013 in his weekly summary issued last Thursday.
Despite reports of drought conditions across much of the US, beef cow slaughter so far this year had in fact remained below year-ago levels, Mr Steiner said.
“This is indicative of how much culling of the herd was done in the previous two years of drought, and that US cattle producers are trying to do whatever they can to avoid bringing their remaining cows to market this year,” he said.
US cow meat supplies are currently running about 3 percent below year ago levels, however dairy cow slaughter has increased sharply in recent weeks as milk producers struggle with record high corn and soybean meal prices.
While US beef cow slaughter in some areas remains heavy, especially on the Great Plains, producers in other areas are not selling cows, Mr Steiner said. However September and October remained the keys for US cow slaughter, and how cow slaughter developed in the next few weeks would set the tone for the remainder of the year.
“We remain extremely concerned that given the shortage of lean and extra lean beef in the US market and the outlook for lower cow slaughter in the first half of 2013, the price of lean and extra lean grinding beef could be poised for new record highs,” Mr Steiner said.
Australian exporters this week told Beef Central there had been a lift in the US imported grinding market over the past fortnight, particularly in the lean meats like 90CL and 95CL, in US $ terms.
One source said prices had lifted 3-4pc on 95s, compared with where they sat a fortnight ago.
“It’s at that really lean end where the best improvement has been seen,” Australian non-packer exporter, Stewart Hanna, a director of Sanger Australia, said this morning.
The main reason was that domestic US 50CL beef is so cheap, he said.
Domestic 50CL trim is currently trading about 50pc below what it was last year. In previous years, a good portion of the fatty trim from carcase processing was being utilised in the production of Lean Finely Textured Beef, but with 75pc of the LFTB processing capacity in the US now gone following boycotts from retail and foodservice operations, there is an abundance fatty beef trim in the open market.
What that means is that Australian 95CL manufacturing beef now has a greater attraction, because of its ability to be blended with domestic fatty trim to produce a typical 75-77CL burger pattie.
Mr Hanna said current offer prices for 95CL are around US215c/lb, CIF, and 90s around 202c. But from there, there was a ‘really big’ step back to 85CL, for the reasons explained above.
“For this reason point-to-lean comparisons really don’t work at the moment. To sell 85s, exporters really need to be back in the 170s,” he said.
But while there has been some movement in lean trim, Mr Hanna said the US market was still ‘very nervous’, and as was seen back in 2008, when the grinding beef market went above US$2/lb, people became very cautious with their buying, because they did not want to get caught.
“Nobody wants to be the bunny holding the dear inventory if the price trend changes,” he said. “Along with tight bank lending lines, US buyers are not running a lot of inventory.”
That big issue seen earlier, in the reluctance among US operators to buy too far forward, had now started to ease, on the strength of the view that the current high rates of US cow kill will start to decline over the next couple of months, reducing lean manufacturing beef supply, Mr Hanna said.
“The US has had cow culls on-and-off now for the past two to three years, and there was a feeling 12 months ago that herd re-building might recommence. But with the onset of severe drought again in 2012, that is certainly not the case,” he said.
The prolonged and deep cow cull meant the medium to long term outlook for domestic US production did not look strong.
“Given our own current position with strong seasons and herd rebuilding, I’d call that a big positive for the Australian industry next year and beyond,” Mr Hanna said.
Asked whether the supply/demand situation in the US next year was likely to test conventional thinking on price limits on grinding meat (as suggested by analyst Len Steiner in the earlier part of this report), he agreed it was likely.
“The other reason why we could test those top-end limits is that suddenly, the competing proteins of chicken and pork are also under enormous pressure in the US due to the failure of the corn crop.
“Suddenly the cheaper competing proteins won’t look so cheap, and that has to assist beef’s cause in pushing the upper boundaries on price, in a severely limited supply situation.”
One of the handbrakes on domestic US beef consumption across the continent during the summer just finishing had been the excessive hot temperatures, Mr Hanna said.
“It’s one thing to say it’s a nice sunny day, but if it gets to 40-degrees plus, it chases people inside into the air-conditioning. Fewer people are throwing a burger on the grill, as a result.”
Corn outlook continues to erode
Much of the attention in the US market continues to focus on the weather situation in the US corn belt, and prospects for a sharp reduction in US corn output this year.
US corn futures have skyrocketed in recent weeks, with the benchmark December corn futures contract trading last week at above US$8/bushel. That’s 50pc higher than what it was back in June. Some farmers in the Eastern corn belt have experienced total crop failure.
The ratio of harvested to planted acres is currently projected by USDA at a little over 90pc.
“That’s a critical number, because each million-acre reduction in harvested area removes about 127 million bushels from the balance sheet,” analyst Len Steiner said.
“If crop losses are similar to what was seen in the 1988/89 drought year, projected corn output will be even lower than current forecasts. Corn yields are currently projected at 123 bushels/ac, compared to 166 bushels at the start of the year.”
This kind of yield is expected to bring in about 10.8 billion bushels of corn, back about 2 billion bushels on what USDA projected in July and a staggering 4 billion bushels smaller than forecasts made only two months ago.