Bull prices expected to improve

01-01-2010 | Not Specified

A recovery in US imported bull prices coupled with the expectation that the NZ dollar will average lower in 2010 than 2009 will help NZ farmers gain better returns on their bulls this year.

NZ beef exporters spent most of 2009 experiencing weaker demand due to consumers replacing beef with cheaper proteins, such as chicken and pork, as the global economy continues to move itself out of recession. The weak demand within the market for US imported beef has meant support to prices has come only in the way of limited supply, Australian product shipped to the US is down on the previous year, and New Zealand continues to look tight.

The stronger NZ dollar reduced meat returns further but for 2010, with the recovery under way in the US, it will force interest rates to rise in the US.

This will mean less cheap money available to invest in the risky asset markets which include the NZ dollar. This may see a downward trend in the value of the NZ dollar against the US currency. NZX Agrifax monthly exchange rate forecast survey has the NZ currency settling in a range of 65c to 81c against the US dollar for the next three quarters. Signals are that the lower end of this range may be more apparent, at least in the short term.

Tight supply of product within NZ may have given some support to the US imported beef market. However, with the export market weak over the year the tighter supply has only given NZ meat companies a headache.

Despite the current prediction for the 2009-10 season to be up 4-5% on the previous season, since the 2003-04 season bull slaughter numbers have eased around 27%. Converting the US imported bull price from USc/lb to NZc/kg and adjusting the NZc/kg US imported bull price so that it is relative to the NZ farmgate price from the start of the year, displays just how competitive the procurement market is becoming.

In 2008 the US imported price (NZc/kg) displayed a stronger lift than 2008 farmgate prices. Over the course of 2009 the US imported price has experienced a greater fall than the farmgate price, reflecting tighter margins for meat companies, if any.

The NZX Agrifax bull slaughter prediction for 2009-10 season is around 20,000 up on the previous season, from 482,000 to 503,000. Figures for the season to date show the season running 20,000 behind the 2008-09 season. On the face of it this would give an expectation for a flood of product coming on to the market in January, early February. However, by collating an average weekly kill percentage for the past 20 years and using a predicted total slaughter number for the current season, a theoretical weekly slaughter figure for the 2009-10 season can be developed.

The reality is that this time last year the bull slaughter was nearly 8% (37,000 head) advanced on the theoretical slaughter for 2008 (see graph) and that in the latter half of the season weekly slaughter levels dropped below the theoretical slaughter for 2008, making up for the surge in volume early.

Using the theoretical slaughter pattern(see graph) for the current season with an estimation of 503,000 bulls to be slaughtered, New Zealand bull slaughter is only 1600 bulls behind where the theoretical slaughter would suggest it be. This implies there is no immediate reason for a significant flood of product over and above the usual peak in January.

At the time of writing the US bull prices was at US142c/lb, having spent most of November around US140c/lb. Market sentiment would suggest that buyers are still hesitant to buy at current price levels. Demand is generally seasonally lower for beef cuts around this period with ham and turkey becoming more of a focus for consumers during the festive period. However, as numbers swell in the malls for Christmas shopping fast-food outlets will expect business to increase and in turn this should give some support to US imported beef prices.

For the past five years the US dairy cow slaughter has averaged around 48,000 cows a week. For the year 2009 the average weekly slaughter, up till the start of December, has been just over 54,000. Therefore, around 315,000 extra dairy cows will be processed in 2009 compared with the five-year average. These numbers were hidden in part by a reduced overall US cow slaughter. However, the excess supply of domestic cow on a recession-weakened market did place downward pressure on the US imported cow price at certain points through the year.

It is likely that some involuntary liquidation of dairy herds will continue to occur through 2010. However, if the solid lift in dairy commodity prices witnessed over the last half of 2009 remains through 2010, it will help to ease the level of US dairy cows being slaughtered and in turn ease any pressure being placed on the domestic cow market.

At the time of writing US domestic cow prices had displayed a small surge from US128c/lb to US133c/lb. This was after areas of the Midwest in the US were hit by heavy winter storms. These are normally not experienced until January, and resulted in disruptions in supply. Unfortunately, for NZ exporters this had no impact on US imported cow prices, holding steady at US131c/lb, though it did help to reduce the premium that imported has been running at over domestic.

Towards the end of December the US domestic cow kill drops away and consumers' attention adjusts back from ham and turkey in January. So it is expected that the US domestic cow price will strengthen. A similar situation to bull farm-gate prices applies here, as US domestic and imported prices look to firm over the year, NZX Agrifax expects farm-gate prices to also trend above prices of previous years.

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