World beef prices higher

01-05-2010 | Hugh Stringleman

Low supply volumes of beef in the major exporting and consuming countries are keeping up prices around the world.

For example, US beef import prices are 30% higher than 12 months ago, although still 20% below the record reached during the short-lived spike in 2008 at the height of the commodity price boom.

Present levels of US160c/lb for bull and 150c/lb for cow are 12.5% higher than in January, which has added 80-90c/kg to NZ CIF prices for boxed beef.

US values are the second-highest they have been since NZX Agrifax began recording in 1988.

Our beef exporters have not been able to maximise the benefits of higher world beef prices because of a slow cattle kill in all regions of New Zealand which have good pasture growth. The short supply and the high export prices have combined for an unprecedented 20-30c/kg CW rise in company price schedules during the summer, when normally meat plants are full and companies are able to eliminate procurement premiums and reduce their schedules.

In March, steers and bulls were up to 330c-350c/kg/CW, which paid $1000-plus for every finished beast, but they have slipped back to 310-326c/kg now. For that reason, plus memories of 350c available when the NZ dollar was lower, and a shortage of finished cattle, beef producers may not feel prosperous.

The world market signals are strong and positive and it is mainly the NZD noise which is distorting the message. Starting in the home paddock, the signals now for NZ farmers to rebuild their cow herds and take on more dairy-beef cattle are the strongest they have been in recent years.

Livestock numbers are the lowest for decades and the summer growing conditions have been the best for decades everywhere except Waikato northwards, so farms are substantially under-stocked and demand and prices are high for replacements.

Beef herds are rebuilding. NZX Agrifax estimates that the total beef slaughter numbers will be down by 150,000 head or 6% for the current season, in the year ended September 30. Cow slaughter numbers are forecast to fall by over 8% this year due to herd rebuilding.

Beef cows number just over 1 million head, the lowest numbers since 1960-61 due to consecutive droughts, which resulted in slaughter of capital stock and higher losses, and the trend to dairying combined with the general trend away from breeding cows to bull beef and steer/heifer finishing and dairy support.

For the season to date the cow kill is running a little slower than usual, a reflection of herd rebuilding activity combined with better than usual pasture conditions which has tempered the usual urgency for breeding properties to cull stock and send weaners to market.

Herd rebuilding is expected to take several seasons to complete. Heifer and cow kill was at a record high last season (since Agrifax records began in 1988).

This was partly due to large cull of dairy stock. The number of dairy cows culled in the 2007-08 season was low due to the high payout and resulting dairy expansion with many of the usual cull cows held for another season.

With the fall in the dairy payout last season and resulting pressure on bank balances, increased numbers of poorer performing cows (which escaped the previous season cull) were dispatched.

The number of bobby calves slaughtered has been relatively high over the past two seasons in absolute terms, however the dairy herd expanded by 30% in the past decade (and 6% between 2008 and 2009).

Therefore the numbers of calves unaccounted for had increased. These calves have either been retained as dairy replacements, raised for dairy beef production, or were disposed of on farm (due to low bobby payout). The bobby calf kill is increasingly unreliable as an indicator of dairy-beef calf rearing demand and thus cattle to be available for slaughter in two or three years.

Former AFFCo chief executive Stuart Weston told his company's annual meeting earlier this year that veal demand had collapsed in the global financial crisis. That meant beef from last year's bobby calf kill went into storage and that class of stock was unprofitable for the company.

"We will keep killing them, but it's a charitable service," Weston said. AFFCo took over the farmer-owned Dairy Meats several years ago.

Now, what are the positions overseas?

Australia is also in a herd rebuilding phase, with a predicted 4% fall in slaughter cattle this season (to June 30) compared with last season. Ironically, floods have disrupted slaughtering, to the kill is 20% behind in Queensland, 6% in NSW and 13% in Victoria.

Meat & Livestock Australia (MLA) is forecasting that total beef export volume will fall 5.7% or 50,000 tonnes in 2009-10.

The volume sold to the US is expected to fall from 280,000 tonnes to 250,000 tonnes, while Japan's share will fall slightly to 340,000 tonnes and Korea's share will actually increase 20% to 120,000 tonnes.

Canada's cattle numbers have fallen 6.3% in the past two years and are at 15-year lows. The number of cattle slaughtered during 2009 was 4% down on the previous year.

Brazil's Agriculture Minister Reinhold Stephanes recently claimed that country's herd capacity would be able to increase beef exports by 20% in 2010, but his meat exporters face considerable challenges. The cattle herd is nearly 200 million, based on Bos indicus rather than Bos taurus, and foot-and-mouth disease is endemic in many states and farming regions.

During 2009, Brazil exported about 800,000 tonnes of beef, slightly more than Australia, of which 126,000 tonnes went to Europe, much of it cooked and canned because of FMD.

An issue with the EU over traceability saw the authorised 10,000 Brazilian farms for beef imports slashed to 100 overnight early in 2008.

Painstaking audits by EU officials have increased the number to 1900 presently, but Brazil's capacity to export to Europe is still constrained. It has no access to the giant North American market and because of the FMD status is not likely to gain access in the short term.

Therefore it is likely Brazil is targeting emerging beef markets in Russia, the Middle East, North Africa and China for its increased export availability, according to the MLA. Or it is possible that Minister Stephanes is exaggerating the potential for increasing beef exports, as other Brazilian sources expect only 10% growth in 2010.

The United States, as the largest importer of beef, holds the key to pricing in New Zealand and Australia. Its own herd is now rebuilding after a liquidation phase prolonged by droughts and poor returns for cow/calf producers and feedlots. Demand is strong for lower quality products such as processed beef because of the recession.

This year has started quietly for US importers of beef from Australia and NZ. Overall beef imports from Australia, NZ and Uruguay are down 26%.

Uruguay has barely been present in this market during the past few years. Australian imports are down 29% and NZ 17%.

Australian beef exporters have been concentrating on Japan, their largest and most profitable market, so NZ has not had a lot of recent competition from Australia in the US market.

According to NZX Agrifax demand in the US remains tentative with buyers reluctant to make long-term commitments. However, lower export volumes from New Zealand and Australia should more than offset the subdued demand, resulting in positive price movements.

Exchange rates should work in NZ's favour in the short term with the USD and the AUD expected to strengthen.

Farmgate prices are forecast to remain relatively steady through to June as although slaughter volumes will pick up, supplies available to US importers will remain tight.

As supplies decrease during the winter and spring in the southern hemisphere, combined with increasing demand in the US as the economy improves, imported manufacturing beef prices are predicted to steadily improve.

The predicted rally in the US market combined with favourable exchange rates and procurement pressure is expected to result in a rise in farm-gate prices, NZX Agrifax concluded.

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