When will global beef prices catch up with the cattle market?

When will global beef prices catch up with the cattle market?


Adauto Franco, Brazil Zoetis genetics unit, says the US and China are viewed as the big business opportunities in Brazil's beef industry at the moment.

Adauto Franco, Brazil Zoetis genetics unit, says the US and China are viewed as the big business opportunities in Brazil's beef industry at the moment.

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Declining world demand for Australian beef is showing no signs yet of closing in on Australia’s red hot cattle market.

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DECLINING world demand for Australian beef may be showing no signs yet of closing in on Australia’s red hot cattle market but it is pointing to current prices being unsustainable.

While the looming might of Brazil, abundant United States supply and Indian buffalo competition is painting a concerning backdrop, predicted big kicks in global demand for protein may provide some cushioning.

It all adds up to varying professional opinion on just when the cattle price dip will kick off in earnest and how much it will drop.

Melbourne-based funds manager Merricks Capital, which specialises in agriculture, says Australian cattle prices will converge with global pricing and result in a 20 per cent drop in the market, likely in the last quarter of 2016.

Chief investment officer Adrian Redlich said cattle prices in Australia could not stay at current levels while India was delivering buffalo into our key live trade market of Indonesia, Brazil was moving in on China and the United States with a far cheaper product and America was in production overdrive.

The US Department of Agriculture (USDA) is forecasting a five per cent, then 3pc, annual rise in its beef production in 2016 and 2017, following two years of herd rebuilding and in combination with lower feed grain prices.

Meat and Livestock Australia market analysts point out that 5pc growth equates to 91pc of beef trade from Australia to the US in 2015.

The US is both Australia’s largest beef export customer on a volume basis and our greatest competition in Japan and Korea, Australia’s second and third largest markets.

Mr Redlich toured meat grinder factories in the US in June and said huge amounts of Australian frozen beef was sitting in warehouses.

“While they still need to use some frozen product to reduce processing costs, US grinders are now buying domestic,” he said.

“Record processing margins in the US, thanks to the big supply of cattle coming onto the market, provides plenty of incentive to push plants to 110 per cent capacity - in stark contrast to what is happening in Australia.”

The result is downward pressure on imported beef prices for Australian hamburger beef.

Brazil looms

Brazil, meanwhile, is gearing up to move in on that fast food chain market, following the USDA’s granting last month of access for fresh and frozen Brazilian beef.

Brazil had sought access for many years but had been blocked due to foot and mouth disease (FMD) and bovine spongiform encephalopathy (BSE) concerns.

In the short-term, given subdued demand for imported beef in the US and the fact Brazil does not have its own country-specific quota, volumes should be modest, according to MLA’s North America international business manager David Pietsch.

However, Brazilian authorities estimate 2017 will see up to US$400 million worth of beef exported to the market.

Mr Redlich said Australian beef was trading at US$5 a kilogram at the moment, compared to Brazil’s at just under $3/kg.

“There is no doubt Australian product is seen as premium and we know Australian and New Zealand product stores better than any other beef, due to how well run our processing sector is,” he said.

“But can those big US customers really justify that sort of price difference?

“Longer term - three to five years - we have to expect Brazil will take significant market share from Australia.

“The risk is that as Brazilian beef comes into the US and there is no sign of FMD it will become more trusted and imports will increase.”

The one positive for Australia is that corn prices in Brazil are high due to a poor harvest and strong domestic demand, which may play a part in how competitive its beef is in the shorter term, Mr Redlich said.

China’s love affair with Brazilian beef

Brazil’s re-entry to the Chinese market last year has resulted in displacement of Australian beef. Our exports were down 30pc in June compared to that month in 2015.

While the small, high end market for Australian beef in China would likely continue to evolve, Chinese demand would ultimately be dictated by price, Mr Redlich said.

Australian exporters said Brazilian beef was currently being offered to Chinese customers at a discount of up to 40pc on Australian product.

There is extreme optimism in the beef game in Brazil at the moment, according to local industry operators.

Adauto Franco, Brazil Zoetis genetics unit, said the two business opportunities Brazilian beef operators saw at the moment were for ‘meat quality value added product’ to the US and large volumes to China.

“Brazilians are prepared to serve both professionally,” he said.

“Companies connected to the market are investing in key technologies and this will make the difference in meat productivity in Brazil.”

Investments in health, nutrition and genetics were the levers for the growth of domestic production in Brazil, he said.

“Producers are concerned with producing more meat and better quality,” he said.

“The clearest proof of this fact was last month’s ExpoGenética, which is the largest beef genetic event in Brazil, where the value of auctions was 8.47pc above last year.”

Commonwealth Bank agri commodities strategist Tobin Gorey said Brazil would take a share of the US and China market for a couple of reasons.

Firstly, Australia did not, until its cattle herd was rebuilt, have the capacity to meet more demand in the two markets, he said.

“Brazil does have that capacity now, not least because its industry has made the effort to meet the sanitary safeguards customers want,” he said.

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