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CME: Australia's Loss is US's Gain for Beef Exports

13 July 2016

US - October fed cattle futures prices were down the daily limit yesterday even as fundamentals in the beef market are some of the best they have been in some time, write Steve Meyer and Len Steiner.

While there is a lot of discussion about the pace of herd rebuilding and what that means for cattle supplies in 2017 and 2018, for now feedlot supplies appear to be much more current than they were a year ago at this point.

Also, domestic beef sales continue to outperform, whether you look at the price of middle meats post 4th of July or the value of fat beef trim.

Last year cattle prices struggled in the fall, in part because feedlots fell behind in marketing cattle over the summer. Beef packers had to counter-seasonally ramp up slaughter in the fall and winter months, which put significant downward pressure on wholesale beef prices in order to clear the market.

The feedlot situation last year was only part of the reason for the cattle price decline. We also think that a combination of lower exports and a big surge in imports added to overall beef availability in the market, pressuring prices lower.

At this point, however, it appears to us that US beef exports are on a much firmer footing. Lower fed cattle prices in the US certainly have helped but so has the decline in the value of the US dollar (relative to a year ago) and higher cattle prices in countries with which we compete directly in key Asian markets, particularly Australia.

Consider the top chart. It shows the price of US and Australian cattle represented in Japanese Yen, thus accounting for the exchange rate difference.

By the end of 2014, US cattle prices were more than double the price of cattle in Australia. This disparity in cattle prices in the two countries increased through the first half of 2015 and helps explain the ever shrinking pipeline for US product into Japan and other countries in the region.

As cattle supplies increased in the second half of last year, exports could not catch up fast enough. After all traders have contracts in place that they need to honour and market participants also wanted to wait and see if lower prices in the US would stick before switching.

Today US and Australian cattle prices (again in Japanese Yen equivalent) have closed the gap both via lower US values but also much higher prices for Australian product. Australian cattle supplies are extremely tight and cattle prices there have hit all time record highs. This is due to extreme liquidation in the last three years and a modest improvement in moisture conditions.

Because of this dynamic, we expect US export gains in Japan and South Korea will be sustained, and likely expand, in the second half of 2016.

We think the resurgence in exports is one of the reasons why 50CL beef is so much more valuable today than earlier in the year. Some of the fatty cuts that last fall were going into the grinder now are finding a more profitable market in Asia.

The brisket primal, which also tends to benefit from exports, currently is priced at a 15 per cent premium to last year while all other US beef primals are down, some in double digits. US beef imports, on the other hand, continue to decline.

Australian beef shipments to the US in June were down 43 per cent and they are down 35 per cent for the year. USDA will publish its WASDE monthly projections. Keep an eye on those per capita beef consumption numbers for beef in 2016. They could be revised lower at a time when fed cattle futures continue to dramatically discount the fall and winter market.

Daily Livestock Report - Copyright © 2008 CME. All rights reserved.

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