Just as the U.S. beef industry was slogging its way out of the BSE mire, the current global economic calamity reminds us again how important the global picture is to our beef businesses.
“We've had financial crises before, but this is different in that it's a true global issue,” says Deborah Perkins, Rabobank International's executive director of food and agribusiness research. “Even though food is less of a discretionary item, it's still affected in a recession.” She adds that another factor affecting beef demand very soon could very well be food price inflation.
Looming inflation in a sluggish global economy combined with a strong U.S. dollar points to a tough environment for U.S. beef in foreign markets.
“The weakness of the U.S. dollar assisted U.S. export growth up until mid-2008,” Perkins explains. “Exporters in the U.S. must now deal with a stronger dollar.”
She says it's important to remember that small ripples in international currency markets can create large waves in commodity markets.
Though Mexico and Canada have held their positions as the top two destinations for U.S. beef, slumping currencies in both Mexico and Canada have been affecting U.S. beef exports to those two markets.
“It's a tough marketing environment for U.S. beef right now, both globally and domestically,” agrees Phil Seng, president and CEO of the U.S. Meat Export Federation (USMEF). “We currently have some high-end cuts to offer at very competitive prices, and we're also encouraged to see the currencies of some of our key trading partners beginning to stabilize. That will also help make U.S. beef more affordable overseas.”
Despite continued economic uncertainty in key markets, Seng reiterates USMEF's commitment to growing the reach of high-quality U.S. middle meats globally.
On a value basis, in 2008 the U.S. returned to being a net cattle/beef exporter, a situation that hadn't occurred since the discovery of BSE in 2003. The combined value of U.S. beef, cattle and product imports declined from 2007 mostly due to a decline in the value of beef and veal imports, says Jim Robb of the Denver-based Livestock Marketing Information Center (LMIC).
Outlook for Asia
Taiwan was among the first countries to reopen U.S. beef imports, but market-access restrictions for U.S. beef are plaguing exporters. Taiwan prohibits all bone-in cuts and variety meats — and allows only cuts from cattle 30 months of age or less.
“Taiwan has been very important to us, especially in the wake of BSE, because it was one of the first markets in Asia to open up in a meaningful way,” explains Seng. “But because we can only sell boneless beef less than 30 months of age, we're working on chilled middle-meat promotions. The real volume for our products, though, would be the short ribs and other bone-in cuts.”
While consumers in some global markets are “trading down” in terms of the U.S. beef cuts they're purchasing, Seng notes that customers in Taiwan aren't as well-positioned to do that because of the market-access limitations.
Increased beef exports to South Korea and Vietnam helped overcome declines in the beef industry's leading markets of Mexico and Canada. This places Korea third among all destinations for U.S. beef in both volume and value.
Vietnam ranks fourth in volume and fifth in value for U.S. beef.
Japan continues its steady rise as a destination for U.S. beef exports. The current trade-access agreement with Japan requires U.S. beef imports to be from cattle 20 months of age or younger.
“With a favorable exchange rate for U.S. beef exports to Japan, the big challenge for the new team at USDA will be to get this market back to product less than 30 months of age,” says Chuck Lambert, former USDA deputy under secretary for marketing and regulatory programs.
Notably, the South Korean government said last month it will take “active measures” on a Canadian government request for World Trade Organization (WTO) review of South Korea's ban on Canadian beef imports. South Korea has been putting a ban on Canadian beef imports since May 2003 when Canada confirmed its first BSE case.
The Canadian government claims a wide range of scientific evidence supporting the safety of Canadian beef and cattle.
The outlook for U.S. beef exports to the European Union (EU) continues to brighten as the continent's beef production declines. The U.S. is currently limited to supplying beef from non hormone-treated cattle (NHTC) processed at six EU-approved facilities.
In an agreement related to the long-standing trade dispute over use of growth promotants in cattle, the EU announced last month it will increase the annual 11,500 metric tons (MT) tariff-rate quota of U.S. beef imports. And, after three years it will allow a total of 45,000 MT/year at zero duty.
“But, this does not resolve the hormone dispute,” says Gregg Doud, National Cattlemen's Beef Association chief economist. “We still have a long way to go before this issue is resolved to our satisfaction.”
For access to the EU market, health and safety records are a must — and traceability and identification are expected, says Monty Brown, U.S. Meat Export Federation (MEF) processing retail consultant.
He explains that while overall demand for food in the EU is fairly “inelastic” — not sensitive to price changes — there's evidence consumers are trading down and looking for cheaper cuts of meat.
As in other countries, Mexican beef prices have continued to increase over time. However, the quality of beef consumed has also improved, says Ramon Lazano, vice president RYC Alimentos, Puebla, Mexico.
In 1980, nearly all beef consumed was equivalent to USDA Cutter beef. In 2000, more than 20% of beef was the equivalent of USDA Select and 10% was the equivalent of USDA Choice. And, with the Mexican beef-production deficit pegged at about 400,000 tons this year, the dependency on higher-quality imports continues to grow.
Lazano says market drivers for beef consumers in Mexico include price, expectations of no subcutaneous or seam fat, freshness as perceived by color, wholesomeness, a campaign against obesity, convenience (including marinated, shredded and “enhanced”) and organic products.
Sizing the competition
In assessing the competition from beef producers abroad, two aspects must be examined:
How other countries' producers compete against U.S. producers in the U.S. domestic market.
How they compete with the U.S. in foreign markets.
Brazil leads the global competition in beef exports by volume. Meanwhile, Brazil remains closed out of export markets for fresh, frozen or chilled beef to the U.S., Canada, Mexico and most Asian countries due to threats of foot-and-mouth disease (FMD).
FMD notwithstanding, Brazilian beef will continue to compete in different markets than U.S. grain-fed beef.
“Nearly 95% of Brazilian beef is grass fed from Zebu-type cattle,” Perkins says. “This beef will go to different markets than U.S. beef.”
Brazil's meatpacking industry has been hit hard by the global credit crunch. In April, the Brazilian government approved a $4.6 billion line of credit at 11.25% for that country's meatpackers.
Short term, Brazilian beef exports to neighboring Latin American countries, Russia, the Middle East and Europe will be buoyed by favorable exchange rates.
Long term, the Brazilian Ministry of Agriculture is bullish on its beef industry — forecasting a 93% increase in exports during the next 10 years. If so, Brazil would account for upwards of 60% of total world beef trade; up from the current 30%.
Australia's beef price competitiveness is allowing Aussie producers to increase market share despite weakening global demand. Japan is Australia's leading market, followed by the U.S.
Combined with the low value of the Australian dollar, exports are very affordable — about 40% lower than what they were a year ago, says Meat and Livestock Australia (MLA) chief analyst Peter Weeks.
As already hamburger-hungry U.S consumers look toward cheaper meal alternatives, demand for lean Australian manufacturing beef remains strong.
“The U.S. is proving to be a good market as the Australian dollar has made our exports more affordable,” Weeks says.
Australia's system-wide cattle and beef traceability system gives it an edge that's been boosted by the Australian dollar's depreciation.
“We've had traceability systems in place that really do put us a step ahead,” Weeks adds.
Speaking at an MLA and Live-Corp industry reception in Bahrain last March, Tony Burke, Australia's federal minister for agriculture, fisheries and forestry, highlighted the work of industry to improve animal welfare.
“We have a very good story to tell — the care of the animals, the shading of the animals, the different technologies that are now being used.”
Beef from New Zealand, which accounted for 20% of U.S. imports in 2008, will be affected by the international dairy market. USDA's Economic Research Service (ERS) says after several years of dairy herd expansion due to high international market prices for milk and dairy products, there has been excess production since these prices collapsed in late 2008.
Beef production and total exports, which are mostly lean beef trimmings and lean “bull beef” for grinding, are forecasted to decline compared with last year. More exports to the U.S. are expected as New Zealand beef producers adjust to smaller market shares in Japan and South Korea.
Back in the USA
Mandatory country of origin labeling (MCOOL) legislation appears to be having its desired effects, say CME Group analysts. CME Group charts show that the legislation thus far has been quite effective. That's if it's measured by the extent to which it has been able to stifle cattle trade in North America.
Imports of Canadian slaughter steers and heifers for July-December 2008 were 35% lower than a year ago. Imports of Mexican feeder cattle were 39% lower for the period than a year ago.
Ironically, CME Group analysts say the reductions in imports from both countries came at a time when a significant devaluation in the value of the Mexican peso and Canadian dollar normally would have been conducive of increased imports from these two countries. Under normal circumstances, CME Group says one would expect cattle imports to actually increase.
Canada was the largest foreign supplier of beef to the U.S. last year, according to ERS. Beef imports from Canada are expected to increase in 2009.
The weak Canadian dollar, which is making the Canadian market tighter for U.S. beef exports, should reduce the relative costs of feeding cattle in Canada and make Canadian beef more competitively priced in the U.S.
Clint Peck is director of Beef Quality Assurance, Montana State University.
Take home points:
On a value basis, the U.S. returned to being a net cattle/beef exporter in 2008.
Small ripples in international currency markets can create large waves in the commodity markets.
The challenge for the new team at USDA will be to get Japanese beef markets to accept product from cattle less than 30 months of age.
Australia's system-wide cattle and beef traceability system gives it an edge in global markets.
Mandatory country of origin labeling legislation appears to be having its desired effects.