When assessing the November global beef shipments from Australia I did so with the intent of trying to identify what markets might still be needing meat for Chinese New Year on January 26th, 2020 and the Northern Hemisphere summer.
When analysing whether a market was short bought I looked at the Australian export trade flow of beef items to certain markets during the months of October and November and compared 2018 with 2019 exports - to try to see if there were any major differences and therefore the likely hood as we move into the stronger Northern hemisphere demand months of 2020 that these items will be needed. China has played a crucial role in reshaping this trade flow landscape and as a result created a tightness in global beef markets that has rarely been seen before - this paper tries to pinpoint which markets and which items are being most affected.
The following summary outlines the growing evidence of why I believe nearly all markets are short bought:
It should noted that during November the US achieved record imported lean beef prices with imported 90's reaching 315 usc/lb on November 20th and since then they have retreated 298 FOB and look to be going lower - Is this a short term phenomena or are we seeing a repeat of 2014 when the market retreated and within 12 months was trading below 200 usc/lb?
It should be noted that even with the US paying record prices and trying to keep pace with other markets US shipments still fell to 13% of Australia's total November exports - in 30 years its only been twice lower than this before - in other words US importers were not rewarded by volume when paying exceptional prices, namely because other markets were paying more.
There is real concern among buyers from all markets that all participants are still short bought on imported beef even though imported beef prices have reached record levels in the last month and this current price correction will be short lived.
China hog prices have corrected themselves 20% falling from $5.80 usc/kg to $4.60 usc/kg in four weeks, prices have just started to recover from the bottom rebounding last week to $4.95 usc/kg.
There is no doubt that buyers from Japan, US, Korea and China have struggled to get ahead of this beef market, the deep concern is that as we move into the northern hemisphere summer they will need to keep buying beef at even higher prices to meet the high demand period of summer.
China is the key to what will happen to demand and pricing in 2020 - when China is buying it forces all other markets to pay up for product and when they step away, as we have seen in the last 3 weeks beef prices fall as well.
Key points to note:
There is I believe a strong seasonal nature to beef buying out of China based on holidays and the coming summer demand period - no different to North America and the export data out of New Zealand gives I believe an important window into understanding how China and the US have competed for the same meat in the last 15 months. I think this data is important because it reflects what has happened with genuine protein shortages within China, other previous years data would not show this trend.
I think recent increases in hog prices, the finite amount of frozen pork available and the large and well reported deficits of pork all point to a market that is still short bought and will be back in buying - this I believe is likely to recommence in January.
The last two years has seen more items that once existed in the grinding meat pack now going China as whole cuts - the premiums for cuts over trim has often been 10-20 usc/lb higher, giving beef exporters around the world a strong incentive to produce less trim and export more cuts to China.
Australian export data shows in 2019 the quantity of beef cuts double into China (35,178 MT during Jan-Nov) compared to 2018. I estimate that 28,730 tonnes YTD less of potential trim that is now going as cuts globally - which has tightened up the grinding meat market as a result.
It should be noted that overall Australian beef shipments have increased in 2019 due to drought and the liquidation of cattle which has pushed the volume all items available higher and this accounts for 10% of the overall change - this trend still remains true.
The second point to note is that China has taken what cuts were going to the US and Japan and paid better prices and diverted them back to China - with less of these export items means that US and Japan will have to go elsewhere to other supply countries or source from their domestic market the same items - this in turn shortens up other supply sources. The same phenomena is occurring out of New Zealand into China whereby a significant amount more cuts are being produced and has tightened up trim availability.
The percentage of export trim produced out of Australia has dropped from 35% to 32% when comparing 2019 with 2018 export data, there has been a shift exports with less 80's and 85's produced and more 90's and 95's namely due to the drought and the dry conditions. The 3% difference in more cuts produced equates to 28,730 mt
To assess which items are under bought to key markets I have focused on the last two months of shipments October and November which are likely to be in the pipeline to be used in the market.
When assessing the US Market for months of October and November - the item that is in most short supply seems to be imported 90 CL which is 2,390 mt less than last year and since August is down 30%, this I believe is related to both 90 CL trim being shipped to other markets and also less cuts in the pack. Australia's export trim 95 CL to the US is slightly lower than 2018 but it is not significant.
Most other items seem to be in similar proportion to last year for the same period with 75 CL showing a notable increase.
The added concern for US importers has been the slow pace of shipments from New Zealand to the US and the proportion beef exports now going to China - in October New Zealand exported 59% of its total beef exports to China and only 13% went to the US, a fall of 39% on last years volume.
When looking at the combined influence of Australia and New Zealand lower exports to the US for November and December I am forecasting that 90 CL availability will be close to half of what was available last year from both countries during Oct-Nov given the dramatic shift out of NZ to China.
The slowness in November of the New Zealand bull kill might see the New Zealand 95 CL volume fall further which has been in part offset by Australia's lean drought driven supply - when combing Australia and New Zealand exports I estimate that November and December shipments are likely to be below 20,000 tonnes per month - the lowest combined shipments for the year.
When assessing Japans situation it seems trimming 65 CL is the item that is most short bought with combined shipments less than half of last years volume for the same period, to a lesser extent 85 CL is down by almost 25% on this time last year
When looking at both 65 CL and 85 CL beef trims they have both been difficult to purchase since August this year with trim 65 CL down 45% in volume compared to last year and 85 CL down close to 24% since July this year - in both instances China has played a significant role in buying both these items away from the Japan.
When assessing Korea's situation they have been aggressively buying 65 CL and 80 CL this year impacting both Japan and the US market, what is not clear is whether these two items have replaced the need for 75 CL and 85 CL within Korea, though the increased 2019 quantities of 65 CL & 80 CL far exceed the shortfall in 75 CL & 85 CL from 2018 - it implies potentially increased demand or supply is coming from elsewhere. I do not see Korea being an aggressive buyer in coming months on 75 CL and 85 CL.
China has been an aggressive buyer on all trims for the last 12 months but it would seem that 65 CL trim is the largest volume item followed by 85 CL trim.
It is difficult to imagine if the momentum is likely to continue in 75 CL, 80 CL and 90 CL.
The recent USDA beef cold storage report showed that frozen beef stocks declined relative to a year ago and a month ago. Year-over-year comparisons show total beef was down 9.6%, led by beef cuts down 23.1%. Total boneless beef product was 8.2% lower. When comparing October frozen beef stocks to September 2019 beef cut inventory increased 4.3% and boneless beef fell 1%.
Once again compared to this time last year available frozen beef stocks going into the US summer demand season seems to be low and when looking close at the report the coastal freezers seem to have a slightly greater fall in inventory which might reflect the lack of imported frozen beef in the US. This to me highlights that spot meat from Australia and New Zealand is likely to remain tight.
As the trade war waxes and wanes it is hard to imagine that it ever will be fixed but I believe there is a genuine desire to have resolution by both sides - if there is agreement I think its worthy of contemplating how this might benefit the US beef industry and what the opportunities that will present itself.
When looking at the requirements on HGP's and feed additives such as ractopamine it is clear to me that China is unwilling to change this import requirement - the best example of this US pork imports that are critical to help fill the 15-20 million tonne deficit but China still insists on ractopamine free pork so much so all the major US pork processors in recent months have now committed to having ractopamine free pork for export to China - beef will be no different.
The issue with US grainfed beef is that products like ractopamine add value in improving the growth rate and return on the animal by an estimated 180-200 USD per head - the product is acceptable on the US domestic market and in Japan and Korea - there is little economic sense to stop using these feed additives.
The more natural fit for the US beef industry is to export cow meat to China (if and when this is allowed) as this product is ractopamine free and would be eligible from the word go. The only issue is the need for cows to be under 30 months and younger which was a requirement left over since BSE was discovered in 2003. In reality, this requirement is not in place for any of the current major beef exporters (namely because they have not had BSE) to China - this is the most likely policy that will be lifted, as Japan has done recently done.
China's appetite for cow cuts has been extraordinary this year with a lot of the cheaper items like shin/shank, briskets, flank, flats and knuckles all being preferred and the middle cuts being least preferred.
The irony of the US exporting cow beef is that it will further tighten the availability of lean meat within the US - the periods of seasonal fall in round cuts, shouler meat, briskets etc are the likely periods when China will buy removing for US grinders the ability to buy cheap grinding options - this is what has been happening out of Australia and New Zealand for the last two years.
There is growing evidence that the many global markets are still short bought on certain items - in this paper I try to highlight which items in which markets are likely to be short bought based on the assumption that best guide on the markets needs is what happened in 2018.
China is the key to driving global prices higher, in the last 3-4 weeks they have pulled back from buying and as a result we have seen imported prices fall. The trend of imported lean prices following hog prices is still too early to know if this is a genuine price relationship - but there is no doubt to me that beef is playing a critical role in China in filling the pork production void of 15-20 million tonnes due to African swine fever. The recent lift in domestic hog prices is being watched closely and whether this translates into rising import beef prices in 3-4 weeks.
My forecasts for next year on Australian beef exports are for these to be 20% less than this years as both the impact of a reduced herd due to drought and China's continued strength in buying away beef both play a role in tightening the global beef market.
The trend in all key supply countries of packing more and more items into cuts and less into grinding meat has further tightened trim availability - in addition, China's increased buying of the remaining trim (all CL's) further exacerbates the tightness of the global trim market.
I think there have been lessons learnt over the last year on understanding the seasonal nature of China's buying and the build up to Chinese New Year these lessons should not be forgotten as we move into another year where all the indications are that global protein will be even tighter during 2020 and this seasonal buying pattern will continue.
The US cow industry could play a crucial role in being part of the 'food pipeline' that is being built by China to fill this void - to me its a natural fit - the removal of the 30 months and younger rule would ensure the US has a seat at the beef exporting table.
I think there is growing evidence that it is not just the US that is short bought but other key importing beef markets are also, this evidence is growing by the day - the ability to get ahead of this will prove to be a challenge as China looks to build and fill its global food pipeline over the next 3-5 years.
Any feedback is always appreciated.