Rabobank Beef Quarterly - Downward Price Risks

There are downside price risks in cattle/ beef markets during the second quarter (Q2) of 2012, as Rabobank expects a slightly larger global supply, led by Brazil and other countries in the Southern Hemisphere, amidst a global economy which remains relatively weak.
calendar icon 10 May 2012
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For the rest of the year, however, cattle prices should recover again as markets shift from the short term supply bulge (primarily Brazil) to materially lower supplies as the majority of the beef producing countries are going through liquidation, a retention cycle or weatherrelated problems. Nevertheless, a significant rise in prices may be limited by weakness in economic growth, which may prompt shifts towards cheaper sources of protein, notably in the developing world. Longer term, our view is that global meat protein and especially beef supplies will continue to lag income and population growth in important emerging markets. This will support prices while raising volume and cost risks to processors and price risks to buyers.

The Rabobank Global Cattle Price Index dropped 2.5% from December 2011 levels in Q1 2012 on the back of generally weaker demand and a seasonal increase in supply in the Southern Hemisphere. Additional headwinds came from the recent fall in United States (US) cattle values amid reduced demand caused by consumers’ reactions to the lean finetextured beef (LFTB) debacle. In a year-over-year comparison, the Index is beginning Q2 down 4% from where it began in Q2 2011 (see Figure 1).

The Rabobank Beef Forex Index average for Q1 2012 was 2% below Q4 2011 levels in the wake of the US dollar devaluation against most of the important exporter countries. However, the Index is starting Q2 6.6% higher than the same period last year, which could increase the downward pressure on international beef prices (see Figure 2).

Demand started out strong in the US and the European Union (EU), with record- setting prices in Q1. Continued strength in pricing will be supported by short global supplies but may be constrained by continuing slow employment growth, falling real incomes and the recent increase in oil prices, which have all added even more pressure to already tight disposable incomes.

Disruptions in the US market and reduced use of LFTB

Since mid-March, the US beef complex has been in turmoil due to the media-driven frenzy over LFTB. LFTB is a 95% lean product produced from beef fat trimmings. It is typically 33% lean or less. The process, which was developed by Beef Products Incorporated (BPI), slowly heats the fat trimmings and uses centrifuge to separate the lean tissue from the fat. The separated fat has typically been used in edible tallow or in the manufacturing of biodiesel. The lean product has primarily been used as an additive to ground beef, hamburger patties and taco meat. The exceptionally lean product has been used to increase the percentage of lean meat in ground beef blends.

Based on a quote from an email sent by a USDA microbiologist in 2002, the term ‘pink slime’ was coined in reference to the product. The combination of national news outlets, bloggers and anti-red-meat activists has stimulated a huge public reaction that has radically lowered the price for U.S. 50CL trimmings and is expected to increase the price of 90CL manufacturing beef. This will force shifts in US consumers’ purchasing patterns of ground beef. The market-disrupting event is also expected to increase the volume of lean trimmings imported into the US, especially from Australia and New Zealand, making the US a net beef importer.

We estimate that LFTB currently accounts for a little less than 2% of the US beef supply. Weeks of intense media attention have, at least temporarily, had a negative impact on beef demand, which has forced lower prices for both US fed cattle and beef.

Rabobank 7-Nation Finished Cattle Price Index

Rabobank Beef Forex Index Against the US Dollar

Impact of Schmallenberg virus on the EU beef industry limited

Compared with the total number of EU farms, the share of Schmallenberg-infected farms is very low (<0.5%). In addition, meat can still be exported, which minimises the effect for the meat industry. However, the import bans by Russia and Turkey’s cautiousness in granting import permits for livestock and genetics are impacting the live cattle traders and genetic companies which are experiencing export problems. This situation has not been helped by the fact that the European Commission is not allowing countries to attach extra documents to the products with proof that the livestock/genetics are not infected by Schmallenberg.

Brazil possibly allowed to expand exports into new markets

Local authorities have great expectations that the OIE will lower the Brazilian BSE risk status from a category 2 to a category 1 (although Brazil has never had a case of BSE). If this change materialises, trade negotiations with several countries may accelerate, resulting in new markets for Brazil. A good example is the Turkish market, which seems to be inclined to deal with Brazil in order to diversify its sources of beef beyond the traditional EU countries.

Global Average Live Cattle Prices

May 2012

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