Kay's Korner

Jun 1, 2012

Stronger dollar hurts imports

Exports are a key contributor to the economic health of the U.S. beef industry. They allow the industry to maximize the value of certain cuts and by-products that have a much lower value at home. And they provide a counter-balance to the domestic market. The result is that exports boost cattle prices.

2011 was a banner year for exports, with new record highs in volume and value. Exports of beef cuts and variety meats added a record $206.37 to the value of every fed steer and heifer last year. That’s one reason why fed cattle prices achieved new record highs. The five-market fed steer price averaged $114.51 per cwt, up from $96.15 in 2010. Based on the net farm value of retail beef cuts, the farmer’s share of retail value for 2011 was 49.9 percent, versus 46.4 percent in 2010 and 42.5 percent in 2009.

What happens to exports this year will continue to determine how high fed cattle prices go. Right now, the outlook is uncertain. The weakness of the U.S. dollar against other currencies boosted the competitiveness of U.S. exports. But the dollar has now strengthened, primarily because of Europe’s sovereign debt crisis and fears of a fall-out from Greece’s possible exit from the euro zone. This and continued record high wholesale beef prices are making it more difficult for foreign buyers to purchase the quantity of U.S. beef they bought this time last year. Export values were up 4 percent in the first quarter versus the first quarter of 2011. But volumes were down 10 percent. This left more beef than expected on the domestic market, which struggled to clear all that was produced.

Evidence of this was seen in USDA’s latest report on the amount of meat and poultry in cold storage. Beef supplies in storage on April 30 totaled 517.5 million pounds, up 16.8 percent from a year earlier and the largest amount of beef in storage since November 2006. Boneless beef comprised 86 percent of all the beef in storage. It was up 16.4 percent on last year and showed that packers were forced to store a large amount of fatty trim from grain-fed steers and heifers as a result of the media furor over lean finely textured beef. But the amount of boneless cuts increased 19.2 percent year-on-year.

U.S. beef export volumes might continue to run well below last year for the remainder of 2012 if wholesale prices remain high and the dollar remains strong. USDA at the start of the year forecast that U.S. beef export volumes in 2012 would be flat with 2011. Its latest forecast is for exports to be down 4.1 percent. Exports in 2013 are expected to be 1 percent below forecast 2012 levels, at 2.65 billion pounds, says USDA.

The greatest impediment to increased exports remains Japan’s under-21-month cattle age limit on U.S. beef. Japan has agreed to consider lifting this limit to under 30 months. But little progress appears to have occurred to date and a new limit might not take effect this year. Exports of U.S. beef cuts to Japan in 2011 increased to 156,000 metric tons (mt). But this was still their lowest level since 1988.

Rival Australia lost some market share to U.S. beef in Japan, largely because of the currency exchange rates. The Australian dollar was at a premium to the U.S. dollar for nearly two years until a month ago. But its exports to Japan remain well above those of the U.S. and have remained strong. It exported 279,000 mt of beef to Japan in 2003. But after the U.S.’ first BSE case halted all U.S. exports to Japan, Australia’s tonnage increased to more than 405,000 mt in 2005 and 2006. It exported 342,000 mt to Japan in 2011, 36 percent of its total exports.

The stronger U.S. dollar will also boost Australian beef imports into the U.S. this year. They were up 91 percent in the first quarter from a year earlier. Improved pasture conditions in Australia have boosted carcass weights and production, says USDA. Strong U.S. demand for processing beef, amid tightening U.S. production, is expected to support higher imports, it says.

This demand is reflected in the price of lean manufacturing beef (90CL). The price the week before last averaged a record $230 per cwt.

The bottom line is that the U.S. will see much larger imports this year, notably from Australia. U.S. beef production is expected to decline more in the second half of the year, versus last year, than in the first half, which will further limit exports. So the U.S. will likely revert to being a net importer of beef in 2012 for the first time in three years. — Steve Kay

(Steve Kay is Editor/Publisher of Cattle Buyers Weekly, an industry newsletter published at P.O. Box 2533, Petaluma, CA, 94953; 707/765- 1725. Kay’s Korner appears exclusively in WLJ.)