Cattle Markets and the Future - An Interview with Kendal Frazier, NCBA Chief Executive Officer

 

by John Robinson, Executive Director, Organizational Communications
National Cattlemen’s Beef Association, a contractor to the Beef Checkoff
 
It’s no secret that cattle market volatility is presenting challenges for the beef industry. Large price swings and a price decline of more than 25 percent from the historically high price levels set in 2015, has left many searching for answers and stability. The good news, according to Kendal Frazier, National Cattlemen’s Beef Association CEO, is that demand remains strong in the United States and abroad.
 
Background
 
“For the past couple of years, prices for all commodities have been subjected to a global economy that has been facing significant headwinds, particularly in some of the overseas markets in Asia and elsewhere. For quite some time, because of the tight supply situation in the United States and elsewhere, beef wasn’t subjected to those same price pressures,” said Frazier. “Last year, the pressure on commodity prices started to impact beef and we saw significant downward pressure on beef and cattle prices and markets corrected sharply in the process.”
 
Global markets
 
Beef is a global commodity and producers in Australia, New Zealand, Brazil and elsewhere are competing for market share in many of the same markets where the United States has been the dominant player for decades. That increasing competition also subjects producers in the United States to the ebb and flow of international commerce and currency.
 
“When there are challenges in the international economy and large foreign economies, such as China, experience a slowdown, it ripples around the globe and commodity prices are impacted. That impact occurs despite the fact that China doesn’t import beef from the United States,” Frazier explained.
 
In the case of the most recent slowdown, it occurred at the same time as the U.S. dollar was strengthening and the currencies of other beef producing nations were falling. The decline in currency values against the U.S. dollar was significant. During 2015, the Australian dollar value was 17 percent below the U.S. dollar, on average, providing producers there with a price advantage over our own exports. New Zealand, Brazil and elsewhere also experienced pricing advantages over the U.S. due to favorable currency exchange rates during the past year.
 
The result was the first year-over-year decline in U.S. beef exports since 2009. In 2015, U.S. beef exports were 11 percent lower than the prior year, falling to 1.067 million metric tons, valued at $6.3 billion, down from 1.196 metric tons and a value of $7.1 billion in 2014. Shipments to Canada and Mexico declined last year, but perhaps the most impactful drop occurred in shipments to Japan, which fell from 241,129 metric tons, valued at nearly $1.6 billion in 2014, to 204,927 metric tons, valued at nearly $1.3 billion last year.
 

 
“A significant portion of the decline in exports to Japan can be attributed to the completion of a bi-lateral trade agreement between Japan and Australia, which provides a further 10 percent tariff advantage to Aussie beef over product from the United States,” said Frazier, noting the impact to U.S. producers will continue to grow over time without passage of the Trans-Pacific Partnership, which would level the playing field for U.S. beef shipments to Japan.
 
Domestic situation
 
The slowing export markets and global economic slowdown occurred last year at the same time producers in the United States began responding to market signals and added to their herds. Record-high profitability at the cow-calf level spurred herd growth. The increasing beef production last year resulted in additional price pressure. According to USDA’s National Agricultural Statistics Service, cattle numbers on January 1, 2016 were 3 percent above the same date a year earlier, at 92 million head. The 2015 calf crop was 2 percent higher than 2014 at 34.3 million head, indicating the likelihood that beef supplies will continue on an upward trend line through 2016.
 
“Although we saw a decline in harvest numbers during 2015 as producers retained heifers, live weight at slaughter averaged 1,380 pounds, an increase of 30 pounds from 2014,” said Frazier. “That increase in average weight largely offset decreases in production. As cattle numbers increase, we will begin to see beef production grow, increasing the importance of growing demand in the U.S. and abroad.”
 
He noted that demand in the United States has continued to be strong despite the higher retail prices facing consumers, a fact that demonstrates consumers’ love of beef.

 

 
“The fact that the USDA’s all-fresh retail beef price index reached a new record-high level in July 2015 at $6.14 per pound without a significant pullback in consumption, shows that beef continues to be favored by consumers,” said Frazier. “The all-fresh price in April of this year had declined to $5.81, which is still strong, but already we have started to see an increase in beef sales and beef featuring, which bodes well for the near-term, and it’s reasonable to expect the prices paid by consumers to stabilize and support wholesale beef and cattle prices through the remainder of the year.”
 
Looking ahead

The full impact of the current state of global and domestic cattle markets won’t be known for some time, but Frazier says there is reason to be optimistic about the future.
 
“Right now, although cattle and beef prices are below year-ago levels, consumers are continuing to choose beef and some of the volatility in our markets appears to be easing,” said Frazier. “Perhaps the biggest positives are the fact that feedlots are beginning to report positive margins and calf prices continue to hold at a level that remains high by historical standards.”
 
Looking toward the end of 2016, he said there continue to be questions, but Frazier said he remains optimistic about the direction the industry is headed.
“Two of the truly interesting questions we face are: ‘With the reduction in calf prices, how will producers respond?’ and ‘what will be the attitude of producers at the end of the summer?’” he said. “It’s not clear whether the drop in prices will cause the rate of retention to slow or whether the good moisture we’ve seen this year will cause herd expansion to continue.”

Tags: Beef Issues Quarterly, Questions and Answers, Summer 2016

June 22, 2016