Beef prices might curb consumer appetite: Rabobank

by Bryan Salvave
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KANSAS CIY, Mo. – Through the month of May, the Rabobank's Global Cattle Price Index continued to drop, down 6 percent relative to Q1 2013 on the back of a downtrend in cattle prices across the globe, notably in two of the most important export countries, Australia and Brazil, according to Rabobank. Also contributing to pushing global cattle prices down was the strengthening US dollar.

Consumers are becoming increasingly reluctant to continue paying high beef prices, according to Rabobank.

"Industry performance has been mixed across the globe" said Albert Vernooij, Rabobank analyst. "The broader picture for demand still points to tempered consumer appetite to paying high prices for beef as increases in disposable income worldwide appear to be slowing and threats of inflation continue across the globe. The relative value proposition for beef has diminished as beef prices have risen relative to chicken and pork."

Rabobank maintains the view that global beef supplies will remain near 2012 levels with a bias towards a minor increase driven by the Southern Hemisphere, Vernooij said. "This will be led mainly by Brazil, Australia, Argentina, Uruguay and New Zealand-coupled with continued liquidation in US beef supply given the ongoing drought-induced cow herd liquidation. In addition, exports from India have moderated considerably," he added.

Prices continued to increase in the European Union (EU) as a result of a combination of the higher demand for beef – as many players have had to replace horsemeat with 'real' beef-and tight supply. This is possibly one of the reasons behind Brazil`s growing exports to the EU this year – up 42 percent to 25.5 thousand tonnes on the year to May. Prices are expected to remain elevated for the remainder of 2013, but the strong increase experienced since February is expected to level off over the summer.

The outlook in the United States remains gloomy. Feedlots are still being negatively impacted by the continuation of strong feed -grain prices exacerbated by adverse weather and an insufficient decline in feeder cattle costs. However, packers have been posting improved margins since May. Cash prices have recently traded at a seasonal low of $120 and are expected to maintain a narrow sideways trading band in the short term, before recovering to the mid-$130 level in Q3 and Q4.
The outlook for the rest of the global beef industry is mixed. Companies located in South America, particularly Brazil, should continue benefiting from the herd recovery and brisk exports, which are getting an additional lift from the depreciation of the Brazilian real. But rising Brazilian inflation coupled with declining pork and poultry prices may limit Brazilian players from obtaining higher prices in the domestic market. Regardless, the general landscape for processors' margins is still positive.

Meanwhile, in Australia and New Zealand cattle prices have continued to decline due to increased marketing driven by drought. While this is not good for ranchers and feedlots, the packing segment is getting short-term benefits from this environment.

Although production has been flat in China, prices have surged. Rabobank expects the value of China's beef market to grow in excess of 10 percent per year over the next three years. High beef prices in China, combined with recent signs that the country will open its doors to the global beef market, point to continued growth in imports. This could also trigger interest in exporting companies and countries from Chinese beef players.
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