Seldom have global markets been more important to the U.S. beef industry than now. Continued weakness in domestic demand into 2010 means any increase in exports will be vital to the industry’s profitability. Two key developments will be a global recovery in leather demand and removing trade restrictions on U.S. beef.

The global beef business today looks very different from a year ago because of the worldwide recession. U.S. beef went on sale again in South Korea last July after a nine-month ban. Commodity markets were booming, with strong demand for everything from corn to meat. Futures prices created both delight and grief for cattle feeders. On one hand, live cattle contracts went well into triple digits. The August 2009 contract closed at a record $116.40 per cwt. on June 25. On the other hand, corn futures went beyond $8 per bushel.

This put cattle feeders in the same price vise as hog and poultry producers. Runaway ration prices caused heavy losses on cattle being marketed, as feed costs and the price of feeder cattle far exceeded live cattle prices as the year progressed. Little has changed since then. Cattle feeders continue to lose money. Cash corn prices the third week of June were 45 percent lower than a year earlier. But feeder cattle prices were still high because of over-capacity in the sector and too much competition for a shrinking cattle supply.

The main reason for the losses, however, has been weak beef demand at home and abroad. Demand globally has declined in the past nine months when forecasts prior to that were for demand to increase. The reason is the recession. Consumers’ desire to eat beef is still there but the money is not. Allied factors include the impact of recession on credit availability and the slump in currencies against the U.S. dollar. Both factors made it harder for countries like Mexico, South Korea and Russia to buy U.S. beef. This has led to declines in shipments to these countries.

The global recession caused beef by-products values (the drop credit) to plummet from their highs of last summer. At one point this spring, the drop credit averaged only $5.70 per cwt. (week ended March 21). This was 47 percent lower than in the same week in 2008 and went against a record high of $12.12 per cwt. the week of July 19 last year. A global leather glut in the face of reduced demand was largely responsible for the decline, because hides account for two-thirds of the drop credit. But the prices of tallow and most offal items also slumped.

Various types of trade restrictions also continue to impact the global beef trade. BSE-related restrictions still remain on U.S. beef even though the U.S. has not had a BSE case since 2006. Trade restrictions also reduce the amount of beef Canada can export. So more Canadian beef has been coming to the U.S. Tariffs and quotas also continue to hamper exports to several countries. The European Union’s long-standing ban on beef produced with hormone growth promotants has meant virtually no U.S. beef trade with the EU for many years. This however looks set to change.

Disease outbreak threats relating to BSE, foot-and-mouth disease, E.coli 0157:H7 or the H1N1 influenza virus also hangs over the global beef trade. The erroneous labeling of the flu virus discovered in Mexico this spring as "swine" flu severely impacted the U.S. pork industry and caused 15 or more countries to ban U.S pork imports.

A perfect (global) storm

The pork and live-hog market had still not recovered by early summer, as bans remained in place. This, plus a temporary decline in Mexico’s purchases of U.S. pork, forced pork back on to the U.S. market this spring that otherwise would have been exported. This in turn was another depressant on wholesale beef and fed cattle prices.

The beef industry also faces ongoing pressure from the animal rights/welfare lobby, with the Humane Society of the United States continuing to lead a crusade against U.S. animal agriculture. The U.S. and global industry also face environmental pressures, notably over its carbon footprint and greenhouse gas emissions. Another issue is drought in key beef-producing countries, notably in Australia and Argentina.

In North America, the full implementation of mandatory country of origin labeling (MCOOL) appears to have added cost to the industry but brought no benefit to either producers or packers. MCOOL could not have come at a worse time. The U.S. needs Canada and Mexico, its two biggest beef export markets, more than ever. They took $2.112 billion worth of U.S. beef in 2008, 59 percent of total exports. They took $27.21 billion of all agricultural products in 2007, according to USDA.

Given the reduction in U.S. cattle numbers, feedlots and packers also need Canadian and Mexican cattle more than ever. But Canadian cattle imports were down 28 percent for the year to May 30, vs. the same period last year. This meant 80,000 fewer slaughter steers and heifers for packers and 123,200 fewer cattle for feedlots. Not surprisingly, Canada and Mexico have filed complaints with the World Trade Organization. But this process will move so slowly it won’t alleviate import reductions in the next two or three years. Meanwhile, Agriculture Secretary Tom Vilsack’s request for the industry to "voluntarily" expand MCOOL requirements is still on the table. The industry will not breathe any easier over MCOOL until he declares he will leave the final rule as is, say observers.

Examination of the expected negative growth in GDP (gross domestic product) of key countries provides insights into the depths of the global recession. Mid-June forecasts from the Economist Intelligence Unit put expected 2009 GDP as follows: the U.S. down 2.9 percent from 2008, Canada down 2.3 percent, Mexico down 4.4 percent, Brazil down 1.5 percent, the European Union down 3.7 percent, Russia down 3.0 percent, Japan down 6.4 percent and South Korea down 5.9 percent. Only China has a projected positive GDP, up 6.5 percent. Forecasts are for GDP in all these countries to be modestly positive in 2010. That portends a recovery in the global beef trade but it will be slow and later than expected, say analysts.

Industry implications

The GDP declines mean that overall world trade will shrink 6 percent in 2009 vs. 2008. Within that, beef exports from all countries will decline 4.4 percent and beef imports will decline 3 percent, according to forecasts from USDA’s Foreign Agricultural Service. U.S. exports have already been constrained by the global decline in GDP and by a stronger U.S. dollar against other currencies. Global exports have been most impacted to developing countries where consumers spend a large percentage of their budget on food. This has a disproportionate impact on expensive dairy and meat products.

U.S. beef exports in 2009 will decline 8 percent from 2008 to 1.744 billion lbs., says USDA. Recovery will depend on the resumption of global economic growth, stronger currencies against the U.S. dollar and a relaxation of trade restrictions against U.S. beef. Some forecasts are for exports to increase 9 percent in 2010 versus this year. USDA projects normal growth rates will return by 2011.

Recovery in by-product values, notably hides, is also highly dependent on a global economic recovery. The difference between last summer’s weekly high in these values compared to this spring’s low was $63.57 per head. The values strengthened somewhat this spring. They averaged $7.39 per cwt. the second week of June. But they were still down 34 percent from the same week last year, which meant a $48.62 per head difference. Hides make up two-thirds of the by-product values. Their decline stemmed mainly from the global slump in demand for leather in automotive, footwear, apparel and furniture.

The global recession and drought have caused global cattle numbers to decline. Other factors include declining beef demand, higher input costs and negative returns for many producers. USDA puts 2009 numbers at 980.8 million head, down 0.8 percent from 2008. Numbers for some countries, however, are difficult to calculate accurately. For example, Mexico had 26.6 million cattle in 2007, according to USDA. But the September 2007 Mexican Census of Agriculture, released only this February, showed Mexico’s 2007 total to be only 24.5 million head.

U.S. cattle numbers declined 1.544 million in 2008 (down 1.6 percent) and could decline by at least another 1 million head this year, say analysts. Argentina’s cattle population will be down 1.6 percent in 2009 to 54.76 million head, says USDA. However, this does not fully take into account the 2 million cattle believed to have perished this year in Argentina’s worst drought since the early 1900s, and the fact that 3 million fewer calves are likely to be born in 2009 than in 2008. The Argentine herd could decline 10 percent from one year to the next, say analysts. Recent reports that Argentina might have to import beef might not be as far-fetched as they might seem.

Of the major beef producing nations, only Brazil and Australia are forecast to be increasing their cattle numbers. Brazil’s herd will this year total 179.5 million head, up 2.3 percent on 2008, says USDA. Australia’s herd will total 28.5 million head, up 1.9 percent. Other forecasts put Brazil’s numbers lower than that. The herd currently totals 170 million head, says Sao Paulo-based agricultural consultancy firm AgraFNP. This number might increase by 13 million head by 2017, it says.

The shrinking global cattle herd also means global beef production will decline 1.5 percent this year, according to USDA. The biggest percentage declines will be in Argentina and Australia, the two countries worst hit by drought. U.S. production this year is likely to fall by 1.5 percent from 2008 and will likely fall another 1 percent in 2010. The irony of this is that global beef demand will likely start to recover in 2010 but the U.S. might not be able to take full advantage of this because of a reduction in cattle numbers.

Beef demand outside the U.S. could improve more than in the U.S. in 2010. One expectation is for Japan to relax its age restriction on U.S. beef (from under-21-month cattle to under-30 months). This move will qualify 90 percent of the cattle that made up 2003 exports to Japan to qualify for export again. Currently, the age restriction and lack of age verification mean that exports are still far below 2003 levels. Exports in 2008 were only 20 percent of 2003 exports. Shipments in the first four months of 2009 were 25 percent higher in volume and value than for the same period in 2008.

Demand could also surge globally if China agrees to lift its total ban on U.S. beef. China remains the wild card in the global beef trade. It is the thirdlargest beef-eating nation in overall consumption. But per capita consumption is small at 10.5 lbs. per person. In contrast, per-capita consumption of pork is more than 75 lbs. per person. The only U.S. beef consumed in China currently goes through Hong Kong, with a growing although small tonnage reportedly going through Vietnam and Macao.

As long as this trade grows, China might have little incentive to lift its ban on direct U.S. imports for a while, say analysts. But when it does, it could become a $500 million market for U.S. beef within two years, says international trade specialist Chuck Lambert, who formerly worked with the International Trade Commission, USDA and the National Cattlemen’s Beef Association.

USDA forecasts that global beef exports will decline 4.4 percent this year versus 2008. It expects Brazil’s exports to fall 7 percent to 1.675 million metric tons. It is the world’s largest exporter with a 23 percent share. Then comes Australia with an 18.7 percent share, the U.S. with 11.4 percent, India with 8.3 percent, New Zealand and Canada with 7.3 percent, Argentina with 5.5 percent and Uruguay with 4.8 percent.

Global beef imports are expected to be down 3 percent despite a 12 percent increase in imports to the U.S., with USDA forecasting imports of 1.288 million metric tons. Given the decline in U.S. production in 2010, imports will increase to 1.35 million metric tons in 2010, says USDA. Imports this year will be down in Russia, Mexico and South Korea. Currency weakness in all three countries since last fall made it harder for these countries to buy U.S. beef in particular. U.S. chuck rolls at the start of 2009 were 5 percent to 15 percent lower than year earlier. But the weakness of the Korean won made those chuck rolls 50 percent more expensive.

Imports in the past three years have seen several reverse trends. The European Union went from being the largest beef supplier to Russia to being a net importer. South America became a dominant supplier to the EU and to Russia in 2007. Then the EU briefly banned Brazilian beef over traceback issues. Russia was a strong market for U.S. beef cuts until mid-2008 then reverted to buying the most inexpensive items.

JBS and South America

The decline in Brazil’s exports has been pronounced. Its 2009 exports might be down 23.5 percent from its record 2.189 million metric tons in 2007. Nevertheless, AgraFNP forecasts that Brazil’s exports will increase 32 percent by 2017. It concedes however that such growth will have to come through efficiencies, improved feed practices and genetics, and feedlot expansion (with 6 million head marketed annually from feedlots).

The contraction of Brazilian and Argentine exports has impacted JBS SA’s South American performance. But it remains the global beef powerhouse, with an unparalleled production platform of 32 beef processing plants in five countries. It has capacity globally to process 65,200 head per day. This puts it far ahead of Cargill Inc. with 39,300 head in 13 plants, Tyson Foods with 29,200 head in eight plants and Brazil’s Marfrig with 21,100 head in 18 plants.

JBS’s strategy is to optimize the value of the carcass in every country where it produces beef by selling the right cut in the right place at the right time. It exports to 100 countries and has 16 sales or trading offices globally. One of its strengths is its market diversity. Unlike the U.S industry, it is not reliant on two or three key markets. A breakdown of its 2008 exports reveals that Japan and the EU each accounted for 16 percent, the U.S. 11 percent, Mexico 9 percent, Russia 8 percent, South Korea 6 percent, and China/Hong Kong 5 percent.

JBS, like other South American packers, also has a large canned-meats business and exports to several countries in Africa. Its ownership in Australia means it now sells Australian capoff rounds (known as the picanha in Brazil) to Brazil, which would have been unthinkable a few years ago. It sells Australian beef to Chile, the EU, Russia and Dubai. JBS has also strengthened its position as the largest protein supplier in Russia by building a large cold storage and patty-making facility in Moscow.

JBS earlier this year announced plans to become the world’s largest fresh and frozen meat distributor, saying it will buy companies to achieve this goal. JBS will continue to redefine how the global beef business is conducted, say observers.

Another global trend to watch is the Halal beef trade. The Gulf States’ economic boom has subsided because of the recession. But luxury hotels and restaurants still cater to a lot of tourists in Dubai, the United Arab Emirates and other states. Egypt remains a good market for liver. Indonesia and Malaysia are large Halal markets and the Philippines is a large importer of Halal beef for further processing. Australia took a lead in Halal certification and subsequently has a strong presence in these markets.

2010: A better year

Next year looks to be a brighter year than 2009 for the U.S. beef industry for several reasons. The U.S.’s "accommodation" with the EU means it has a 20,000 metric ton tariff-free quota for each of the next three years, with another 25,000 metric tons in Year Four. The current 11,500 metric-ton quota with a 20 percent tariff remains. The EU’s hormone ban on U.S. beef also remains and the EU won’t allow packers to use carcass rinses. So, material from EU-designated carcasses that doesn’t go to the EU will probably have to be cooked. Nonetheless, the EU market has become potentially larger.

The key factors though in 2010 will be positive GDP growth in most countries, a consequent improvement in consumer wealth and what Japan and China do. Now that Japan has official BSE "controlled risk" status, it has a scientific context in which to move to lift its age restriction. This action thought might not be finalized until some time in the first quarter. If and when this occurs, and if China decides to accept U.S. beef, the industry’s biggest problem might be to produce enough beef to satisfy a spike in demand.

Steve Kay is editor and publisher of Petaluma, Calif.-based Cattle Buyers Weekly (