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By Adam Davis - Head of Commodities at Merricks Capital
The recent signing of the Phase 1 US China trade pact is expected to serve US export interests well. Points probably missed by mainstream media and those that don’t trade in meat markets on a day to day basis like we do is that the China/US trade deal is in fact a major game changer for the US beef industry, indeed the global beef industry.
What’s changed (in layman terms)?
- The Chinese government has lifted the age restriction on cattle, meaning that meat derived from cattle slaughtered over the age of 30 months, namely cows, is now eligible for export to China. So what? Well a major ingredient in the US hamburger industry is grinding beef, typically derived from cows from US, Australia and New Zealand. So this opens up a new export market for cow meat not previously available to the US meat industry which will compete head to head with Australian and New Zealand beef. US prices are likely to rise.
- US beef production is heavily skewed to fattening cattle in their extensive feedlot infrastructure. This compares with Australia where the vast majority of beef production is done on pasture, our feedlot sector is growing but remains a fraction of the US industry. The US have long used growth promotants in their beef production system which has been used as a trade barrier for US beef access, much to the benefit of Australia and New Zealand. The US/China trade deal ends that restriction effectively opening up the entire US beef market to the Chinese. Buyers from China are clamoring to meet the US beef industry.
- China will now accept the US traceability system and agree to use the US certification system meaning that beef facilities that meet US government approval will be automatically approved for export to China, this effectively reduces the risk of a Chinese inspection system being used as a trade barrier.
- What about the tariffs? The tariffs on meat imported into China remain (37% on beef and 68% on pork) HOWEVER the Chinese government has reserved the right to waive these tariffs which effectively allows China to control the flow of product by choosing when tariffs are or are not applied.
This ‘globalization’ of the beef market is likely to result in the mostly domestic focused US beef market increasingly looking to Asia for price direction as has been the evolution in Australia and New Zealand in recent years.
Global meat markets are already dealing with an unprecedented reduction in global pork supply and with new trade routes being established between North America and China as well as the uncertainty of trade tariffs and China’s growing need for US pork means that price volatility in meat and livestock markets is expected to remain elevated throughout 2020.
A quick note on Australia and we thank those that have sent messages of support for Australia during the bush fire crisis. We are happy to say that the breakdown of the high pressure system over Australia and onset of the Northern wet season has brought welcome heavy rain across the Eastern seaboard, particularly in regions that have been fighting bush fires quite often in inaccessible National Park areas. Importantly for local cattle markets, this broad band of wet weather, whilst far from drought breaking, is expected to tighten the supply of cattle and we expect this to be the start of a period of vastly higher Australian cattle prices over the next 2 years as the industry attempts to rebuild the herd, currently at 30 year lows.
Merricks will be attending the Gulf Foods Expo in Dubai in February as well as meeting with US meat and livestock market participants right across the United States in late February and early March.
https://www.merrickscapital.com/
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