Beef surges to record on US demand for hamburgers, outlook upbeat

Tuesday 23rd September 2014

Prices for beef used in hamburger patties in the US are likely to hold at elevated levels after surging to a record in the past year as drought-ridden American farmers rebuild their herds, boding well for kiwi farmers, an analyst says.

The price for US imported 95CL bull beef, the raw ingredient for meat patties, has surged 59 percent to US$3.18 a pound in the past year, according to Agrifax data. In New Zealand dollar terms, the price is at $8.37 per kilogram, beating the previous record of $6.60/kg in 2001.

"It has just been rocketing up very sharply. It is well into record territory now," said Nick Handley, senior sheep and beef analyst at Agrifax. "If prices can stay anywhere near these levels, it’s extremely positive for New Zealand because you expect a lot of that to flow through to New Zealand processors and New Zealand farmers."

The US is New Zealand's largest beef market, accounting for about 43 percent of the nation's $2.1 billion in annual exports. The US beef herd is at its lowest level since 1973 as a result of several years of drought and high feed prices. Better pasture growth and higher prices are prompting US farmers to start rebuilding their herds, although the US Department of Agriculture estimates local beef production won't start increasing again till 2017.

The US may kill 700,000 to 800,000 fewer cows this year, almost matching New Zealand's 900,000 annual kill, Handley said.

"The hole (in the US market) is nearly as big as New Zealand's total supply," he said. "Supply is expected to be low for another couple of years to come. It's not just a short-term spike."

Further bolstering the outlook for New Zealand beef returns is that Australia, the biggest rival in beef exports, is likely to pull back its export supply when a drought across the Tasman, which has seen more meat pushed onto global markets over the past 18 months, ends.

"They have been killing record numbers of cattle and at some point that drought will break," Handley said. "When that drought breaks, that is going to leave a huge hole in global markets. The hole they will leave is about the size of New Zealand's total production so that's another factor that gives us a lot of confidence in the next couple of years. When it does break, it is a few years worth of rebuilding before their production starts to lift again so again that's quite a long-term positive."

Helping lift beef prices in the US is the fact that prices of rival meat proteins such as pork have also gained, reducing the lure of a cheaper meat substitute for consumers.

US pork prices have jumped as a result of a virus affecting pork production, Handley said. The high price of prime beef has also prompted many consumers to trade down to the lower grade manufactured beef used for meat patties, he said.

Because of the spike in prices, US consumers may now be paying for mince what they paid for steak 12 months ago, Handley said.

"Unless you want to pay a huge amount for prime beef, some people are choosing the ground beef option instead because it is the only real affordable one," he said.

The rise in prices has resulted in higher value cuts being added to the manufacturing pack, tightening up supply for cuts such as knuckles to markets including Indonesia and Korea.

"Anything that can go manufacturing is going manufacturing," Handley said. "The US is just soaking it all up. We are getting close to a point where even a rump might be going into a manufacturing pack which to a New Zealander is a roast or a steak item, but is getting near being worth more to an American in a burger pattie."

Prime beef producers haven't benefited as much from the price gains, however they are likely to see an uptick once Australia's supply is curtailed, he said.

"If I had cattle to process in the next few months, I would be very optimistic about my returns at the moment," Handley said. "There’s always uncertainty because a lot can change in a year or two over the time that a farmer owns those cattle, but I think there’s as much reason to be confident for the next year or two than there has been in any year for quite awhile."

BusinessDesk.co.nz

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