With prime steers and heifers now moving at a base of €4.30 to €4.45/kg, prices are running 70-80c/kg ahead of last year. A typical 360kg steer carcase has increased in value by €250 to €300 per head. In this week's edition, Adam Woods looks at the supply and demand balance in the domestic market, while Phelim O’Neill profiles the international beef market. On both fronts, the news is positive with indications of sustained price increases on the cards.
At a domestic level, strong demand in our main export markets, in particular the UK, is fuelling competition among factories. The reopening of the food service market combined with only a marginal decline in what were record retail beef sales last year has created exceptionally strong demand in the UK and across Europe.
On the supply side, Irish farmers are reaping the benefits of a strong live export trade in 2018/2019. Bord Bia figures show the large increase in the number of calves leaving the country in 2019 coupled with a strong weanling export trade in the autumn of 2018 has translated into a year-on-year decline of 7% in animals within the 24- to 30-month age bracket. Numbers in the older 30- to 36-month age bracket are down 13%. This drop in domestic beef production correlates with declines in UK and EU production. The UK market is forecast to decline 5% this year while EU production is forecast to decline 2%, with a 4% decline forecast for Germany.
Previously, where the supply and demand balance was tipped so firmly in favour of farmers, the market would adjust by increasing the volume of beef imports from non-EU countries, mainly South American. But such is the strength of international beef markets, this option is not readily available. In the past year, Brazilian beef prices have increased by over 50% in euro terms, now trading at the equivalent of €3.40/kg. Meanwhile in the US and Australia, prices are running at the equivalent of €4/kg and €4.50/kg respectively.
It is the perfect storm with demand outstripping supply in domestic, EU and international markets
As with Europe, the strong international market is being underpinned by tight supplies and strong demand. Once again it is the Asian market, and in particular China, that is the driving force behind the demand increase. Combined, China and Hong Kong will account for one-third of all global beef imports this year.
Since 2014, beef imports into China have increased tenfold: forecast to reach almost 2m tonnes in 2021. Last year, Brazil supplied over 40% of all beef into China with volumes increasing over 75% on the year previous.
Traditionally, such a sharp surge in demand leads to the liquidation of national herds due to a spike in cull cow slaughterings combined with a reduction in the number of heifers retained for breeding. In line with this, Brazilian beef exports in 2021 are forecast to fall 10-15% reflecting lower production levels.
On the opposite side of the coin, the rebuilding of national herds temporarily forces production down further as increased numbers of heifers are retained for breeding and culling rates normalise. We see this in Australia now where after years of drought, cattle herds are rebuilding. As a result, beef exports in 2021 are also forecast to decline as less cows and heifers come on to the market.
In many ways, it is the perfect storm for Irish farmers with demand outstripping supply in domestic, EU and international markets. In the short-term there is little on the horizon to suggest that this market dynamic is set to change. However, as we have seen many times before, high prices are a cure for high prices – in that a sustained period of high prices either sees market demand ease or production increasing to reflect the increased profit margins.
Such is the dominance of the Asian market, the increase in international prices is unlikely to significantly impact on demand. However, in time, production will respond to increased market prices and bring supply and demand back into balance. Given the length of the beef production cycle, this will take time – albeit that countries such as Brazil will fast-track production by moving from extensive grass-based systems into intensive feedlot systems that reduce age and increase weight at slaughter.
Nevertheless, we are potentially looking at a 12-month window for the Irish beef industry to develop a roadmap. Too often we see such attempts take place against a backdrop of crisis or when farmer and factory relationships are fraught. As with the beef taskforce, engagement in this type of environment proves fruitless.
Key to getting progress will be an honest conversation around the positioning of Irish beef in EU and international markets. We view the industry as a premium producer of beef. A position which we use to validate our year-round steer-based production model, despite the increased costs associated with winter finishing and loss of efficiency from castration.
But does this premium status really determine the price farmers receive? Or as evident in the market at present, does farmgate price simply come down to the basics of supply and demand? Being able to answer this honestly is fundamental to shaping the direction of our beef industry. Continuing to sell a premium product into a market where price trends more closely reflect that of a commodity is not sustainable.
Farmers cannot continue to produce a premium product for it to be sold into a commodity market. Those leading the industry should not waste the opportunity that strong markets present to plan ahead for more challenging times and build better trust and transparency into the sector.