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CME: State of World Economy Still a Concern for Meat Industry

US - Concerns about the state of the global economy continue to weigh upon market sentiment, and for good reason, write Steve Meyer and Len Steiner.
calendar icon 12 October 2012
clock icon 1 minute read

Today, the US meat industry depends on trade with the rest of the world more than at any other time in history. Often we hear about the impact that increased imports have on domestic producers, invariably followed by calls for the government to do more to limit such imports. The truth is that the US is a significant beneficiary of trade with the rest of the world. In 2011, exports of beef, pork, broilers and turkey accounted for about 17% of the overall volume of red meat and poultry production in the United States. The expectation is for exports to be even higher in 2012 and in 2013. In 2011, the US was a large net meat exporter, shipping about 15.7 billion pounds of beef, pork and poultry while importing only about 3.5 billion pounds of product, a good portion of it in the form of lean frozen boneless beef. Imports of lean beef used to get a lot of negative press in the past but even there the situation has dramatically changed.

It is now in the interest of US cattle producers for the US to import more not less beef. Consider that much of the beef that comes into the US does not compete directly with the steaks, round cuts and chuck that sells at the grocery store. Rather, it is a critical component in making ground beef, largely for the foodservice industry. Without this supply of lean beef, it would be much more difficult to find enough supply to mix up with the fat trim that results from breaking down beef primals. At this time, there is a significant oversupply of fat beef trim in the US and there is a shortage of lean cow meat (smallest cow herd in 50 years). Lack of lean beef supplies tends to depress the market for fat beef trim and lower the overall value of the cattle coming to market. As for other proteins, there is very little debate as to the benefits of trade. In 2011, the US exported some 5.1 billion pounds of pork while importing just a little over 800 million pounds while chicken exports totaled almost 7 billion pounds and imports were just 100 million pounds or so.

The significant positive net trade in meat protein makes US producers more vulnerable to shifts in global economic conditions as well as shifts in exchange rates. Part of the reason for the sharp rise in US meat protein exports is the decline in the value of the US dollar. This has made US meat protein much more competitive in global markets and offset the higher production costs compared to other large global suppliers such as Brazil, the EU, Australia and Canada. More than 60% of US meat exports currently go to six major markets (see chart). Mexico and Canada account for about 28% of US meat exports, a result in part of the Free Trade Agreements negotiated in the 1990s. Japan, China and S. Korea are also very important markets. So when you see news of slowing growth in China, stagnant growth in Japan and S. Korea, keep in mind that these are not just curious stories from lands far away, they directly impact some of our major customers and affect the price of livestock and poultry traded every day. And when world growth forecasts are pared back, it could mean your profit potential may be pared back as well.