Global marketplace determines outlook, positive signs seen for futureWritten by Saige Albert
San Diego, Calif. – “In the course of the last few years, our business has become more global,” said CattleFax Analyst Mike Murphy during the National Cattlemen’s Beef Association Cattle Industry Convention and Trade Show at the end of January.
In 2008, when recession hit the global economy, markets contracted.
“We started to see the globe come together to try to stimulate business in our own countries around the world,” he said. “When that occurred, we had a big influx of commodities and values were supported.”
However, cattle aren’t as flexible as other commodities in terms of ability to recover quickly. The reproductive cycle of cattle can be prohibitive as compared to hogs or even crop markets, he noted.
“When we look at these changes in terms of crude oil or hogs, we have seen a significant correction to their values,” Murphy said. “That is driven by supply. We were having increased production, which was affected by demand. Then we saw a slowdown in global demand.”
Global demand declines led producers to assess their situations in terms of long-term price trends.
“We lowered interest rates to try to stimulate the economy,” Murphy said. “We were able to achieve some success, but we are now in a situation where interest rates can’t get lower.”
Some European countries are even encouraging their citizens to not deposit their money in banks now.
“There isn’t much more we can do to stimulate the economy,” he said. “At some point interest rates are going to go back up, but in the short-term, we expect them to stay fairly low.”
The impact seen from lowering interest rates was positive, but it has begun to wear off.
“We are seeing countries trying to devalue their currency in hopes of stimulating export growth. Some are in more difficult shape than others,” Murphy commented.
Key countries around the world are seeing a slowing of growth, including Brazil, Russia and China.
“Brazil and Russia, in particular, have seen contraction from an economic standpoint,” Murphy explained. “Countries like China stand out as solid but with slowing growth.”
For example, in Russia, a 56 percent decline was seen in their currency over the last 18 months.
“Some of that is related to what is going on in the energy sector and the deflationary concept,” Murphy said.
Murphy also noted that, despite slowdowns and cheaper beef coming from Brazil, many countries are still seeking U.S. beef because it is a high-quality, grain-fed product.
“Brazil has a grass-fed product,” he said.
While economic stimulation is still a concern, Murphy also added that slowdown around the world is starting to impact the U.S. economy more significantly.
“This is a reflection of where we are from an economic standpoint,” he continued. “In the U.S., we know we are in really good shape compared to the rest of the world, and that is the expectation as we look forward. We see no concerns looking at 2016 to be any sort of recessionary year.”
However, beyond the borders of the U.S., the picture is less clear, and Murphy noted that it continues to be important to pay attention to the global marketplace.
“We know how important global demand is for proteins – and in particular beef,” he said. “We have to make sure we are always analyzing and assessing what is going on around the globe.”
“The challenge in the U.S. is we are a stable economy,” Murphy added. “There is no fear of seeing our decline, at least in the short-term, over the course of the next one to two years.”
With a stable economy and other countries devaluing their currency to stimulate growth, Murphy explained that the U.S. is at a competitive disadvantage.
“There are some positive things from a global standpoint,” Murphy commented.
First and foremost, he noted that it is also important to consider supplies.
“We have had a small increase as we look at beef production, but when we look at the last several years, we have a tight, tight supply,” Murphy said. “Australia will contract their beef industry from a production standpoint because they are going to begin expansion as they receive more moisture. To expand, they have to contract first.”
Canada will experience a similar situation, comparable to what was seen from 2013-15 in the U.S.
“We don’t have a huge increase in terms of overall global beef supply,” he said.
Looking forward, beef imports are expected to decline about eight percent as Australia contracts their supply.
At the same time, the value of the 90% lean beef market has gone from three dollars a pound to $2.20.
“From an export standpoint, over the last four to five years, we have exported about 2.5 million pounds, which is what we expect to export on a consistent basis,” Murphy said. “That is roughly nine to 10 percent of our production.”
The ability to continue exporting beef is a “big positive for the industry,” he added.
Any increase in global beef production will also come from the U.S., considering expansion of the beef cattle herd, which puts the beef industry in a position to prosper.
“That puts us in a position where we should be able to command better demand from a global standpoint so we can export more product,” Murphy said.
He added, “There are some trade winds we will have to face, but we feel like, overall, the global market will be more positive.”