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Where's the beef?
Whenever there is a vacuum, something rushes to fill it. It's true in the cattle business, too.
As U.S. cattle numbers have declined over the last decade due to drought and competing demands for land and feed, Brazil, in particular, has been filling the void. Its cattle herd has increased by 17% in the last five years. Its vast grassland resources are fueling cattle growth, too. And with the emphasis on grass, Brazil's beef producers have not felt the same pressure of escalating grain prices as their North American counterparts.
Don Close, Rabobank vice president of agribusiness research, closely follows the world animal protein sector. Brazil is not the only country trying to capitalize on the escalating demand for beef around the world. Following is Close's rundown of key players vying for a bigger slice of the market.
“It's sort of the hub of any growth in cattle numbers around the world,” Close says. He gives credit to the general Brazilian agricultural economy, favorable tax policy, and a strong emphasis on exports for the beef surge. “It has land resource advantages for a grass-based beef industry,” he says. “It is making some efforts to establish a feed grain industry, but when it comes to cattle in Brazil, it's grass-fed.”
Brazil is also growing the infrastructure to support its beef industry. The largest processor, JBS, has enlarged slaughter capacity by 10% since the beginning of 2012. “Brazil is absolutely poised to capitalize on the beef export market,” says Close.
After severe drought over several years, Aussie cattle producers are recovering and rapidly rebuilding herds. The 2012 inventory is the highest in 30 years, says Close, and slaughter numbers will be up 3% to 5%. Australia, too, is geared for exports, with a record volume shipped this year of nearly 1 million tons – 45% of total production.
While they could be a threat to steal some of the U.S. export market, Mexican cattle producers have felt the same drought pressure as their neighbor just to the north. Close thinks some parts of northern Mexico have liquidated 30% of their herds. And drought appears to be lingering there in 2012. “After the drought ends, Mexican beef exports are going to be low for another three to five years,” Close says.
Our northern neighbor dramatically downsized its cattle herd after the BSE outbreak of 10 years ago that radically reduced exports. It decimated them, says Close. Since then, Canada has been in a very slow process of rebuilding and recovery. “Given its natural resources, you would think that Canada will be back,” he says. “But it's doubtful it will ever get back to where it was.”
While everyone wants to talk about this developing economic giant, it's not a big player in world beef trade. With its huge population, it has a limited land base to expand herds, and the diet there is based on pork and poultry. Any increase in cattle numbers is mostly dairy-based, says Close.
Cattle operators here have two constraints. The first is that they are a society that has imposed numerous rules and environmental regulations on agriculture, adding to production costs. The second is that the economic uncertainty brought on by the near meltdown of the European financial system puts great pressure on all industries, including beef. Agriculture will likely get far fewer public resources in the future. The decline in consumer purchasing power hurts beef demand.
Close says the U.S. beef industry is still dominated by weather. The drought in the South and Southwest the past few years led to wholesale liquidation of herds. “We're seeing some stabilization on that front in the Texas area,” he says. “Herd expansion will be constrained until we see a significant recovery in soil moisture.”
U.S. cattle inventory has declined by 6% since 2007, but it still has an unquestioned advantage in grain-fed beef, Close says. Nobody comes close to having feed grain resources like the U.S. “The U.S. has lost a lot of the land base for beef production to alternative land uses, development, and especially drought in the last few years. But I expect recovery and expansion – especially if we get some cooperation from the weather.”
High costs for resources such as land, breeding stock, and feed will limit the pace of cattle expansion, Close predicts.