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International Beef and Veal Prices: June 2013 Outlook

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US prices stagnate

Live cattle futures (for June delivery) remained stagnant over the 15 March-11 April review period on the Chicago Mercantile to end at US$1.21 per pound. Positive factors included weak data about cattle on feed, released by USDA on 22 March. Cattle on feed lots during March declined to just 93% of its average in the same month the previous year. This percentage was eight basis points lower than in February 2013. Lower than expected numbers of cattle on feed typically prompt concerns about mid-term supply because cattle on feed lots are destined for slaughtering. Data on US beef exports was relatively strong over the period, and that provided support to live cattle prices over the first half of March. In addition, sales  of US beef to Japan surged to a 12-year high during that period following Tokyo's decision to ease import restrictions that were applied after the first US case of BSE in 2003. Volume sales of beef and veal in Japan totalled 884,000 tonnes in 2012. Beef cash prices between 4-9 April, however, remained stagnant despite the proximity of the US grilling season, dashing hopes for a rally in
fresh meat prices during the first half of April.

Weak demand in Germany depresses European prices

The latest data published by the European Commission shows that EU weekly average prices for beef and veal (carcass prices) declined by €1 per 100kg between 4-31 March. EU March prices were negatively affected by a surprise €9 per 100kg fall for German beef and veal over the 4-24 March period. This was mostly down to weaker than expected demand over Easter, a period which typically sees price hikes. Data released on 21 March showed a decline in German manufacturer confidence. German business confidence unexpectedly fell from a 10-month high in March as Cyprus inflamed the euro region’s debt crisis. The IFO Institute in Munich said its business climate index, based on a survey of 7,000 executives, declined to 106.7 from
107.4 in February. Volume sales of beef and veal in Germany totalled 718,000 tonnes in 2012.Food manufacturers seeking to re-stock their beef and veal  supplies via trade transactions on the Chicago Mercantile should consider a number of factors. Firstly, the lower prices of contracts for June in relation to those for April delivery suggests a decline in prices over the next two months. This is because of the larger volume of supplies expected for marketing (slaughtering) of calves born in the spring of 2012. In addition, warmer weather conditions allow cows to graze in fields, reducing the amount of feed grains needed for cow and veal fattening and lowering the cost of beef and veal production. Meat manufacturers could achieve hedging (protection) against potential price rises in the cash market by going long (buying) on June call options (right to buy) at US$1.18-1.20 per pound support levels.

European fresh meat manufacturers seeking to benefit from Japan’s lifting of the ban on European beef imports, effective since February 2013, should pay attention to currency fluctuations in the value of the yen. Hedging through currency forward agreements could protect exporters from a decline in value of the Japanese currency over the coming months. The Japanese Central Bank’s aggressive quantitative easing operations in April and May could result in a weakening of the local currency, increasing the cost of imports.

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