By Simon Quilty, MLX Limited
This week an important meeting takes place in Washington between President Donald Trump and Mexican President, Enrique Pena Nieta with trade being the focus of discussion and in particular NAFTA (North American Free Trade Agreement) and its viability as we know it.
The automotive industry is what continues to drive the Trump Administration and its trade policy and an unfortunate casualty has been US pork exports to China and Mexico which due to hefty tariffs threatens I believe all major meats pricing including beef and lamb globally – a critical part of the talks will be the removal of the 20% tariffs which impacts the largest US pork export market Mexico which last year imported 820,000 tonnes of pork items.
Such is the fragile nature of global protein supply and demand and we have reached what many regard as a tipping point in global pricing – I am of the opinion US pork supply and tariffs is at the heart of this problem – up until now strong global demand and US growth has kept prices firm but the Trump Trade War may unravel all this hard work for the US and global meat industries.
In the Wall Street Journal it was reported that US data is expected to show record levels of beef, pork, poultry and turkey being ‘stockpiled in US facilities rising above 1.1 billion kgs’.
The article highlights the growing pressure that this oversupply is likely to create – quoting a Rabobank analyst, saying this situation could result in “one of the biggest corrections in the industry in several years”.
Key points in this paper are:
- The trade war that President Trump has initiated is all about the automotive industry – China and Mexican pork and beef export tariffs are a casualty of this bigger plan.
- US analysts speculate that a separate deal with Mexico might be on the cards which could see a bilateral trade deal and spell the end of NAFTA.
- Global pork production is up by 2 % and global markets are awash with pork with key markets such as China and EU having strong domestic supply.
- The tariffs imposed by China of 78.2% and Mexico of 20% if maintained could see US exports displaced back onto the US domestic market along with the increased US domestic production could see an additional 900,000 tonnes (carcass weight) of pork being needed to be absorbed domestically this year above last years domestic consumption.
- Given the increased US pork processing capacity and the expected desire of processors to ‘not give up market ground’ and the expected time line of 10 months to normally slow production down many industry participants believe that a reduction in US pork production might not occur until early 2020.
- The collateral price damage I believe will be next year – I have estimated that US pork cutout prices could fall 15% in 2019 followed by a 3% fall in 2020 – this equates to a potential fall in the US beef cut out of 15% in 2019 and 8% in 2020 as the spread between pork and beef cut out narrows in 2020 – I have tried to use history as my best guide here.
- A fall of the US beef cut out values of 15% and 3% respectively I believe would translate into a fall in global beef prices of 17% in 2019 followed by a second year of price falls of close to 11% – dragging potentially Australian beef and cattle prices lower in 2019 and 2020 should the pork glut continue and the worst case scenario plays out.
- Currencies are playing a crucial role for both pork buyers and sellers globally since April 3rd when the first tariffs were introduced by China – with currencies in key demand countries getting weaker and currencies of key supply countries like the US and EU increasing in value and pushing there respective domestic prices lower – Brazil is the exception and is likely to see cheap Brazilian pork sold globally – it all points to the over supply of pork being acerbated by these currency movements.
- Live Hog futures in the last 5 weeks have seen price falls of up to 22% with much of the negative sentiment built into forward prices – its been noted that few forward sales have been placed in recent weeks as many hog producers may have missed the opportunity to lock away positive margins using futures – and a reluctance to lock in losses.