BETTENDORF, Iowa — The world demand for protein is impacting several markets, including the U.S. cattle market.

“We have a set of dynamics going on that is like nothing we’ve seen before,” said Don Close, cattle economist for Rabo AgriFinance.

“The No. 1 conversation today is China with the country’s escalation in earning power and disposable income,” said Close during a presentation at the Illinois Beef Association 2014 Summer Conference. “There are 1.4 billion people in China.”

And India, he said, located right next door to China is about one-third the size of China, and it has a population of 1.3 billion.

“For the last three years, India has been the No. 1 or No. 2 in volume of beef exports globally,” he reported. “They are selling water buffalo and equated to the U.S. dollar and pound equivalent, it’s trading on the global market under $2 per pound and our beef is at $2.35 per pound.”

The three major regions that supply beef globally are North America, Australia and New Zealand and Brazil, Close said.

Although Close said there is room for growth of the Brazilian cattle industry, he has a growing concern that it is an “open-ended” opportunity for growth.

“Three months ago, Rabo had a client tour in Brazil, and they said the transportation network is not there,” he noted.

In addition, the rainforest in Brazil is closely monitored by satellites.

“It is so sensitive that a guy cut down a dead tree in his grove and the tree police called on him,” Close said.

“Brazil built 11 stadiums to host the World Cup games, and they are also going to build all the accommodations to host the Olympics in two years,” he said. “With all these public resources going toward these athletic functions, I question whether Brazil has unlimited growth potential.”

Feeder Cattle

In North America, cattlemen are using up the available supply of cattle outside of feedyards at a “breakneck” speed, Close said.

“After the drought in 2011-12, Mexican shipments last year of feeder cattle showed a 15 percent decline,” the economist reported. “Yesterday, year-to-date shipments of Mexican feeder cattle into the states are up 1.5 percent, which is totally atypical to drought recovery.”

In Canada, he said, year-to-date cattle on feed have been running 10 percent above a year ago.

“Feeder cattle exports from Canada year-to-date are up 46 percent from a year ago,” he added.

Close, who just returned from a trip to Australia, said the cattle population in that country totals 28 million head and the human population is 24 million people.

“Twenty-seven percent of that population was not born in Australia,” he said. “About 50 percent of the newspapers are in Chinese, and 50 percent are in English.”

Australians consume 71 pounds of beef a year compared to U.S. consumers at 54 pounds annually.

“The Australians eat 22 pounds of lamb on top of their beef consumption,” Close added. “About 65 percent of their beef production is exported, and I might be a touch low on that number.”

Due to the drought in Australia, the 2013 slaughter was the largest in 24 years.

“The year-to-date slaughter is running 8 percent above last year,” Close said.

“Late in 2012, Australia gained direct access of sales to China, and Australian sales of beef to China were up 634 percent,” he said. “That’s a monster number.”

U.S. cattlemen are receiving economic signals to expand and rebuild the cowherd with feeder cattle trading from $205 to $210 and fed cattle at $148 per hundredweight.

“The year-to-date cow slaughter is down 13 to 13.5 percent and the last two weeks, the average has declined 23 percent,” Close said.

Retail Prices

When comparing the monthly retail meat prices, Close said, beef is running away from the other protein sources.

“Pork is 74 percent of the value of beef, and broilers are 33 to 35 percent the value of beef,” he said. “The overall beef demand is still growing. However, demand is a measure of the quantity of items sold times the average price of item sold.”

Close is concerned that the demand number is the result of a contracting tonnage of product sold at an increasing price.

“I don’t know how long we can do that before the loyalty of our customers softens,” he said. “The choice of substitution may be a growing issue.”

Changes in consumer choices are not made at home, these changes are occurring in the restaurant sector, Close said.

“As we eat out, we try a meal that we haven’t had before, and if we like the items, we go home and try to replicate them,” he said.

CME Index

The CME feeder index shows the feeder cattle market is 65 cents above a year ago and 75 cents higher than the five-year average.

“This market is overvalued, and I think we have potential for a hefty correction,” Close predicted. “The strongest seasonal reliability of cattle is the seasonal increase in feeder cattle prices from the April-May low to an August-September high.”

With historically tight feeder cattle supplies, a corn price that’s declined 50 cents to 75 cents a bushel and cattle feeders with a pocket full of money for the first time in a number of years, he said, “I think the feeder cattle market is going to stay incredibly strong.”

Large cattle placements into feedlots occurred in January and February.

“We will likely see a summer correction in the fed market to the high $130s or low $140s,” Close predicted.

“We have made a monster jump in fed cattle prices, but the market up to this point in time has been incredibly orderly,” he said. “I think that suggests we’ll see prices change, but the stability shows us this is the new norm.”