Simone Quilty - Global AgriTrends

Analysis – Part B/ Australian Angus's role in meeting the global US Choice shortfall will be significant.

By Simon Quilty July 31st, 2024 This paper joins the dots between global US beef Choice market prices and the value of Australian Angus cattle – I outline where Angus livestock prices are expected to go over the next two years as US beef supplies tighten.

The recent Wagyu report demonstrates that the consumer has proven its adaptability by adjusting to changing needs. Wagyu customers have traded down to Angus grain-fed programs, while others have embraced grass-fed programs.

European breeds, including Angus, Hereford, Charolais, Shorthorns, etc., are pivotal in high-end quality beef exports, grain-fed and grass-fed beef, and crossbreeding programs. For the sake of simplicity, this report will primarily refer to these breeds as Angus, given its dominance.

However, it's important to note that these breeds can be equally significant in various instances.

The increase in the pricing of Angus cattle depends on demand and supply. We are likely to move from a supply-driven market over the last two years to a demand-driven market in the next few months, and with that, I expect Angus's prices to move higher.

This report focuses on Angus cattle’s price relationship with overseas markets, the price spread between Australian Angus chilled pricing and US Choice pricing in key markets, Australia’s role in filling the void left by falling US exports and the expected price movements in each market.

I will give a long-term Angus outlook for 2024, 2025, and 2026 and an 18–month estimate of monthly price movements based on global demand.

1/ Australian Angus livestock price relationship with Australian chilled beef export pricing When Australian chilled beef export prices are compared to Australian Angus pricing, there is a strong relationship, showing an 81% correlation when the two pricing periods are brought into line over four months.

This timing of delayed pricing e ect is based on the average 150 days Angus feeders are on feed; export value pricing is based on the FOB price at the time of shipment.

So, it is no surprise that Australian Angus and chilled beef values have a strong relationship as high-quality Angus cattle dominate both chilled grass-fed and grain-fed programs.

Once we better understand Australian Angus pricing, we can make a better estimate on both flat-backs, Brahman, and Wagyu.

2/ What factors drive Angus's demand in global markets?

This question needs to be answered separately for both grain-fed and grass-fed markets. Due to high inflation globally, consumers are looking for value, which has led to high cost-of-living pressures and the desire for ‘value for money’ beef.

In our previous report, I outlined the challenges for Wagyu producers globally. The perfect storm of oversupply of high-end Wagyu products (including Hanwoo beef from Korea) has seen Wagyu prices fall 37% since August 2021. During this same period, US Choice export values fell 22% and then rose 22%, and they are now trading at near-record levels, as we saw in January 2022.

+22%

$75.00 $70.00

$12.00 $11.00

$65.00 $60.00

$10.00

$55.00

$9.00

$50.00

$8.00

$45.00

-18%

$40.00

Japan Wagyu export value

US Choice export value

$7.00

US Choice export prices

Japan Wagyu export price

Japan Wagyu and US Choice export prices 2018-2024 (April)

So, the question is, why is Australian grain-fed beef not at near record highs? I believe the answer is partly due to the increased turno in 2023 and 2024, and the excess Australian cattle supply, partly due to the downturn in specific markets in 2022 and 2023, was also a significant contributor.

The other important answer to the question is how selling grain-fed beef in Australia has changed over the last ten years, where once upon a time, the number of days on feed truly mattered and was a large part of the marketing program. Today, marble score (MS) has become an equal-quality trait and, in many markets, is now the most essential trait.

In the 1990s, full sets were also crucial to exporting, mainly to Japan, where almost 50% of beef exports were complete sets. In 2023, full sets were less than 3% of Japanese beef trade.

Today, the grain-fed carcass has ten or 15 separate destinations across all the cuts that product is exported to from a single animal—no one market drives the decision-making on whether cattle should be on a 100-day, 150-day, or 250-day long-fed Angus program; instead, it is evaluated across many markets.

3/ Australian Angus medium to long-term outlook What markets are doing well, and what are not?

To best understand where Angus livestock prices are heading over the next two years, it's important to understand Australia’s role in backfilling US Choice exports. As Us supply tightens, Australian products will fill the void and, most importantly, fall into line with US Choice pricing.

When assessing which Angus markets are doing well and which are not, I have used the following assumptions: US grain-fed export values reflect 150 grain-fed Angus products and low-grade Prime. The other assumption is that chilled Australian beef competes directly with US Choice exports in these key markets—the correlation of 81% confirms this.

China market – Australian Angus versus US Choice US Choice has performed very well in the Chinese market over the last two years, with prices rising as other supply countries have experienced price falls. Tighter US beef supplies and an unwillingness to move on price due to a strengthening US domestic price have forced the Chinese to pay more for US Choices.

So, even with a weak Chinese economy, the semi-elite end of the market, in part, has remained good, though Wagyu prices have struggled, so there is a limit to how high Chinese consumers are willing to pay. It highlights the belief that a three-tier recovery is happening in China for each demographic class.

This bodes well for Australian grain-fed Angus exports, mainly producing in the MS 2+ range. The expectation is that US prices will hold or move higher; I am confident that within two years, Australian grain-fed Angus (MS +2) will again match US Choice prices as it has in the past. If so, this would see a 50% increase in the value of Australian grain-fed Angus beef exports.

I do not see US Choice prices falling, given the expected further tightening and higher US domestic prices, which will increase US export prices – instead, Australian prices will rise to fall in line with US export values, as was the case two years ago.

Another significant development in the Chinese market is the 140-day extended shelf life that Australian chilled beef is now recognised for. This is an essential point of di erence, as US products fall well short of this short-life period, and therefore, product inventory management puts

Australian beef at a clear advantage.

Bottom line—The potential in China for Australian Angus grain-fed beef exports looks enormous, with prices potentially improving by 50% within two years. This might prove to be even higher if US Choice prices move higher. Contrary to popular belief, demand is reasonable at the semi-exclusive end, where once Wagyu buyers traded down now to Choice and quality Angus products.

Australia’s export data does not capture the significant volume of full sets now going to China, which many exporters have said reflects the Japan of old, where buying eight to 12 cuts per full set has simplified this business. China's specs generally are 150 days on feed and an MS2+ or better. Costco has driven this, which has set the standard for many other importers.

As US product tightens and go up in value, Australian products are filling the void; this is mainly the case with Costco, Sam's Club and Hema (owned by Alibaba) in Southern China – who have in the past used 70% US beef and 30% Australian but is starting to increase its Australian ratio, at the expense of the US usage ratio.

Korea market – Australian Angus versus US Choice Both Australian and US beef export values experienced a significant fall in 2022, with US chilled beef prices falling 21%. Since then, US prices have almost recovered to the record highs of 2021, but Australian prices have continued to fall and are now 24% below the early 2022 record Australian highs.

Like China, US exporters have increased prices as supply has fallen, while Australia’s has continued to fall. Also, like China, I see the opportunity for Australian Angus grain-fed prices to increase by at least 30% over the next two years to regain the lost ground and realign themselves with US prices, as we saw in 2021 and early 2022.

Once again, 150-day grain-fed beef is the likely sweet spot for Korean importers looking to fill the US grain-fed void with Australian beef.

What is interesting to note is the monthly spike in Australian May import values, which jumped 12% from April while US prices flatlined. This could be an essential turning point, as Korea and other Asian buyers have now realised the need for Australian beef, and the lack of US beef has reached a critical stage. In the past, Korea has been an early indicator of trends across Asia.

The challenges of Australian Wagyu in this market will likely remain for at least 2024 and into early 2025 due to the large Hanwoo herd. Hanwoo cuts have swamped the domestic Korean markets. The good news is that this Hanwoo herd is falling in size, with a 4% decline expected this year.

Hanwoo herd size

Korean Hanwoo Herd size 2022-2024 forecast 3,650,000 3,600,000 3,550,000 3,500,000 3,450,000 3,400,000 3,350,000 3,300,000 3,250,000 3,200,000

3,557,185 3,476,629 3,360,000

Expected to fall 4% on average Q1

Source - Korean Statistics

Q2 2022

Q3 2023

Q4 2024

Japan market – Australian Angus versus US Choice This is the most intriguing market – it has become genuinely price-sensitive, with some describing it as the ‘poor man’s market of Asia’. The once-upon-a-time desire for high quality and reasonable prices is about price now.

This is so much so that there will likely be more grain-fed composite breeds (flat backs) export growth into Japan over the next few years than in high-quality Angus in this market, as price will determine their needs.

There will be obvious exceptions to this rule, with many long-term Australian grain-fed programs continuing as they have in the past with a well-established customer base—but this is likely to have limited growth and be with those who have established business.

The consensus is that the composite grainfed business will be based on 100-to-120-day programs (109 days that sweet spot). However, Japan will remain a critical market for beef tongues and thick and thin skirts.

Another crucial item with a potential demand increase could be briskets, which may help fill the short-plate market that has been the staple of US beef exports for many years.

Should Japan's demand improve and the spread between Australian and US chilled grain-fed cattle narrow, a potential upside of 16% to 20% is expected. The Australian livestock price gap between Angus and Flatback cattle should also narrow as Japan's demand improves.

US market – Australian Angus versus US Choice This is the most critical market as the US is both a significant buyer and a significant competitor in global markets – which is now setting the benchmark for Australian export prices.

One of the most important indicators of where potential prices will rise in the US is the price spread between retail and whole beef prices. In the last six months, the spread has narrowed from 40% to 31%, and wholesale values and US Choice cut-out values have increased by this equivalent amount.

Retail prices are unlikely to fall as retailers know that supply is tightening and, if anything, prices are likely to move higher. Therefore, US prices for Australian chilled products may also increase by a minimum of 31% in the next two years as wholesale and retail levels come into line. I have added another conservative 6% rise to retail prices by 2026, which would see wholesale prices move 37% from where they are today.

It is important to note that chilled high-quality cuts, particularly loin cuts, are critical for Angus beef exports. Trims will play an important role, but chilled loin cuts play the greatest role (this will be discussed later in this report).

This report will provide a more detailed outline of the influence of individual cuts, which will give an even greater insight into why US cuts and Australian Angus cuts will increase by 37% over the next two years.

Bottom line – Australia’s Angus livestock prices have a strong price relationship with chilled beef export values. Australia’s chilled beef exports have competed head-on with US chilled beef in key markets globally.

Two years ago, Australia’s chilled beef traded at parity or in sync with US prices in all key markets, but as Australia’s supply increased, this price relation fell apart. US prices moved higher, and Australian prices moved lower.

As both US and Australian beef supply tightens, I can see chilled export prices moving back into sync, and with that, Angus prices will rise. Based on each market's price spread today, I see Australian prices rising in China by 50%, the US by 37%, Korea by 30%, and Japan by 16% in the next two years. This would see an average price increase of 33% across all markets.

This 33% rise would, I believe, equate to an increase in Australian chilled beef export value of $21.00 AUD/kg, which in turn would see Angus feeder steers reach 780 ac/kg LW, surpassing the old record price of 670 ac/kg LW seen in early 2022.

The next part of this discussion paper outlines the path to these new record prices over the next two years.

4/ The two-year path to record Australian Angus feeder prices – How do we get there? Which beef cuts matter and into which markets?

The next few months are a transition period from a supply-driven market to a demand-driven market.

To best understand the market drivers of how this will occur, it requires separating the many markets to which Angus chilled beef is exported and which items and markets drive decisionmaking.

Loin cuts are the dominant cuts that give the most value to the carcase. Ideally, a marble score of 4-5 would require animals to have been on feed for more than 200 days. The second most important cuts are forequarter items, for which Eastern and Southeast Asia are the dominant buyers

The list of cut priorities changes with composite breeds, where trims and hindquarter items play a more significant role in carcass value and decision-making.

Greater demand pushes Angus cattle prices higher, and when beef supply from Australia is abundant, this often results in markets buying hand-to-mouth. As Australian supply tightens (and US supply tightens), the desire to buy forward increases as buyers try to maintain supply.

The importance of buying forward cannot be overstated, as this removes risk from the table for processors/exporters and gives confidence in putting cattle on long-term feed programs. This, in turn, drives the need for quality Angus feeder steers. Excess supply in 2023 and for the first half of 2024 made buyers more reluctant to buy forward and more hand-to-mouth, slowing the market and making it di icult to have confidence in long-term programs.

i)

Loins are the biggest driver of Angus demand The US market is now Australia’s #1 market for loins, and Japan has moved to #2.

Loins are critical to Angus cattle's price value. 42% of the carcase value comes from loins and rumps—this is by far the most significant contributor to the Angus cattle's value, yet it only makes up 11% of the carcase weight.

It's important to note that in 2024, the US has become the primary destination for loins over all other markets, importing 8,458 MT in the first six months of this year (and 2,813 MT of rumps).

As the US beef supply tightens, Australian products will play a more significant role in meeting US domestic needs in 2024. US loin customers are willing to buy forward, which tightens the available loin supply for Japan, China, Korea, and all other markets.

It was mentioned earlier that Japan today only buys a small number of full sets, but a more significant trend is the US buying 20,410 MT of mainly grass-fed full sets this year, with chilled making up 90% of US shipments. These would also have loin cuts within them; therefore, the volume of loins going to the US is even more significant than the figures would show. An additional 2,400 MT of loins might be seen in the full mix of natural fall, which could be assumed.

The US's importance as the number one market for loins means that our largest competitor needs are far greater at home, so any US loins we may compete with in other markets are now even more challenging to buy.

US tenderloins and ribeyes are at a seasonal low. If the last two years' price movements are a guide, the upside expected with tenderloins is approximately 47% and with Ribeyes approximately 44% between now and Christmas.

Striploins will likely fall slightly further in the short term by 19%. They traditionally bottom out in October before almost doubling in value between October and June next year. This will dampen the rise of Tenderloins and Ribeyes, but as I understand, Striploins are going in minimal quantities to the US today.

Bottom line—Given that 42% of the carcase value comes from loins and rumps, US demand for ribeyes and tenderloins is at a seasonal low, with August expected to be sluggish. Demand and momentum pick up after that, with a peak in demand from October to December. Striploin demand will remain weak until October, after which momentum and demand will improve until mid-2025.

Rump demand is at its peak in the Northern Hemisphere today. Still, in the Southern Hemisphere, it occurs from December to February during summer, coinciding with US tenderloin and ribeye demand.

I expect Angus demand to slow in August, but from September onwards, demand will increase significantly based on US and Australian domestic demand. Given the tightness in the US, this is expected to be unusually more robust demand this year.

ii)

Forequarter is the second biggest driver of Angus's demand.

When assessing the demand for forequarter meat, almost 75% of Australia’s exports go to three markets: South Korea, China and Japan.

When assessing which of the forequarter meat has the biggest influence, it is Chuck Eyerolls; in Australia’s export data, this is part of the Chuck Roll category. Once again, South Korea dominates this market by more than double compared to their nearest rival with 48% of the market share.

The US is the largest beef exporter of South Korea, shipping 92,565 MT from January to May, and Australia shipped 73,377 MT in the same period – together, combined, Australian and US beef makes up 85% of Korea’s imported beef needs. So, as US supply tightens and prices move higher, they will push Australian prices higher on forequarter meat and, in particular, Chuck-Eye Roll.

The US Chuck-Roll seasonal peak is in October and November most years, and it more often sees a 22% increase from the year lows. Current US domestic pricing is near the year's lows, and I expect it will lift by at least 22%, similar to last year, which saw a 30% rise for the same period.

Bottom line—Forequarter demand globally is expected to increase after August and peak in November (or even later), driven by Chuck-eye rolls and other key forequarter items. This will strengthen Angus's livestock demand in September and after that.

iii)

Trim demand is the third most significant driver of Angus's demand.

Beef trim makes up 19% of the carcass and 11% of the value and serves as the third most important driving factor in the value of Angus livestock. Trims vary from 50 CL to 85 CL, more often than not 65’s and 85's being the two dominant items produced by Angus grass-fed and grain-fed.

Both fat and lean trims are dominated by the US and Japan, with role reversals occurring with each category. With fat meat in the 65CL-75CL range, Japan is the dominant buyer, the US second, and with the 80 CL-85 CL range, the US is the dominant buyer, and Japan is relegated to second.

The lean end of 80Cl-85CL is driven by the shortage of lean meat in the US, which impacts 80 CL, 85 CL, 90 CL, and 95 CL. In recent months, we have seen record prices in trim, and this trend is likely to continue in the US as the US market moves into full rebuild mode. Comparisons have been made between 2004 and 2014, and I believe these two previous periods will occur again when lean 90 CL meat prices rise next year to reach 410 USC/lb.

The peak in fresh 85’s is likely to be September/October, similar to 2014 and last year, once again ensuring demand for trims and Angus remains strong. The key di erence to last year will be that lean trim values will hold firm until the end of the year as the rebuild continues (just like in 2014).

The more significant uncertainty is the fat end of the US market driven by the 50s. One scenario is that short plates become very tight, raising the value of the 50s and increasing demand in Japan, China, Korea, and Indonesia. Customers try to buy 65s or briskets from Australia as a fillin for fewer short plates.

So, even though prices are expected to fall after August, it will likely be a soft landing, as we saw in 2024, with overall fat meat demand remaining relatively strong. Once again, this is pricesupportive for Angus livestock values.

5/ Holidays matter for the market going forward.

The other key to good demand is holidays when spikes in demand often occur.

Holidays will be an essential demand driver over the next six months (and longer). It also plays a vital role in changing the mindset of buyers who have been able to buy ‘hand to mouth’ from Australia for almost two years. As supply tightens in the US, South America and Australia, buyers will need to move into a forward buying strategy; this, in turn, enables exporters in Australia to take ‘risk o the table’, with middle and long-fed Angus (and Wagyu) programs.

In brief, the holidays to watch for: Chinese New Year – Many Australian exporters would say CNY holiday buying has been absent for the last two years, but not for US exporters. Chinese consumers have bought US Choice over the last two years. I believe Australia will also see the benefits of CNY for quality 150-day exports to China, in part this coming CNY on January 29th, 2025, but more importantly, the following CNY when US product is indeed depleted. This buying should start in September and October.

US Thanksgiving—This typically is a high-demand period for turkeys, but with many families travelling, it is also essential for fast food demand, particularly hamburgers. So, trimming demand is often high in the lead; this year, the holiday falls on November 28th.

Anne-Marie Roerinks' US retail meat June report stated that three June weeks experienced volume growth compared to year-ago levels. The final week ending June 30th pulled down the positive momentum, resulting in a 0.5% decrease for June. This is undoubtedly due to the timing of the Fourth of July holiday relative to the Sunday month ending in the Circana data.

Sales will shift into July, meaning the Independence Day sales bump will show up more in July’s report.

Japan Golden Week—This festival begins on April 29th, 2025, and lasts 10 days, including Constitution Day. Once again, given the tightness of US supply, Japan might be in the market early in 2025, looking to sure up supply for this festival.

Ramadan and Eid-al-Adha Festivals—Both significant Islam festivals occur on March 1st, 2025, and June 6th, 2025, respectively. The need to buy forward for both will be critical. With 1.8 billion Muslims globally, who represent 24% of the global population, the consumption of meat around these festivals is crucial in global demand.

6/ The transition from a supply-driven Angus feeder steer market to a demand-driven Angus feeder market.

The two previous periods that resemble today's market are 2004 and 2014. I have looked at each scenario to try and draw a conclusion on where Angus feeder steer prices will trend in the next 18 months, keeping in mind that the landing point is 780 c/kg LW in 2026, a 16% increase of the previous record reach in early 2022 at 670 ac/kg LW.

Much chatter has been about the increased Angus feeders coming forward in six weeks. This might impact August and early September pricing, but the increase in global demand, particularly in loins, will likely push Angus feeder steer prices higher by late September. For all the reasons outlined in this paper, I see this momentum continuing through 2025 and into 2026, with 780 ac/kg prices in early and late 2026.

7/ Conclusion Many factors outlined in this paper will drive Australian Angus feeder steer prices to new record levels in 2026.

Points to note -

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The market will transition from a supply-driven market to a demand-driven market in the next few months.

Australia will fill the void left by Choice beef exports throughout Asia as US beef supplies tighten. Eventually, Australian chilled beef will trade in sync with US beef in these markets, with an expected 33% rise in export prices over the next two years.

Key cuts are essential in driving Angus livestock prices, with loins adding 42% of the carcase value, forequarter items 28%, and trim 11%. Each item is expected to increase based on seasonal demand and tight US supply.

Another significant change expected in the market is buyers' mindsets. Instead of buying hand-to-mouth, they will likely move to a buying-forward strategy. Critical holiday periods such as Chinese New Year will be essential in changing this mindset as product tightness becomes abundantly clear.

Timing is everything, but as stated in previous podcasts, a rising tide lifts all boats; as the US 90s move higher, more and more US Cow, Select, and Choice cuts are moving into the trim pack— this is tightening supply not only in the US but also in key markets around the world.

Australia’s role in backfilling US products in many global markets will increase in the next few months. Angus beef will play a significant role in this next leg-up in supply shortfall by ensuring Australia meets the ever-increasing market's needs.

Your feedback is always appreciated.

Rgds Simon

Simon Quilty Global AgriTrends 0411199433