Rabobank Industry Note #363 - January 213 US and Mexico Feeder Cattle Rabobank International Food & Agribusiness Research and Advisory Don Close don.close@rabobank.com +1 314 317 825 Pablo Sherwell pablo.sherwell@rabobank.com + 52 55 52113 www.rabotransact.com www.rabobank.com/f&a Contents Current import trends unsustainable 1 Mexican cattle supplies run a full cycle back to historical lows 2 US cattle feeders face a sharp reduction in supplies from a reliable source 5 Outlook 6 No Hablo Inglés, Moo Over time, Mexico has proven to be a reliable and consistent trading partner with the US. Since the mid 198s, annual shipments of Mexican feeder cattle into the US have averaged just over 1 million head per year, with a peak year of 1,653 million head in 1995 driven by the devaluation of the Mexican peso and extreme drought conditions. The smallest annual shipment of 456, head came in 1996 as a result of shipping too many cattle the previous year. Despite a decline in total Mexican cattle and cow numbers in recent years, feeder shipments to the US have continued at an unsustainable pace. Shipments have been supported by exports of spayed heifers and cattle from deeper into Mexico. However, the availability of cattle for shipment is expected to post a steep decline in 213, with an even sharper decline expected if weather conditions improve. Given that shipments of Mexican cattle have reached an unsustainable level and will inevitably decline, the critical question is how the US cattle feeding industry will make up for reduced supply of feeder cattle in the next few years. Current import trends unsustainable The Mexican cattle market has evolved from an isolated, self-contained market, exporting a residual supply of calves, into an aggressive exporter of feeder cattle that has become a critical supply network for the United States (US) cattle feeding industry. While annual shipments have averaged just above 1 million head of cattle per year, this has been accomplished against a steadily declining Mexican beef cow herd. Between 1979 and 1985, the number of feeders exported into the US was consistently below 5 percent of the Mexican cow herd total. By 211, the percentage of Mexican export shipments swelled to better than 2 percent of the herd. The drought-induced surge in feeder cattle shipments, which intensified in late 21 through 212, has reached an unsustainable level. The escalated imports have generally been driven by short-term conditions, such as record high feeder cattle and calf prices in the US as well as a trade-stimulating US dollar to Mexican peso exchange rate. However, the biggest driver behind the increased shipments of feeder cattle is a record-breaking drought in 211 that forced Mexican ranchers to give up their herds due to poor pasture and range conditions. While such conditions are usually short term, we expect the combination of these drivers will have long-term ripple effects across the North American beef production sector. More broadly, the implementation of NAFTA has made a positive contribution to the cattle and meat trade between the US and Mexico, opening the market to a more vibrant trade with feeder cattle into the US and a massive growth of animal protein shipments from the US to Mexico. While the forced implementation of Country of Origin Labelling by the US has been costly and time consuming for Mexican producers, it has not had any meaningful drag on cattle shipments. Mexican herd showing signs of depletion A critical result of the drought induced surge in feeder cattle imports from Mexico over the past two and a half years has been a substantial increase in the shipment of heifers. Such an escalation in heifer shipments signals a depletion of total Mexican cattle supplies. The depleted inventory and sharply reduced retention of potential replacement heifers strongly suggests that shipments of feeder cattle into the US for the next two to three years will be substantially lower. The increased shipment of heifers also suggests that it will be considerably difficult for the Mexican cattle industry to rebuild supplies to a level that will restore exports to the US to historical levels. Page 1/8 Rabobank Industry Note #363 - January 213
When looking at the Mexican/US cattle situation, it is also critical to look at Mexico s increased consumption of ready-to-cook beef, pork and poultry products imported from the US. These products, which are more economically produced in the US, are serving as a cost effective replacement to the beef protein being shipped out of Mexico on the hoof. In 211, US shipments of beef, pork and broilers into Mexico totalled 2.2 billion pounds, a 17-fold increase over 199. As the Mexican economy has grown and living standards have improved, the quantity and mix of animal protein consumption has grown and changed substantially. Mexican cattle supplies run a full cycle back to historical lows Mexican cattle inventory steadily grew from a base of under 2 million head in the early 196s to a peak of 35.4 million head in 1988. Since that time it has steadily declined and is currently under 2 million head (see Figure 1). Figure 1: Mexican cattle inventory, 196-212 thousand head 4, 35, 3, 25, 2, 15, 1, 5, Source: ERS, USDA, Rabobank, 212 Annual exports of Mexican cattle into the US virtually doubled from just over a half a million head prior to the mid 198s (see Figure 2). At that level, cattle inventory numbers supported an export program that exceeded the 1 million head per year total. Simultaneously, Mexican producers consistently improved the quality of their breeding stock to vastly improve overall cattle quality, thus enabling Mexican feeder cattle to fit the requirements of the US market. Figure 2: Mexican feeder cattle exports into the US, 1972-21 head 1,9, 1,7, 1,5, 1,3, 1,1, 9, 7, 5, 3, 1, Source: USDA, AMS, Rabobank, 212 Mexican exports increase while cow numbers contract As the Mexican market transformed from a closed domestic market into a feeder network for the US, the shipments of feeder cattle as a percentage of the underlying beef cow herd escalated at an unbelievable pace. During the period of 1979 to 1985, feeder cattle exports as a percentage of the beef cow herd were at or below 5 percent. The percentage of cattle exported to the US has steadily grown over the 3-year period. By 211 and 212, the number of feeder cattle exports reached 2 percent of the underlying Mexican beef cow herd. Such a huge shift in percentage was the result of both a very strong growth rate of Page 2/8 Rabobank Industry Note #363 - January 213
export shipments and, even more significantly, a continuously contracting cow herd (see Figure 3). Figure 3: Mexican feeder exports as a percentage of Mexican beef cow numbers, 1972-212 percent 25% 2% 15% 1% 5% % 14, 12, 1, 8, 6, 4, 2, Feeder Exports as a Percentage of Mexican Beef Cows Beef Cows Source: AMS, ERS, Rabobank, USDA, 212 Contraction trends changing herd mixes As total cattle numbers declined and export shipments remained above 1 million head per year, there was a change in the mix of cattle being shipped. Initially, the steer/heifer mix was well in excess of 9 percent steers. In 211, the percentage of spayed heifers had grown to 16 percent of all shipments. Through September 212, spayed heifers further increased to account for 27 percent of all shipments (see Figure 4). It must also be recognised that the surge in heifer shipments in 211 and 212 was not a matter of choice by Mexican cattlemen but was caused by severe drought conditions which forced the acceleration of herd liquidation. Figure 4: Mexican feeder exports by sex, 26-212 percent 5% 45% 4% 35% 3% 25% 2% 15% 1% 5% % 26 27 28 29 21 211 212 Heifers Steers Source: AMS, Rabobank, USDA, 212 At the bottom line, with the combination of declining total cattle numbers, declining beef cow totals and the surge in heifer shipments as a means to sustain the export totals, the Mexican cattle export market has long crossed the threshold of sustainability. Mexican cattle market in transition The escalation of feeder cattle exports into the US over the past 3 years signals a complete transition of the Mexican cattle market. At the beginning of the study period, the Mexican cattle industry was largely a self-contained unit where exports were little more than a residual supply. Over the years, the industry, transitioned into a sophisticated supplier network for the US cattle feeding sector especially in the north. In order for Mexican cattle exports to sustain such an aggressive export pace despite drought conditions, the industry has begun a consolidative transition. Specifically, strong beef prices have allowed larger domestic Mexican beef processors to implement aggressive procurement strategies to secure supply. However, the decline of already smaller dual purpose cattle herds (producing both beef and dairy) has forced many smaller processors Page 3/8 Rabobank Industry Note #363 - January 213
out of business, further demonstrating the strain currently being placed on the entire Mexican cattle supply (see Figure 5). Figure 5: Decline of dual purpose Mexican herds, 198-212 beginning stocks (million heads) 25 2 15 1 5 Beef cows Dairy cows Dual purpose Source: Rabobank with USDA data, 212 There are 11 primary US/Mexican border-crossing locations. Along the Texas border these include Hidalgo, Laredo, Eagle Pass, Del Rio, Presidio and now closed El Paso. There are two locations in New Mexico, Santa Teresa a replacement for El Paso and Columbus. In Arizona, the crossings are at Douglas and Nogales, and San Luis on the Arizona and California border. The five states along the Mexican border are Tamaulipas, Nuevo Leon, Coahuila, Chihuahua and Sonora. It is reported that 7 percent to 75 percent of the Mexican cattle that are imported into the US each year are cattle that are indigenous to those five states and Durango (see Figure 6). Figure 5: Chihuahua and New Mexico lead as the largest export location Source: AMS, Rabobank, USDA, 212 Historically, border inspections and processing stations were largely on the Mexican side of the border. Over the past three to five years, inspection locations have been forced to relocate on the US side of the border due to the escalation of drug-related violence on the Mexican side. As the violence escalated and US veterinary inspectors encountered threats, the US State Department pulled all inspectors out of the Mexican stations. The change in locations has forced US inspections to be done in temporary cattle-handling stations, which has made the shipping business more difficult. Surprisingly, these interruptions in business practices have not had a noticeable impact on the number of cattle shipments. Page 4/8 Rabobank Industry Note #363 - January 213
As exports have been preserved despite challenges to the export process and an ever contracting Mexican cattle inventory, there is anecdotal evidence that that cattle are being shipped from progressively more southern locations in Mexico in order to sustain export totals. US cattle feeders face a sharp reduction in supplies from a reliable source Over the past 15 to 2 years, Mexican feeder cattle have accounted for 5 percent to 1 percent of the US cattle on feed inventory (COF). The percentage of Mexican cattle imports has been at the 1 percent level in each of the past two years as Mexico s severe drought conditions have forced increased liquidation of cattle (see Figure 7). Figure 6: Mexican imports as a percent of US COF, 1996-211 percent 12% 1% 8% 6% 4% 2% % Source: AMS, NASS, Rabobank, USDA, 212 If Mexican cattle imports to the US are measured as a percentage of the COF total in only the five connecting US states of Texas, Oklahoma, New Mexico, Arizona and California, the percentage jumps to an incredible rate of 27 percent to 31 percent over the last two years (see Figure 8). Because the shipments of Mexican cattle have reached an unsustainable level and will inevitably decline, the critical question now is how the US cattle feeding industry will make up for a reduced supply of feeder cattle from Mexico. The first option is for southern US cattle feeders to become more dependent on feeders from the south-east cow/calf complex. Alternatively, southern cattle feeders will be forced to compete more directly with feeders in the northern states for supplies. With the US cow/calf herd already at a 5-year low, such new competition is likely to force feeders with weaker supply sources or weaker operating finances out of the market. Figure 7: Mexican imports as a percentage of five state COF total*, 1996-211 percent 35% 3% 25% 2% 15% 1% 5% % *includes Texas, Oklahoma, New Mexico, Arizona and California Source: AMS, NASS, Rabobank, USDA, 212 US protein exports far exceed cattle import balance As Mexico has transformed into a large supplier for the US cattle feeding industry, the US has reciprocated by exporting ready-to-cook protein products to Mexico. Since the Page 5/8 Rabobank Industry Note #363 - January 213
implementation of NAFTA in 1994, shipments of US produced protein products to Mexico have flourished. In 199, total shipments of US protein products to Mexico included 3.4 million pounds of beef, 39.3 million pounds of pork and 84.9 million pounds of broilers, for a total of 127.7 million pounds. By 211, total shipments had increased more than 17-fold, with beef shipments reaching 154.9 million pounds, pork shipments reaching 1,38.2 million pounds and broilers reaching 1,6.8 million pounds (see Figure 9). Figure 8: US protein exports to Mexico, 1989-211 thousand pounds 2,5, 2,, 1,5, 1,, 5, Beef Pork Broilers Source: USDA, ERS, US Commerce Dept., Rabobank, 212 The US clearly has the advantage over Mexico in the balance of trade in animal proteins. In addition, the increased shipments of US beef, pork and broilers into Mexico more than compensate for the quantity of beef shipped to the US in the form of feeder cattle. With a developing economy, a much younger population and a higher population growth rate, Mexico has a great deal more elasticity of demand for their protein choices. The US is a much more mature market with a slower population growth rate, which translates into relatively inelastic protein demand, especially for beef consumption. Annual per capita protein consumption on a ready-to-cook basis in the US is 38.81 pounds of beef, 27.89 pounds of pork and 43.3 pounds of broiler meat, for a total of 11.1 pounds. In Mexico, per capita consumption is 17.28 pounds of beef, 15.77 pounds of pork and 29.73 pounds of broiler meat, for a total of 62.78 pounds. Mexico has a young and vibrant population with a modest but growing average income. The US can be described as a mature market with stable organic growth. Virtually all of the growth in US population is from immigration. By looking at the core set of measurements there is little doubt that Mexican consumers are much more flexible in their meat selections and price sensitive in their protein purchases. However, Mexican incomes are growing and demand for animal proteins is expected to increase as income levels rise. Beef consumption in Mexico is estimated at 1.94 billion pounds, with 92 percent produced domestically and 8 percent imported from the US. Pork production is estimated at 1.77 billion pounds, with 41 percent produced domestically and 59 percent imported from the US. Broiler meat consumption is estimated at 3.34 billion pounds, with 7 percent produced domestically and 3 percent imported from the US. Continued drought and economic stress on the industry has hurt both the US and Mexico. Going forward, Mexico is positioned to see additional economic growth and can expect more protein demand and a broader mix of protein species. The US cattle feeding industry is put into a tenuous position due to increased dependency on imported feeder cattle supplies. Outlook The history of Mexican feeder cattle exports into the US shows a five-to six-year cycle. The spike years were most often the results of drought-forced shipments but were also driven by currency and political situations. Once the cycle peaks, the Mexican system is purged requiring three to five years to rebuild inventories in order to resume shipment growth. The current cycle could be even more severe because the beef cow herd to feeder export ratio is so far out of balance. The other unusual circumstance in the current cycle is that the number of heifers being exported is so Page 6/8 Rabobank Industry Note #363 - January 213
exceptionally large that the rebuilding capability of the industry has been additionally damaged and will surely be further delayed. The historical averages for export reductions following a spike year have been 35 percent in year one, 39 percent for year two and 49 percent for year three (see Figure 1). Figure 1: Mexican feeder cattle imports, 1972-214 head 1,8, 1,6, 1,4, 1,2, 1,, 8, 6, 4, 2, Source: USDA, AMS, Rabobank, 212 If this pattern is repeated in 213 exports could decline to 923,773 head in 213, 866,925 head in 214 and 724,86 head in 215 before stabilizing and possibly recovering beyond 215. The anticipated drop in Mexican feeder cattle supplies will come at a time when the US cattle feeding sector, beef packing industry and consumers are in the greatest absolute need for additional numbers. Where will the additional cattle numbers come from? Due to geographical considerations and the impact of reduced Mexican imports on the southern US cattle feeding region, US cattle feeders will first look for additional numbers from the south-eastern US cow complex. Second, southern US cattle feeders will be forced to look further north and be more price competitive in the central and western US in spite of the freight disadvantage. Finally, it can be expected that the US cattle feeders will be required to return to Canada for available feeder cattle numbers. Page 7/8 Rabobank Industry Note #363 - January 213
Rabobank International Rabobank Food & Agribusiness Research and Advisory Global Animal Protein Sector Team US David C. Nelson david.nelson@rabobank.com Brazil Guilherme Melo guilherme.melo@rabobank.com NE Asia Chenjun Pan chenjun.pan@rabobank.com US Don Close don.close@rabobank.com US William Sawyer william.sawyer@rabobank.com Australia Sarah Sivyer sarah.sivyer@rabobank.com Argentina Paula Savanti paula.savanti@rabobank.com EU Gorjan Nikolik gorjan.nikolik@rabobank.com EU & Russia Nan-Dirk Mulder nan-dirk.mulder@rabobank.com EU & Russia Albert Vernooij albert.vernooij@rabobank.com Mexico Pablo Sherwell pablo.sherwell@rabobank.com NE Asia Daron Hoffman daron.hoffman@rabobank.com SE Asia & India Pawan Kumar pawan.kumar@rabobank.com New Zealand Matthew Costello matthew.costello@rabobank.com www.rabobank.com This document is issued by Coöperatieve Centrale Raiffeisen-Boerenleenbank B.A. incorporated in the Netherlands, trading as Rabobank International ( RI ). The information and opinions contained in this document have been compiled or arrived at from sources believed to be reliable, but no representation or warranty, express or implied, is made as to their accuracy, completeness or correctness. This document is for information purposes only and is not, and should not be construed as, an offer or a commitment by RI or any of its affiliates to enter into a transaction, nor is it professional advice. This information is general in nature only and does not take into account an individual s personal circumstances. All opinions expressed in this document are subject to change without notice. Neither RI, nor other legal entities in the group to which it belongs, accept any liability whatsoever for any loss howsoever arising from any use of this document or its contents or otherwise arising in connection therewith. This document may not be reproduced, distributed or published, in whole or in part, for any purpose, except with the prior written consent of RI. All copyrights, including those within the meaning of the Dutch Copyright Act, are reserved. Dutch law shall apply. By accepting this document you agree to be bound by the foregoing restrictions. Rabobank International Utrecht Branch, Croeselaan 18, 3521 CB, Utrecht, The Netherlands +31 3 216 This report has been published in line with Rabobank s long-term commitment to international food and agribusiness. It is one of a series of publications undertaken by the global department of Food & Agribusiness Research and Advisory. 213 - All Rights Reserved. Page 8/8 Rabobank Industry Note #363 - January 213