August 2011 Articles

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Exchange Rates Favoring U.S. Beef Exports

Exchange Rates Favoring U.S. Beef Exports
With strong export demand contributing to historically high prices, the question is how long will both last? Export demand is contingent upon incomes and currency exchange rates which are currently both working in the favor of U.S. poultry and livestock producers. As incomes rise, diets tend to shift to include more protein. This allows for cuts of meat such as the chuck and round to be more valuable since they are generally not desired by U.S. consumers. As a result, the price for those exported cuts rise from the increase demand and support the wholesale cutout or boxed beef price. Part of the recent strength in U.S. exports has been the weak dollar. A weaker dollar masks the price increases to foreign consumers that domestic U.S. customers have seen. As the graph shows through the end of February 2011, since the year-on-year strength in beef exports began in October 2009, the percentage increase of the beef cutout value has been greatest in the U.S. The top four export markets for U.S. beef (Canada, Japan, Mexico, and South Korea) have seen smaller rate increases after converting U.S. cutout values to their respective currency. This helps explain the continued strength in demand for U.S. beef at a time when prices continue to increase due to tightening supplies here (and worldwide). Beef exports to Taiwan dipped in February relative to last year despite following the same pricing patterns shown in the graph, so there is a pricing point where foreign customers will back away from the meat counter just like U.S. citizens. Factors leading to the weakness in the U.S. dollar do not appear likely to change in the near future, but exchange rates can change rapidly, thus eroding the current cost advantages U.S. meat and poultry enjoy in foreign markets. This current analysis does not account for transportation, tariff, and further processing costs which would be added prior to the final consumer purchasing meat or poultry. Trade is important, but can be volatile. It’s not unreasonable to expect export demand to continue to remain strong or expand in the coming months, but strengthening domestic demand is also needed to help keep cattle prices strong.
Source: Ross Pruitt, Department of Agricultural Economics and Agribusiness Louisiana State University AgCenter