America’s gross domestic product (GDP) accounts for more than 20% of the global GDP. With such a high level of economic activity, it is obvious the US economy will have relevance to almost all of our markets. The Irish beef industry is no exception.

Declines in beef production among the traditional beef producers since 2007 can be attributed to changing land use, driven initially by demand for biofuels in the US, but also by the growth in demand, especially for soyabeans and grains in south-east Asia.

This increasing demand for soyabeans in Asia was compounded by the fact that the US is now exporting less soyabeans because more is needed for its own biofuel industry. These combined demand increases drove up commodity prices and resulted in a knock-on effect which led to increased production in South America, most noticeably in Argentina and Brazil.

In these countries the better land has now been converted to soyabeans, wheat, maize and sugar cane production. This has pushed suckler cows west and northwards, off the Pampas and Savannah and onto the more marginal scrubland.

Those involved in the livestock sector are generally of the view that the biofuels sector drove up feed prices. Those on the grain side argue that biofuels generated prices that allowed for the expansion in production in the grain sector. Those higher prices were essential to bring poorer land back from livestock production and created an industry in the US which meant they had a lower volume to export.

Since 2005, when the US surpassed Brazil as the world’s largest producer of ethanol, there has been a sharp increase in global grain prices. The biofuel industry provided strong demand for their raw materials.

Global cereal prices increased as a result, which was good news for Irish tillage farmers as farm gate prices rose. See graph for the rise in UK ex-farm price in line with US grain prices since biofuels were made mandatory in the US.

Fertilizer prices are closely linked to grain prices, as are other tillage inputs. When grain prices increased, they were tracked upwards by fertilizer prices, which account for a significant proportion of the input costs. From an Irish perspective, this didn’t just impact on our tillage farmers, but had knock-on effects for grassland farmers also. See graph for rise in the cost of urea for the period.

Higher grain prices naturally man higher feed prices. In Texan feedlots, intense competition for grain saw costs on feedlots rise by up to an equivalent of €615 per head from 2005 to 2011. While Irish farmers experienced similar increases in the cost of both fertilizer and concentrates during this period, our grass-based systems cushioned beef producers somewhat from these cost increases.

The US is continually the world’s biggest beef producer and the world’s biggest beef consumer. It trades places with Russia, year on year, as the number one importer of beef globally with the US currently holding the title. The US currently ranks fourth as the world’s largest exporter. It is easy to see that when input costs rise for beef producers in the US, the consequential increase in beef price there also pushes up beef prices globally.

Drought pressures

As well as input costs rising for US beef producers, drought had an impact on some of their main cattle producing regions. The USDA project that from 2009 to 2014 the US calf herd will have reduced by almost 8%. The figure of 8% may not sound massive, but that’s a difference of more than 2.6 million head of cattle per year. To put this in context, that is more than all of our dairy and all of our suckler cows, or twice our annual national kill for 2012.

This drought has caused ranchers to liquidate herds or parts of them. Ranchers were selling breeding cows for reasons which ranged from not being able to afford hay, to aging ranchers who don’t have successors to take over the operation, to ranchers retiring early and taking the high beef price on their whole herd. Today, some ranchers are selling heifers and taking high prices for feeder cattle, which won’t help to rebuild the beef herd, which is now at its lowest level in 61 years.

A number of feedlots are now running far from capacity. Cargill, the third largest meat packer in the US, closed the doors of its Plainview plant in Texas earlier this year due to the low supply of animals. This plant had a slaughter capacity of 4,650 cattle per day, representing about 4% of the US steer and heifer slaughter. They have recently taken the decision to wind down one of their feedlot operations, which has a capacity of 62,000 head or 120,000 cattle annually.

US drives the market

These are some of the factors that accounted for the rise in American beef price over the past number of years. In recent times, short supply of cattle is the main influence as feed prices have eased.

From an Irish perspective, this had knock-on effects across the global beef market in which we trade. If we look at the graph we can see how international prices for R3 steers follows the trends in US prices.

While input costs increased for Irish beef farmers, beef prices also increased in line with the American prices. In the short term, even though feed prices are coming back in the US, the raw material for the feedlots is so thin on the ground that beef price seems unlikely to decrease dramatically.

We cannot, however, forget the US dairy herd in this equation. As feed prices ease, the dairy herd is projected to increase in size. This is positive news for US feedlots, who will not only have lower feed costs but will also have an increase in the supply of dairy calves going into the beef sector. And this supply is constant due to the fact that a high proportion of the dairy herd is milking all year round. This will also resolve some of the seasonality issues with beef supply.

As a nation, the US is pro trading and, as a result, is more than transparent in its dealings. The government departments there provide exceptional detail on imports and exports, which allows for a strong understanding of global trading. As their ability to increase production is somewhat stifled, this leaves an opportunity for other producers to step up to the mark in emerging markets. However, some of these may be less keen to provide this important trading data as the US and this could have a negative impact on global trading data records.

We have seen the influence of biofuels and drought on grain production and on beef, both powered by different motives in different regions. The Kyoto protocol commitment period from 2008 to 2012 will have encouraged some nations to develop their biofuels industry. The main driver in the US, however, was more from the Department of Homeland Security to increase energy self sufficiency. Ethanol production has remained steady in recent years, while biodiesel production has increased but so too has natural gas and crude oil production due to improvements in technology.

The US surpassed Brazil as the world’s largest ethanol producer in 2005. In the same year, total liquid fuel net imports peaked at almost 60% but had fallen to an average of 40% by 2012. The US Energy Information Administration (EIA) expects the net imports share to decline to 28% in 2014, which would be the lowest level since 1985. Along with this consumption they also expect gasoline consumption to fall marginally as a result of continued improvements in fuel efficiency.

The EIA’s short term outlook expects crude oil prices to reduce in the next year. The US will surpass Russia as the world’s top oil producer by 2015 as they exploit shale deposits.

The US is the world’s greatest consumer of the luxury protein beef and the greatest consumer of oil. It will be interesting to see how the future unfolds as the thirst for both grows internationally.