THE margin outlook for the global poultry industry is still strong, benefiting from ongoing bullish market fundamentals, according to Rabobank's "Poultry Quarterly Q3" report.

Poultry supplies are balanced in most regions, beef prices are high and feed costs are low. The poultry industry is profitable in almost all major global regions, with China as the major exception.

Rabobank said avian influenza remains a major concern for the global industry, with new outbreaks in most regions except for Australia and South America (Infographic). However, the reduced number of outbreaks recently offered the industry in these regions some time to recover.

"The performance in most regions is currently improving, but the industry should have optimal biosecurity as its first priority as avian influenza pressure is still significant," Nan-Dirk Mulder, Rabobank animal protein analyst, said. "Any new case can have a big impact on regional and global trade streams, as we have seen in the past months in which Brazil and Thailand have taken further market share in global poultry trade from the U.S. and China."

Rabobank believes the outlook for late 2015 and 2016 is bullish because feed prices are expected to remain at low levels, and the global breeding stock supply will be very low in regions with flu-related import restrictions, such as China and Southeast Asia.

The expectation that China will face a shortage in poultry and pork supplies next year could especially become a major swing factor for the global poultry industry.

Further spread of avian flu to key U.S. chicken production areas is a major wild card for the industry outlook in the second half of this year, according to the bank.

In the U.S., Rabobank said margins are strong despite avian flu-related trade bans. While avian flu is expected to re-emerge this fall, Rabobank said a bullish domestic market has helped compensate for the trade implications.

Beef trade, inventory

At the beginning of this year, Australia's beef production and exports were expected to drop well below 2014 levels as the industry began to rebuild its breeding herd after more than two years of drought-induced liquidation.

However, the U.S. Meat Export Federation (USMEF) recently reported that these reductions did not materialize in the first half of the year as disappointing rainfall kept Australia's slaughter levels at a record pace. As a result, exports continued to soar, further buoyed by a weakening Australian dollar.

USMEF said a slowdown finally began to surface in July, although beef exports of 121,568 metric tons were still steady with last year's large volume. In August, Australia's exports dipped below year-ago levels for only the second time since 2013, with volume slowing 5% on the year to 106,010 mt.

"This coincided with a decrease in Australia's kill numbers, which have slowed since June," USMEF economist Erin Borror explained.

Borror added that this will tighten Australia's available supplies and help improve the competitive position of U.S. beef in key Asian markets.

"If we look at smaller Australian supplies going forward, we do expect our competitiveness to improve in the Asian market, especially places like Korea and Taiwan. We are already gaining market share," she said.

However, Borror said Australia will continue to have market advantages in Japan and China.

In Japan, Australian beef faces lower import duties than U.S. beef due to an economic agreement enacted earlier this year, USMEF said. U.S. beef still lacks access to China, where Australia is the largest supplier.

"Across the markets where we do have access, even though we'll still expect the strong dollar disadvantage, we know that our competitiveness on these Asian cuts is already improving," Borror said.

In the U.S., front-end supplies are heavy, Len Steiner and Steve Meyer noted in a recent "Daily Livestock Report."

Analysts expected the Sept. 18 U.S. Department of Agriculture "Cattle on Feed" report to show a 3.7% increase from a year ago for Sept. 1 cattle on feed inventories. Additionally, Steiner and Meyer noted that the inventory of cattle on feed for more than 120 days was expected to be 17.8% higher than the same period a year ago.

"Producers have been placing heavier cattle on feed and keeping them on feed longer. Feedlots likely feel under the gun that they need to move cattle a bit faster given rapid weight gains," they said, adding that the cash trade — which was around $134-135/cwt. last Wednesday — has been lower than what futures were expecting even a month ago.

"Packers have been content to reduce slaughter, and it has worked," Meyer and Steiner said. "Their margins are some of the best of the year. Likely, they will not be in a rush to chase cattle until holiday demand starts to pick up."

Market recap

While futures prices for live and feeder cattle were lower than the previous week, futures fell sharply last Wednesday due to a lack of bullish news.

October live cattle futures closed higher last Monday at $141.475/cwt. but declined to $136.85/cwt. by Thursday. September feeder cattle futures closed lower throughout the week, with nearby contracts closing lower last Monday at $200.150 and falling sharply to $193.20/cwt. by Thursday's close.

The beef cutouts also declined last week, with the Choice cutout closing at $230.50/cwt. on Thursday, nearly 10 cents lower than the previous week. The Select cutout also closed lower at $221.70/cwt.

October lean hog contracts were mixed but gained strength throughout last week. Nearby contracts settled lower Monday at $66.825/cwt. but finished higher Thursday at $70.575/cwt.

Hogs delivered to the western Corn Belt last Thursday were $67.53/cwt., slightly higher than the prior week.

Pork cutout values were mostly lower. The wholesale pork cutout finished lower last Thursday at $82.35/cwt. Loins closed higher at $82.06/cwt. Hams closed lower at $56.37/cwt. after nearly an 8-cent decline during the week. Pork bellies decreased to $155.68/cwt.

In the poultry markets, the Georgia dock was unchanged at $1.15/lb. last Wednesday. Breast meat retreated, falling to $1.87/lb. from $1.895/lb. the week before. Leg quarters were unchanged at 45 cents/lb., while wings fell slightly to $1.575/lb.

Large eggs delivered to the Northeast continued a recent downward trend last week to $2.25-2.29/doz. Eggs delivered to the Southeast dropped to $2.33-2.36/doz. Eggs delivered to the Midwest were lower at $2.21-2.24/doz. Large eggs delivered to California were sharply lower than the prior week at $2.91/doz.

The turkey markets were steady to firm last week, with offering prices trending very light to light on light to fair demand. Prices for hens were unchanged last Thursday at $1.30-1.34/lb., while tom prices were slightly lower at $1.30-1.36/lb.

Volume:87 Issue:36