Mexico's Cattle and Pork Sectors to Recover in 2017 Oct. 14, 2016

Highlights

Financial incentive and genetic improvement programs along with stable grain prices are paving the pathway for Mexico's herd recovering, however, the herd recovery in the U.S. would slow live cattle exports in the short/medium term. As Mexico's production is expected to grow during 2017, increased beef exports will maintain stable per capita beef consumption. While Mexico learns how to deal with porcine epidemic diarrhea (PED) and to make genetic improvements in domestic herd, pork production is expected to bolster supplies, increase price competitiveness with other meats, and therefore, increase consumption. The recently-created Animal Protein National Commission (CONAPO) would advocate for increased protein consumption regardless the animal origin. During 2017, Mexico will continue importing beef and pork from the United States.

Production

Stable grain prices would boost production in the mid-term Mexico's main financial incentive program, which continues enticing producers to repopulate the domestic herd, is reportedly meeting its objectives. Mexican cattle production is forecast to expand to 7.1 million head in 2017, as producers who are registered for the 2016 Program to Promote the Livestock Sector (“Programa de Fomento Ganadero") are reportedly entitled to continue receiving a direct subsidy for 2017. Improved genetics through the Program for Genetic Improvement are expected to aid cattleman in the recovery of the domestic herd as well.

As previously reported, this program is enabling producers to remain in business and to offset obstacles to repopulation that the domestic herd has previously encountered, in particular, the lack of steers for feedlots. Due to the incentive to feed steers, calf slaughter is expected to decline by the end of 2016, but will likely rebound in 2017. Despite an ample supply of grain and pasture in 2016, herd expansion is unlikely to occur until 2017 at the earliest.

Despite the peso-dollar exchange rate disadvantages Mexican producers face for grain, relatively low grain prices overall should keep production costs fairly stable. Moreover, as elevated beef prices generate positive margins, feedlot producers will likely lengthen feed duration, resulting in higher weights. The decline in calf slaughter will also contribute to higher weights.

Trade

Herd recovery in the U.S. dampens exports from Mexican cattlemen

Live cattle exports are forecast at 1.0 million head in 2017, which is marginally down from the revised 2016 figure (1.1 million head), as lower demand for steers prevails in the United States due to herd recovery. Despite the fact that the price paid per head was reduced significantly compared to prices paid in 2015, the U.S. market remains attractive for Mexican cattlemen in part due to the exchange rate. As noted previously, retention by feedlots will decrease exportable supplies contributing for the domestic herd recovery. A rebound in exports is not expected for the last quarter of 2016 in light of U.S. declining prices.

Mexico to continue importing genetics

Live cattle imports are forecast at 35,000 head, slightly up from the 2016 figure as feed lots are being enticed to bring back the domestic herd to historical levels. Despite high prices for U.S. livestock, partnered with a strong dollar, Mexico will continue importing cattle mainly for feeding purposes, with small-scale purchases for herd improvement. The import of high breed cattle aimed for herd improvement is a slow-paced mid- to long-term objective for the cattle sector, supported by the ongoing Government of Mexico (GOM) herd improvement program. Imports of cattle for feedlots from Australia are gaining share while New Zealand imports are expected to begin during 2017.

Production, Supply and Demand Data Statistics

Commodities

Meat, Beef and Veal

Production

Production is forecast at 1.90 million tons, marginally higher than the revised 2016 estimate (1.87 million tons), as longer retention of calf in feedlots will result in higher yields. For the third year in a row, heavier weights are expected to offset a decline in slaughter. As in 2015 liquidation, although at a slower rate, continues to depress slaughter.

Consumption

CONAPO: a strategy to promote consumption

Consumption is also forecast to be relatively stable at 1.79 million tons, as per capita consumption will increase marginally following several years of decline and Mexico's production trend is forecast to show an accelerated growth in 2017. The 2016 consumption figure has been revised slightly up from the official figure. Despite current higher beef prices compared to other animal proteins, the medium/low income population is showing a continuing trend for consumption of thin-muscle beef cuts known as “bistec", which is a lower valued beef cut compared to fine cuts. Consumption of high-valued beef cuts among the upper social stratus is also expected to remain stable.

Recently, the livestock sector created the Animal Protein National Commission (CONAPO by its Spanish acronym), whose mission is to promote the consumption of animal protein overall, regardless of the species of origin. At this time, only beef, pork and dairy sectors have joined this commission. Once the poultry sector clarifies its position and resolves concerns among its membership, it may also join as a CONAPO member.

Trade

Canada is a current concern but Brazil is on the horizon

Imports for 2017 are forecast at 182,000 tons, marginally up from the 2016 import figure despite the Government of Mexico (GOM) intention to open the Mexican market to imports from Australia and New Zealand to offset high prices of beef from the United States, which continues to be the main meat supplier. (See policy section). Also, as in 2016, increased domestic production and a strong U.S. dollar are expected to keep Mexican demand in check.

Cattlemen expressed concerns regarding the potential opening of the Mexican market to Canadian beef imports due to the removal of Bovine Spongiform Encephalopathy (BSE) restrictions; however, no official statement has been made about changes to Canada's BSE status.

Exports are forecast at 290,000 tons. The United States continues to be the primary market for shipments, followed by Japan, Hong Kong, and Canada. Lower exports from Australia and New Zealand to the United States in 2016 are expected to enable Mexican shipments to remain strong despite lower U.S. import demand. The ongoing improvements in the quality, food safety, and sophistication of Mexican beef operations continue to facilitate Mexican exports.

Production, Supply and Demand Data Statistics

Policy

Cattle and Beef

On June 8, 2016, the Secretariat of Economy (SE) published in Mexico's Federal Register (Diario Oficial - DOF) a decree establishing tariff rate quotas (TRQ) for the import of live cattle for feeding purposes, and fresh, chilled, and frozen beef from countries with whom Mexico has no free trade agreements.

The decree established that Mexico is not self-sufficient and must supplement its domestic beef production through imports. It is important to note that the text of the decree emphasizes the need to enforce measures that could guarantee the stability of the market given possible fluctuations in the availability of cattle and a potentially limited beef supply.

As a result, SE's decree lays the groundwork to establish a duty-free TRQ for the import of live cattle for feeding purposes and fresh, chilled, and frozen beef classified under HTS. 0102.29.99 (live cattle, other), 0201.10.01 (carcasses or half carcasses), 0201.20.99 (bone-in meat), 0201.30.01 (deboned meat), 0202.10.01 (carcasses or half carcasses), 0202.20.99 (bone-in meat), and 0202.30.01 (deboned meat).

Moreover, the text notes that, historically, Mexico's main beef supplier has been the United States, but that more recently high U.S. beef prices have slowed imports. Mexico remains the main live cattle supplier to the United States. Recently, due to liquidation of the domestic herd in the United States, attractive cattle prices have enticed Mexican cattlemen to increase exports, thus limiting the availability of cattle to supply the domestic market. Consequently, higher domestic beef prices have inhibited consumption, mainly in lower income consumers.

GOM estimates that during the last five years, the average annual growth rate of beef production has been only 1.2 percent, while exports have grown nearly 15 percent and imports have decreased 10.2 percent, constraining availability and pushing up prices. Consequently, domestic consumption dropped to 0.7 percent. It is important to note that this decree is only a first step in the process to open a TRQ for these products, and to date there has not been any additional movement in that direction.

Commodities:

Animal Numbers, Swine

Production

Mexico learns how to deal with PED permanently

Despite a recent recurrence of porcine epidemic diarrhea (PED) incidents, the enhanced control efforts combined with investments in herd genetic improvements will allow a marginal production increase to 19.3 million head in 2017. Increasing numbers of pigs per sow due to improved genetics and enlargement of the breeding herd will enable the sector to overcome PED impacts. Ending inventories are forecast to reach a record 10.8 million head.

Contrary to expectations, backyard farms facing PED challenges have reported fewer incidences than commercial farms that continue addressing the disease more intensively with improved biosecurity measures. Mexico lacks an effective vaccine and the one available in the U.S. has not been used effectively for controlling outbreaks. To date, virus control efforts have been relatively successful, though the threat remains.

Despite a strong U.S. dollar, imported improved genetics combined with lower feed prices continue to contribute to lower production costs across the production chain.

Trade

Imports consist mainly of swine with new breeding lines aimed at increasing the number of weaning piglets per litter to offset the after effects of the PED outbreak. Imports are forecast to increase in 2017 to 30,000 head following the significant breeding swine purchases trend of 2015.

Production, Supply and Demand Data Statistics

Animal Numbers, Swine

Commodities

Meat, Swine

Production

Production in 2017 is forecast 4.5 percent higher than 2016 at a record 1.44 million tons due to increased slaughter and heavier weights. Improvement in the breeding herd has bolstered productivity, spurring greater slaughter-ready supplies. Relatively low feed prices and new breeding lines have driven weights higher.

Consumption

Consumption is forecast at a record of 2.27 million tons, 2.8 percent higher than the 2016 figure. Pork remains a lower cost alternative to beef, and is price competitive with poultry meat. Supported by increased production, imports, and affordable prices, per capita consumption is expected to reach nearly 19 kilograms. As consumers are increasingly aware that swine production systems are as reliable as those in the poultry and beef sectors, pork continues to gain consumer confidence as a healthy source of protein.

Trade

Imports for 2017 are forecast at 1.0 million tons, nearly two percent higher than the revised figure for 2016. Although Mexico's production is forecast higher, it must source product from imports to keep pace with rising consumption. Mexico's main pork imports will remain hams and picnics from the United States. Mechanically deboned meat (MDM) plays an important role as well. Given that an increase in U.S. production is expected, expected lower prices are likely to spur U.S. shipments to Mexico.

Exports are forecast at a record 170,000 tons. Mexico recently received recognition from Japan as free of Classical Swine Fever (CSF), and is now able to export pork from all states. Japan remains Mexico's top market by volume and value – a situation that is not expected to change. In addition, China also recently granted Mexico eligibility to export; this will undoubtedly contribute to increased exports.

Production, Supply and Demand Data Statistics