Chinese meat counter

Chinese meat counter.

Exchange rate whammy intensifies for U.S. beef exports

China’s move to devalue its currency is sending shock waves through U.S. beef exports.

Although China is closed to U.S. beef, the mid-August devaluation of China’s currency and general market uncertainty surrounding China’s economic situation have widespread implications. The U.S. beef industry already had been facing significant challenges due to the strength of the U.S. dollar for much of 2014 and the first half of 2015, and the situation worsened in August.

The Chinese yuan fell by about 4% against the dollar Aug. 11-12 – its largest devaluation in more than 20 years – before recovering some value over the next several days. While the yuan’s value held steady for the remainder of August, the aftershocks from China’s move and growing concern about its economy affected the buying power of key international customers for U.S. beef, as well as the price-competitiveness of our largest competing suppliers. The impact has been significant, with countries heavily reliant on commodity exports being hit especially hard, including Australia, New Zealand, Canada and Brazil. 

The Australian and New Zealand dollars, already trading at their lowest levels since 2009 (when many currencies bottomed against the U.S. dollar following the global economic and financial crisis) continued to slide and ended August down 24% year-over-year.

Among major importing countries, the South Korean won had held up relatively well versus the dollar over the past year but fell to its lowest point since 2011 following the devaluation of China’s currency and the recent heightening of border tensions with North Korea. The won is now down 14% compared with last year. The Taiwan dollar fell 3% in August, reaching its lowest point in nearly six years, and is down 8% from last year.

The effects were not limited to Asian markets. The Mexican peso, already trading at historic lows, continued to devalue in August and is now down 22% from last year. The Brazilian real continued its losing streak, ending August down 28% from last year, a 12-year low. The Colombian peso is in a similar situation.  

“The strength of the U.S. dollar against virtually all currencies has more than offset what would have been an improvement in price competitiveness for U.S. beef this year,” explained U.S. Meat Export Federation Economist Erin Borror. “Prices for many U.S. beef cuts have stabilized, and in the case of key Asia items, have decreased from last year’s high levels. But the strong dollar has essentially eliminated the benefits for our international customers. These dramatic swings in exchange rates also add another layer of volatility for exporters, often wiping out profit margins.”

On a positive note, the euro and the Japanese yen strengthened slightly in August, though both are still about 15% lower year-over-year.

Japan is the largest foreign market for U.S. beef, with 2014 exports totaling nearly $1.6 billion. Exports in 2015 are slightly below last year’s pace as Australia has gained market share, benefiting from lower duties through an economic partnership agreement with Japan and the weak Australian dollar. One encouraging factor is tightening supplies from Australia, which will narrow its price advantage heading into 2016.

U.S. beef exports to the European Union totaled about $250 million last year. Because beef exported to the EU must be from non-hormone-treated cattle (NHTC), the additional production costs are especially difficult to recover when the euro is in a weakened state.

China’s devaluation of the yuan could also affect beef exports in a less direct – but potentially impactful – manner when a key trade bill comes before Congress this fall. A customs and trade enforcement bill (H.R. 644) is set to be considered in conference committee, and one of the most controversial differences between the House and Senate versions is a Senate provision that requires retaliatory measures to be imposed on trading partners that engage in currency manipulation.

Some members of Congress have also threatened to withhold support for the Trans-Pacific Partnership (TPP) unless it includes strong provisions regarding currency manipulation. China is not currently a TPP participant, but with currency manipulation already being a hot-button issue for some members of Congress, China’s recent action could become a factor in the TPP debate.

Editor’s Note—Joe Schuele is vice president, communications for the U.S. Meat Export Federation. He is based in Denver, Colo.

 

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