In this week’s pod, we’re doing something new and digging into the derivative market’s Ag roots in our first “Way more than you need to Know” series, starting with the Global Meat Markets. Joining us today discussing all things Meat in the world is Simon Quilty, from Melbourne, Australia, and also RCM’s very own Jeff Eizenberg, who handles all things Ag, including hosting the Hedged Edge podcast where they talk grown in the ground commodities once a month.

Today we get an overview of the Global meat market: Beef, Poultry, and Pork, the main players and the main concerns, including labor and shipping shortages being a critical problem in securing food security around the globe. Simon talks about how he goes about hedging the various contracts providing risk management for the current disruption for in-demand meat products. We’re talking Cutouts, CME vs. Wholesale prices and how to manage that risk, using swaps and removing basis risk to help manage price risk, and how the big players in the meat industry navigate it all. Bacon? Who said bacon. We briefly discuss that cut of pork belly that most of the US and Canada love so much & the future of alternative food, Beyond Meat, and their questionable mark on the industry since COVID. Also, We Want the Beef! Why beef will continue to dominate the meat market and why inflation is fueling it right along.

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Check out the complete Transcript from this weeks podcast below:

 

Weigh More than You Wanted to Know About Meat, with AgriTrend’s Simon Quilty

Jeff Malec  02:17

All right, Hi, everybody. We’re switching things up today and what’s going to be a new series on the pod here. We’ve talked with hedge fund guys and derivatives, traders speculating on markets, like oil and bonds and VIX and more all the time. And you can almost forget when digging into a client’s model or a trend followers approach that there’s actual grown in the ground physical commodities, behind much of the trading that takes place here. Indeed, the Board of Trade Chicago Board of Trade started out as a way for those with a crop in the ground to hedge the risk that something goes wrong before the harvest. So without further ado, welcome to our new way more than you wanted to know series, which we’ll be doing quarterly markets like cotton, lumber, natural gas and more. And bringing in Jeff Eisenberg, who I’ve worked with for over 20 years and who hosts our Sam’s other podcasts, the hedge edge each month, say that 10 times fast each month talking about hedgers and traders in the world of physical commodities. So to start things off here on our first episode, way more than you wanted to know about meets with our guests, Simon Quilty, he of Wangaratta. Did I say that even close?

 

Simon Quilty  03:22

I think blink blink or rather the Aboriginal that

 

Jeff Malec  03:26

he of Wangaratta, Australia, that booming town of about 20,000 people? About 150 miles northeast of Melbourne. How did I do with Melbourne? I know you guys don’t like that arm there, right?

 

Simon Quilty  03:38

Pretty good. Pretty good.

 

Jeff Malec  03:41

So before we dive in, tell us about your little town out in the world you ended up there.

 

Simon Quilty  03:48

It’s my family. My wife’s family’s town and my own family grew up an hour away. So it’s it’s a classic love story of shepherd and boy meat grinder at a girl. And we met at university in dancing classes. So down in Melbourne.

 

Jeff Malec  04:07

And then Jeff Asbury, you had a story about Simon and Tiananmen Square.

 

Jeff Eizenberg  04:13

Yeah, I had the opportunity to meet Simon. Boy, it’s been over a year ago now and we’ve gotten to know each other. One of the first things he tells me is that he happened to be in Tiananmen Square in 1989. And I, you know, immediately stopped the presses. Let’s just start over. What happens and how do you even get out of there?

 

Simon Quilty  04:37

Quickly as my advice

 

Jeff Eizenberg  04:41

Takes rolling in, and it’s time to go and you tell me that someone actually handed you a plane ticket. Is that real? Is that? Is that how

 

Simon Quilty  04:49

it happened? Yeah, yeah, that was about five days into, you might say the siege. So it was, yeah, it was a pretty difficult time and the country tree was in lockdown. You know, two factions of the army fighting each other. Tiananmen Square was as bloody as you can imagine. I think there was 14,000 people killed students during it. And I’d been there the day of the massacre and left that evening, knowing that the tanks were about to roll through about three or four hours later. So I ended up in a small town outside of Shanghai could to gel and they’re hunkered down for four days as gradually the information traveled through but in 1989, no internet, we had TV, but no phones. So information was not what it is today.

 

Jeff Eizenberg  05:46

You’re here to tell the story. So we’re glad to have you. Thanks, Jeff, for having me on the derivative, by the way,

 

Simon Quilty  05:54

thank you.

 

Jeff Malec  05:55

Let’s do it. And so were you doing meats way back then? And what was it? 89?

 

Simon Quilty  06:00

No, I was, um, I had my first job out of university, I did an ag science degree. And I was with a lobby group called the Victorian farmers Federation. And I was on a mercy flight out and landed in Hong Kong as the plane erupted. applauding, just glad to get out. And I sent a fax, if you know what faxes are saying, hold the press. Don’t go stop advertising for a new research officer. I will be back. Alright. So that was my fear that they just say, Oh, boy, we’ve lost him. And let’s find a new research officer.

 

Jeff Malec  06:47

So if we can I kind of want to start talking meats, exactly what that means. Right? So in the futures world, we have cattle futures, we have hog futures, but there’s poultry, there’s sheep, there’s all sorts of things going on in your meat world. So if you could just give us Let’s start with a big 30,000 foot overview. 30,000 feet probably doesn’t do it in the world of meats, right, because we got to look at the whole globe. So let’s say 3000 miles up. And you got to you’re gonna show us go for

 

Simon Quilty  07:19

a run, just to clarify things. So you know, the total amount produced globally of beef is about 73 million tons. Poultry, about 124 million tons and pork 110 million tons and sheep meat is a poor cousin to all of them at 15 million times. I think what’s clear here is that half of the hog population once resided in China itself. So you could almost have that picture there for pork in half. And say that where, you know, half the world’s pork come from so it during African swine fever that changed and it’s slightly less today, but once it the message is the same. China is is huge on pork, not only for its own production, but what it imports.

 

Jeff Malec  08:17

And I’m going to test your math here, but maybe you can tell me how many pounds are in a ton

 

Simon Quilty  08:24

2.2 or 462. To be

 

Jeff Malec  08:27

nice. So there’s what I was just roughly summing that up, there’s about 350 million tonnes there. So yeah, so if I’m trying to get to is there more more pounds than people per year? So every person on the planet has a couple of pounds of protein.

 

Simon Quilty  08:45

That’s right, and we’re going to look at that ratio, but that’s about 770 million, you know? Well, I have to times that by another 1000 to give it in pounds equivalent,

 

Jeff Malec  08:57

but 7.7 billion pounds correct. guys are doing

 

Jeff Eizenberg  09:01

Some high level math here. I think we need to get back to the metric system. Yeah, exactly.

 

Simon Quilty  09:09

We may be a long time waiting for America to do that. So you’re breaking it up. This is a somewhat simplistic approach, but the four main players in global protein production is the USA, Brazil, EU and China. And as we’ve said, China really consumes pretty well everything it produces. So that those figures Yes, 46 million tons produced in America, of protein 28 in Brazil, 45 in the EU, and about 65 million tons within China. So when we break it up into pork, you can see that China has lost a bit of ground with African swine fever, but at 44 million tons. There The largest producer globally, and it’s about a third. You know, America is about a third of China’s total volume. The EU sits closer to slightly below half or more at half. And then Brazil’s comes in at 4 million, and they have more poultry. Once again, honor is dominant. America’s just below half the poultry production. And then you’ve got Brazil in the EU running an equal third. And then last but not least, is beef. And they’re all pretty close in at seven to 30 million tons globally produced in beef, and then Australia and Argentina, a fairly sizable in their own right. And what’s more important is how much goes export. So when we look at population, Jeff, both Jeff’s and here I’ve got, you know, the size, you might say, within China of their population of 1.4 billion. And then you look at the EU, that falls dramatically to 512, Brazil’s only 212 million, and America at 331. So you can see that there’s excess production or supply occurring versus population, if, you know, China is meeting its own needs. So the net effect is that that excess supply here really equals the exports. And that, to me is what’s crucial is the role that the US Brazil and the EU play in export market for each of these proteins. And it’s, you know, obviously going to be sizable as we move forward. And these are the estimates, sorry,

 

Jeff Malec  11:48

just those three, US, Brazil, & EU something like what 80% of all exports of meats around the world.

 

Simon Quilty  11:56

pretty well. They dominate it. Yeah. And, you know, it varies from year to year. What the USDA haven’t recorded in the last year is the role of India, and buffalo. And in actual fact, between the US, Brazil, and Australia, in India, we all vied for the top beef spot each year, and it sits somewhere around one and a half million tons per year. So yes. The it’s pretty sizable, all those players

 

Jeff Eizenberg  12:33

by Mayor question on that. So is this all because of the arable land and Endor technology? What drives it to be happening only in the US and China, Brazil? I mean, why is it not happening more out of Europe? Or, you know, is China going to be able to catch up? Because the technology? I mean, this seems out of balance to me.

 

Simon Quilty  12:58

Yeah, I think one, you know, the fact that there are so many people 1.4 billion in China, they’re running out of space. Yeah. And that their land has been worked so hard for so long, that the ability to expand is limited, whereas the US production system is very intensive. So corn makes up, you know, 90% in terms of cattle feed 90% of all animals are on corn for 150 days. So there’s different reasons for different countries, America’s lard production is because you become very good at intensive agriculture. And that occurs in hogs, and in chickens as well.

 

Jeff Eizenberg  13:44

And I looked up right before we got on here. I was wondering about that how much of our corn and soybean production goes to feed? And seems to me that all the data I read between 40 and 50% of all corn produced in the US is going to feed and 75% leaving so you know, it’s because we’re the largest producer of grain. Naturally, it’s easier to also raise the cattle and pigs and swine here in the in the US.

 

Simon Quilty  14:13

You and Jeff, add to that now ethanol production is Yeah, it’s just tighten that need and it’s a three way contest between human consumption energy and, and the livestock needs. So, yes, in terms of exports, USA, Brazil and the EU dominate. And, you know, part of the challenges with drought, flooding, and the uncertainty globally about markets is that those you know, volumes change dramatically every year. And the ability to hedge or manage risk is challenging for a lot of moms. It’s I mean, Brazil has a live cattle market. But it’s really very much for domestic hedging. And I think somewhat limited, to be honest, the EU, there’s nothing there. China has just in the last three or four months introduced a hog contract that’s very loose, and somewhat driven, I think by external interests, namely the government. Truly the US is the only place globally that with confidence, I think managers price risk better than anywhere else in the world.

 

Jeff Malec  15:38

get more into that. I have two quick questions. One buffalo you mentioned in India that’s not the buffalo that us Americans think about. That’s not bison. There is water buffalo water, but it is

 

Simon Quilty  15:51

its relation, but it’s water buffalo, but is a cheap lean meat product and is 100% of it goes globally. So the size of the water buffalo herd in India is 110 million head that it’s a byproduct really of their dairy herd, which is 310 million. So, a third of it made up of Buffalo the dairy herd and two thirds regular dairy type animals. So 100% of Buffalo is exploited because of really religious reasons, whether by cow meat cannot be exported, because the cow is sacred. So, there you have, India is a very important player and pricing wise sit at about half the price of Australian and newest beef globally. And then somewhere in between Australia and the US pricing, which is very high, sits Brazil, in between India and US if you know what I mean. So it’s a very competitive product and plays an important role in what we call secondary markets, such as the Middle East.

 

Jeff Malec  17:14

And what do they use? Like I’m not going to go into a restaurant and see water buffalo steak, right so as I used in dog food or buy what kind of stuff is

 

Simon Quilty  17:24

no no, it’s used in manufacturing for you know, producing meatballs, hamburgers, ground beef. It’s a slow cooked item. But it’s it’s used right across Southeast Asia and in the Middle East. Okay.

 

Jeff Eizenberg  17:44

What about kangaroo come on? We I don’t see kangaroo on the last year Simon and you know you’re in Australia. So tell us. What was the story told me there’s two Australians for every kangaroo? Is that what it? Is?

 

Simon Quilty  17:57

It what it’s getting closer to? I think three I think it sits at about 60,000,060 6 million head of kangaroo. And one of the ways you measure the size of the population is you drive down our main freeway, and the number of roadkill you count kind of reflects the size of the herd. So last trip I went on, there was something like 30 kangaroos on the side of the road. So yep, there’s a lot of

 

Jeff Malec  18:28

you. You told us that Australia is the only country that puts roadkill on its flag, right?

 

Simon Quilty  18:35

Greg, we are proud of our road kill. So as we move along from looking at who the major players are, Jeff and Jeff, the standout to cargo Tyson, V on Smithfield, JBS and BRF. And when you’re homing in on, who is just the extraordinary participant there, across all those protein sectors, it’s JBS they’re the number one beef producer in the world situated in four different countries, they’re the number one poultry producer in the world once again across four separate countries. And then you’ve got in terms of pork, their number two, their net global revenue is 52 point 4 billion. And to me, this is a really interesting so it’s in so many ways when you know dietary needs are changing and chickens cheaper than pork or beef. JBS is still a recipient or a winner out of that. And when there’s droughts and floods in North America, but not in Australia, JBS is once again a winner out of that because, you know, things change globally, and they Have a footprint everywhere, and then add to that foreign exchange as well. So I think it’s a, it’s a model that they’ve truly shown how to, you might say spread your supply risk, and they really leverage this to the maximum. Where were they headquartered? their headquarters in Brazil?

 

Jeff Malec  20:23

Yeah. Okay. And like, so I know Smithfield. Everyone in the US knows Tyson for the most part, but we’re not used to by an JBS bacon or something. So they’re not a brand name right there. So they’re just behind the scenes providing all this.

 

Simon Quilty  20:40

They have a number of pilgrims pride is probably the, I think the number one one that you would know.

 

Jeff Malec  20:49

So immensely Smithfield used to be a US company. And then the Chinese bought Smithfield. Right? Or at least double height?

 

Simon Quilty  20:56

Correct? Yeah, yeah. So. And that really puts, I guess, in terms of that time between China and the US, it really strengthens that, of course, with pork being such an important part of the Chinese diet, and the real concern or need for some security when it comes to food supply.

 

Jeff Malec  21:18

And in fact, 10 million tons of pork produced in a Smithfield plant in the US, does that count as Chinese production or us production?

 

Simon Quilty  21:29

That’s us production.

 

Jeff Malec  21:31

Okay, good.

 

Simon Quilty  21:35

But I like the way you’re thinking. So what I think’s interesting about these revenue for last year, is toggle in the middle there stands out at 130 5 billion. And I think you’ve got to separate out their main interests from their grain and all their other value added businesses they’ve got. So you know, they trading house in their own right, you know, whether it’s energy, or the various commodities we’re familiar with, they value where they’ve got an enormous number of brand names in the frozen food sector in America. They are very strong, obviously, they present in Australia, they in America, they have offices all over the world production places all over the world. They’re the standout in terms of size. But when we just isolate pure protein interest, JBS is also the standout in my mind.

 

Jeff Malec  22:44

So these guys are huge, which is what we’re showing here, everywhere from for billions, the smallest player up to 50 billion purely just on proteins, we’re JBS. So how does it? How do they think about this market? Like what are their what are their concerns are they’re constantly worrying about having to hedge this 50 billion in revenue?

 

Simon Quilty  23:06

Yeah, I as I alluded to, currencies play a huge role. And so they’re continually looking at which of their countries, they’ve got the best foreign exchange and therefore, there’s that comparative advantage at that point in time that they will capitalize on. I think like every company in the world at the moment, labor is an issue. And right here, all these companies are struggling with having enough labor. So this is not just a problem in America, not just a problem in Australia. It’s a global problem. And how these companies address that is one of the challenges maybe JBS is in a unique situation that once the borders open up they due to their enormous network could possibly draw on some of that labor and and relocate it to where it’s most needed over in their global operations. I don’t know but I do know that labor is one of the critical factors Jeff

 

Jeff Eizenberg  24:17

Well and shipping right so you start seeing in the news here, we’ve got Walmart, buying their own ships cargo buying their own ships, I mean, these companies here probably on comparison, or near the size of some of these large us wholesalers, are we gonna see JBS own ships cargo own ships and you know that they’re gonna be trying to ensure food security and maybe even another question is, are countries like China and the US gonna sit there and say, we need to make sure that our food supplies is protected and help these companies secure shipping lines. I mean,

 

Simon Quilty  25:00

But, yeah, a lot of it is, um, look, I do know it, even within Australia and New Zealand, that chartering of vessels is occurring more and more effectively, you’re not owning it, but you’re taking control of that vessel over a full year or whatever is required. There’s no doubt that the last year in the last six months has made all these major players rethink about that logistic risk. And then on top of that, Jeff is cold storage facilities across America very tight, and in lots of countries around the world. So it’s not only getting it from point A to point B, but I think once you’re inside those countries, I mean, the fact that it’s takes eight to 12 weeks, for one container of Australian beef to be entered into China, through Shanghai at the moment, speaks volumes. And so

 

Jeff Malec  26:02

take us through a little journey of what that looks like. So I’m a nice Australian cow there. And what happens to me, I get up, I get slaughtered. what’s that journey look like?

 

 

 

Simon Quilty  26:15

You could it will, you know, you probably end up going to three different four different destinations. Because every market has different needs. So your life is, you know, if you wanted to travel overseas, you’re simultaneously going to four separate countries, as part of you shipped out,

 

Jeff Malec  26:35

Drawn and quartered in a corner to each part of the world.

 

Simon Quilty  26:39

Perfect. Yes. So Korea, the US, Japan and China dominate the Australian landscape, and about 80% of our exports go to just those four destinations. So you tend to find that the US takes the higher end stuff at times, if it’s chilled. If it’s not, if it’s Cammy, you go as in as naughty CL to end up in the hamburger. In China, they take everything. They’ll take the highest value wag us that we produce, and the lowest value county and there’s a place for everything within China, Japan, they’re very selective. Often it’s chilled, often it’s grain fed, and it’s very high end, though that market is been struggling in recent months. And then Korea much of it is bone in product. So ribs, and the likes. So Jeff, it depends on what cut you are

 

Jeff Malec  27:42

Thinking more like it gets slaughtered somewhere there it gets put on a train, is it get frozen on site? Like what does that whole thing?

 

Simon Quilty  27:49

Yes, it gets frozen on site in Australia, and then truck port and then shipped out. And so you know, the major cities, Brisbane, Sydney, Melbourne, where the bulk of the product goes out Brisbane being the largest hub for beef out of Australia. So

 

Jeff Malec  28:09

yeah, and if there’s any of these issues like we have in Long Beach of containers coming in, and they’re delayed months, that stuff spoils, right, you have to get it out of

 

Simon Quilty  28:20

you, you raise a really good point that I have with all the slowness that’s going on globally with entries in the ports due to the bottlenecks that are happening. For example, on the east coast of America, it’s 21 days average time to get a product cleared. In Japan and Korea, it’s two weeks. And as we said within China, it’s now six to eight weeks. So what happens there is that chilled beef chilled Lamb has a certain shelf life. And we’re just seeing in the export figures that companies are pulling away from exporting chilled because of shelf life because of the concern of this long, long period of time before the product actually ends up on the supermarket shelf.

 

Jeff Malec  29:17

And what’s that? So they pull back from chilled what’s the alternative? jerky frozen tote. Oh, okay, so this is what’s the difference they’re chilled and frozen.

 

Simon Quilty  29:28

Well basically when you selling something as chilled you it goes in a form that when you freeze something, the meat is somewhat denatured to a certain extent, the quality is not as good. Whereas with chilled, you know it comes out fresh and ate well immediately and retains a lot of that tenderness whereas by freezing you’re taking away some of that freshness. So the market prefers chilled. If it can afford it. And grain fed chilled in particular.

 

Jeff Eizenberg  30:04

Sound like a start to a bad joke or something? What happens when we take you to a steak restaurant Chicago, you’re going to be critiquing all of the meat that comes across the plate or what?

 

Simon Quilty  30:18

Well, dare I say, I may be saying this steak is not good enough. To be honest, I’ve never done that in America. I’ve never had a bad meal in America. I can’t say that about India. But I can say that about America.

 

Jeff Malec  30:36

Very, very well take it.

 

Simon Quilty  30:38

I think the next year gets really interesting, Jeff, because us production is expected to fall by 3.1%. Due to the drought that you’ve bought, so herd liquidation, the US. latest figures, we’ve got Brazil with an expectation of a 7% for Argentina has had a tone headaches this year with their quota scheme that the government introduced. liquidation, I think going on in Uruguay, and Indian buffaloes has struggled to get out into the global market because of COVID. So it gets kind of interesting to me, Jeff, because beef supply next year is going to tighten, I think dramatically 3% out of the US has just said 7% out of Brazil, you know, and an 8% fall out of Argentina. And when you add that together, just those three alone, that’s 2.1 million tons less beef globally, that points to higher prices, beef wise, around the world,

 

Jeff Eizenberg  31:48

Jeff, you can’t put this out. All the hedge funds are going to be piling in and following your your Twitter here trying to figure out what to do they just boom, they already know what to do.

 

Jeff Malec  32:00

And tighten that up for me if I’m tighten it, no pun intended. But I’m having trouble thinking is that to me, when you say the supplies, finding that the herd goes down? That’s correct. The herd goes down, you had to kill it, slaughter it, and then you have more supply, right? So what will that happen

 

Simon Quilty  32:19

during we’re in that phase right now and the market absorb that. And still we’ve had rising prices. So you always know demand good is when suppliers up and steel prices continue to rise. So next year with a contraction in supply globally, expect even higher prices.

 

 

Jeff Malec  32:41

Got it and you can’t read the cure for high prices as high prices as they say, right? Like you’ll just the producers will kill more to make more money, but then they get behind the eight ball and they don’t have the they can’t refresh it fast enough, I guess. Right.

 

Jeff Eizenberg  32:55

And then in the other.

 

Simon Quilty  32:59

Well, one of the unique parts about this rising global meat prices is really China again, it’s about the losses due to African swine fever. So we had back in 2018. The first case occurred in August 19 was the big year of liquidation where we think close to 65% of the herd was lost. They were rebuilding. And then this year, they ran into second and third waves of African swine fever, no different to the Delta variant that we’re familiar with the COVID. Well, they had their own variants. And they lost huge amounts. And then it went from a disease liquidation into an economic liquidation where now for the last eight weeks, they’ve been losing somewhere between 60 to 80 US dollars ahead, and farmers are accepting the industry. So we think somewhere between 30 to 50% has been lost already in terms of their herd size again, as they retreat. And by the end of this year, if that continues that rate of loss, it will be closer to 50%. So that’s importing those global markets,

 

Jeff Malec  34:16

And well the people eat the disease bag or they get slaughtered and try and sell it or it’s just gets burned.

 

Simon Quilty  34:22

So what happens why prices fall so quickly in it 65% the exact since January is what we call the rush to the door whereby Jeff, you’re far better off selling the pig even though it’s not properly finished, and get something for them to get nothing. So the farmers just said I’m not going to wait for the disease. I’m just gonna sell the pigs

 

Jeff Malec  34:50

Yeah, right why fat, only afraid to get sick and then you’re then you’re done.

 

Simon Quilty  34:55

Die and you get nothing. So there’s we’ve seen that right? To the door occur for most of this year. But the net effect is it’s left this protein hole that once again, will support global meat prices, whether it’s poultry, beef, or pork, I think for the next three years to say the minimum,

 

Jeff Malec  35:18

and what do you say to write it? I’m jumping off script here a little bit. But right, we have trade wars with China. And you could argue like China can never get all that strict with us because they need all our protein. But I could also argue they could just dictate that nobody gets protein for the next five years, right? They could really lay down the iron law and say, This is how it’s going to be you don’t get any pork for the next five years till we bring back to her.

 

Simon Quilty  35:45

Yeah. Unfortunately, as you rightly point out, high prices, six higher prices. And even China has its limits. So yeah,

 

Jeff Eizenberg  35:54

you’d have another bout of Tiananmen Square.

 

Simon Quilty  35:57

Yeah. Exactly. And, and so that your points corrective, that there is this need and desire to have a certain amount of inputs to make up for the shortfall. But nonetheless, their economy, I think, is probably more like a two speed economy. We’ve seen the inner parts of China struggle, the outer region, coastal regions probably are doing exceptionally well, because of the export driven recovery. So depending on where you sell to in China, but I think, in some respects, Jeff, they’ve stumbled in terms of the economic recovery. So therefore, the ability to pay high prices is somewhat limited. Let’s move

 

Jeff Malec  36:48

on to how all these big players we talked about what you do day in day out with Jeff in our ad group does, how do they think about hedging this stuff, what tools are in the toolbox and go from there.

 

Simon Quilty  37:05

So we’ve got you, as I said earlier at the start that the US provides, I think one of the best risk management options in the world in terms of what can be done and so the live cattle futures, that’s based on the finished animal and that’s been on feed for about 150 days. The size of each trade is about 40,000 pounds. And then you’ve got on top of that the feeder cattle futures and so that effectively the difference between the feeder cattle and the live cattle is the weight and the cost of grain to get the animal to that finish date. Once again, that trade in 40,000 pounding increments, and those two are critical but let’s quickly look at the lean hog futures as well. Real quick,

 

Jeff Malec  37:57

is there anything magical about this 40,000 pound number is that like Well,

 

Simon Quilty  38:01

no, it’s just been an industry standard that that has been in place for years and and suits. I guess the lot sizes within America.

 

Jeff Malec  38:11

Yeah, we learned on our lumber group the woods that contract size 108 board feet or something like that. 10,000 board feet, right, which is what fits on a flatbed railcar?

 

Simon Quilty  38:22

Sure,

 

 

Jeff Malec  38:23

I’m sure it’s probably grounded in something similar, like that’s what can fit in a refrigerated truck or something.

 

Simon Quilty  38:30

Yeah, exactly. Exactly. So, and that is correct. You know, we see that within we use 40,000 pounds when it comes to imported meat as well. So lean hog futures. That too is worked in 40,000 pound increments. Now, what gets interesting here is that during COVID last year, that the price difference between the live stock futures contract whether it’s live cattle feeder or hogs during that period in which suddenly workers got sick panic buying useful retail prices in America, and wholesale prices go through the roof at time to double and at the same time, livestock prices fell. So if you were using hog futures or live cattle futures to price manage or price risk managed, meet your upside down, it was not a good hedge because suddenly instead of covering you on a market that’s going higher, you actually were going lower because it was against the live cattle. So the CME in a twister developed another contract and this is the whole or pork cut out contract. So this effectively is the cut out is like the wholesale prices of all the various components of the animal. Good glued back together to give the carcass price value.

 

Jeff Malec  40:04

As I said, it’s double the meat without the bones that.

 

Simon Quilty  40:10

So once again, this was introduced about six months ago with the real purpose, Jeff, of trying to provide risk management. So that that this course that occurred because of the disruption in supply of cattle, the bottleneck in the meat works. And the fact that prices to the consumer double, that won’t occur with this contract, because this will reflect that retail demand and wholesale demand. Not more so than the livestock demand, if that makes sense in

 

Jeff Malec  40:47

my brain goes to it’s like Crude Oil Futures, which is the oil in the ground versus gasoline futures, which is the refined stuff ready for the consumer. So yeah, so the live cattle and the lean hogs are the live actual thing that Produces the thing people need to buy. And then the cutout is the refined product, so to speak.

 

Simon Quilty  41:10

Exactly. The finished product. So quick study

 

Jeff Eizenberg  41:13

there, Jeff, good work.

 

Jeff Malec  41:16

I’ve been doing it 30 years.

 

 

Simon Quilty  41:18

So if we look at where the market is today, Jeff, and it looks like to me, we’re heading back to more of a traditional pattern it prices have been truly elevated for most of this year. And I think that that’s a strong reflection on demand. The bounce back effect, as America climbs its way out of the COVID driven market from last year, we’ve seen the discretionary spending that’s been going on, it’s been extraordinary. And I think a lot of this is reflected in strong demand and to a certain extent, supply. And what’s important here too, is global export market. So the hog market ammo or pork, about 26% of it goes export. And so the demand in China is absolutely critical in helping elevate as well as other countries, the value of the carcass itself. And interestingly, too, when you look here at cattle, and you can see that extraordinary spike here, Jeff, last year when that squeeze was on. And we thought, here’s the beef cut out value, where prices just went through the roof, and cattle live cattle prices fell. But here’s the beef cut out. Once again, we’re moving probably more into traditional seasonal low. And then as we get towards your season, in terms of festivities and Christmas, Thanksgiving, it’ll start to pick itself back up

 

Jeff Malec  43:01

and help. I’m just going to dig in on this chart for a second. So that spike is post COVID. When everyone’s going to the grocery store and emptying out the shelves, like super all time, high in demand for finished product. Got it? Okay, so that’s what spiked in the live product had trouble keeping up.

 

Simon Quilty  43:23

That’s correct. And workers were sick, the availability of labor was absolutely limited. And therefore the cattle couldn’t be processed. So they fell in value. And there was a restricted amount of meat coming out of the system, and therefore consumers were willing to pay a lot more for

 

Jeff Malec  43:43

I’ll go back to my oil example, right, Katrina shuts in all the refining in New Orleans. There’s plenty of crude oil, crude oil is cheap, you can buy all the oil you want. But the gasoline is super expensive because nobody can refine it.

 

Simon Quilty  43:57

That time I think, on a per head basis, the pricing or the profits got up to around about 1500 US dollars per head in America even higher. So last year and a good portion of this year. revenue will return for meat process but in particular beef have been extraordinary

 

Jeff Eizenberg  44:26

assignment I think, to take a moment here, I think it’s important to articulate to Jeff and the listeners the difference between what we’ve been talking about which is CME prices versus the wholesale price and then how to actually manage that risk and reality is that there is a mechanism in the meat cuts that is not readily available in many other markets like energy like Jeff suggested, grains in particular via the swaps and OTC markets that that you and I work on. our day to day basis, I think it’s really important to, to bring this up because it’s a somewhat of an unknown market to many to many. And quite honestly, there’s a lot of opportunity for for people to consider those markets for both hedging and even maybe even speculators, I’d be interested in your opinion.

 

Simon Quilty  45:21

Yeah, that’s exactly right. So as we said, you know, the, that squeeze that you see right in front of you there, that in pull the four cut out, but in vif, there is no CME hedging mechanism for that processed item. So Jeff’s 100%, right, that the way in which the market is now looking to manage that risk is using swaps. So we’ve got market makers and people we deal with end users speculators on a day to day basis, that are continually pricing up. Beef, it’s 90s and 50s, fresh 90s, fresh 50s based off the USDA, weekly average, but we can take that hedging right through to the caucus itself, or to individual items, depending on the items that involved but you know, the more items the better the the sharper the pricing becomes. So

 

Jeff Malec  46:29

they’re gonna find most people, what are 90s and 50s.

 

Simon Quilty  46:33

so naughty, CO is fresh 90s that’s how we measure grinding meat. And, you know, a hamburger is a blend of 50s and 90s. So the 50 seal, grinding me is fat meat, 90 cL is lean meat in your blender to

 

Jeff Malec  46:51

CLE cut lean or something lean, typical lean, chemical lean, okay?

 

Simon Quilty  46:57

And, and it’s the way in which the industry for you know, 50 60 70 years has measured the fat content within, within grinding meat, or ground beef. So you blend the two to make a hamburger which is normally around 76/77 CL. So in beef, it’s proving to be really useful, particularly also because the pricing out front in the physical, you can often get pricing up to three months out. But it’s that three to six to 12 month period where pricing is very, very difficult. So a lot of end users are using swaps to manage that price risk out front

 

Jeff Malec  47:43

and an end you weren’t talking like Wendy’s or McDonald’s or Burger King or someone like that actually,

 

Simon Quilty  47:48

yeah, or Texas Roadhouse or whoever, you know, restaurant chains, you name it, they’re all interested in managing risk in this space. And then when we get to pork, you know, the cut out is available. It’s it’s thinly traded at the moment. And also, once again, we tend to be pricing up hams, 72 sealed pork trim, 42 sealed pork trim, these are done daily. Belize is another one that’s highly volatile. So once again, it’s removing that basis risk from the value of the caucus to the individual cup. And for a lot of companies taking away the basis risk is exactly what they want. So as a swap, we’re able to forward price in that three to 12 month period and effectively offset that risk for people.

 

 

 

Jeff Malec  48:49

So I’m going to pull on that thread of I came from so Texas Roadhouse, I’m going to buy t bones. We’ll keep it simple, right? I’ve I want a couple million pounds of T bones. If I just had with the outright live cattle futures, I’ve got two problems, right one, it’s the live cattle it might fluctuate. Crew, you’re saying the basis race between what comes out of that? And maybe for some weird reason, everybody wants t bones and the price of that skyrockets.

 

Simon Quilty  49:18

So how do you run into another problem? Like last year, Jeff Where? Yeah, suddenly workers get sick. And t bones go through the roof and live cattle fall?

 

Jeff Malec  49:30

Yeah, because they can’t suddenly. Okay. So but there’s

 

Simon Quilty  49:34

no loss on your head. You’ve lost both way.

 

Jeff Malec  49:39

So how are the hedgers though they are not the hedges but the people offering those swaps. They they have to go they don’t want that risk. They’re not just taking directional risk on the other side, right. So they’re building some sort of futures market based hedge routes for that swap.

 

Simon Quilty  49:57

They’re offsetting the risk reward level. Either they’re doing trying to find like this like, as though TiVo, TiVo, or they’ve done their homework and they found a customer that’s willing to look at a cut out, beef cut out value, that they’re happy with that basis risk. So they may be offering, you know, the sale on a T bone, but they’re buying on the opposite side, a carcass, or a cut out value, and they’re wearing that basis risks themselves, and they’re happy to do so

 

Jeff Eizenberg  50:32

if you just follow the supply chain, Jeff, you have, obviously, the grain and everything goes into the cattle, you get the feeder cattle, then you’ve got the live cattle, they go to slaughter, and then they go to slaughterhouse a slaughterhouse then sells it to a processor, and the processor sells it to the end user. So we got people all along the way, like effectively need to hedge and manage their risk. And so, you know, when you see these transactions all along the way, each time it’s laying off risk, lay off risk. And then at the end of the day, you know, someone has to bear the other side, it’s either going to be a match, like Simon saying, where though, you love saying Simon says, Simon says, you know, you know, go fish, but where the processor needs to kind of, you know, hedge himself or he has to effectively find a match, like I say, find a match. And when you do, then they use the swap markets, and two, and the counterparties to neutralize the risk.

 

Jeff Malec  51:41

And what do you see, right? Like, I’m used to talking to people who want to be a fly on the balls, backside, right? Pun intended there, the book, but right, they don’t want to be they don’t want to have any market impact. These are the largest players in the world, they’re going to have market impact. So how do they How do they manage that whole thing? Right? Like, they’re going to be bigger than the volume that day or they are the volume of that day is

 

Simon Quilty  52:07

not necessarily because the swap is settled against the physical product itself. So the USDA weekly average, so no one player in America is that big to impact that weekly sale. So it’s all settled against the physical sales that occur, the USDA collecting that information, as you know, and to me, it’s as robust as you will get in terms of not being overly influenced by any one company. Now, you know, ideally, if you’re managing risk, and you’re sitting on the other side, the more parts of the animal that you have, so for example, the T bone, but if Texas Roadhouse said, You know, I want to also manage my hamburger risk as well and all the other components, then it makes the price even sharper, the more of the caucus that they enable, to

 

Jeff Malec  53:10

get closer to the futures contract. Yeah,

 

Simon Quilty  53:13

exactly, exactly. Or to a caucus, who

 

Jeff Eizenberg  53:16

maybe are the person trying to offset of risk can get closer to the futures correct?

 

Simon Quilty  53:20

Exactly. So that it helps, the closer you are to the complete cut out, the better the sharper the pricing, whether we’re talking pork, or beef, the other component of what we do is I trade the physical market as well brokerage. And whether it’s out of Australia, New Zealand, India, or it’s throughout North America. So we are in the physical market every day, Jeff, and I think that’s the other key component is it’s not just research, just not analysts, analyzing the market, you’re living and breathing it every day. And that’s absolutely critical. We’ve effectively got skin in the game. So to me, you know, that separates us potentially from the rest in that we truly hopefully understand the markets that we’re in.

 

Jeff Eizenberg  54:14

The I would add, the last thing I want to add to that is Jeff, you and I’ve talked about this with you know, the floors kind of gone and that’s where you started in the business. And you know, we started working together that was a breeding ground for people to learn the markets. Now, as I’ve gotten to know Simon many of our customers, they are the people that are in these markets every day. In the physical side, these transactions are doing the decisions, they have to make the risk management decisions, the actual trading the transactions, it’s very much like the floor of the old they have to make these physical trades very quickly and make decisions and it has to be calculated. So perhaps we wonder where the next traders of the markets are going to come From maybe it’s just physical, maybe it’s the physical traders.

 

 

Jeff Malec  55:04

And what is that physical space look like just walk us through a trade. You’re you’re on the phone, someone is wants to buy 6 million pounds of Indian Buffalo and you got to work out the logistics to get it to South Korea

 

Simon Quilty  55:20

bids and offers the quibble. You name it, Jeff, everything that goes with it. Do Is there the Do they have the right documentation, meeting all the halal requirements, whatever specifications is critical, understanding the meat cuts that you’re involved in, making sure that you’re delivering, you know that Apple with that Apple that they’re buying versus, you know, that slightly different banana ends up thinking they’re bought an apple, you’ve got to make sure with specifications and meeting market requirements. As I said, you know, whether it’s halal, or you name it, if it’s a organic product, if it’s biodynamic, you name it, you have to meet those regulations.

 

Jeff Malec  56:08

biodynamic, what does that mean?

 

Simon Quilty  56:11

That’s the next level up from organic. Yeah, that’s where superfoods exist.

 

Jeff Malec  56:19

I love it. And do you do? Do you ever consider any of these people ever consider what managed money is doing right? commodity trading advisors might come in and large size and bid up any one of these futures? Is that just noise in your world? Or is that something either you or the hedgers look at to say, I gotta be careful around this level, because all this technical buying might come in or something of that nature.

 

Simon Quilty  56:46

That’s definitely been a concern in in, you know, the live cattle futures, particularly over the last two to three years. And I think, you know, like there has been with pork cut out, there’s been a strong push to try and have a beef cut out for exactly that reason, Jeff, that the the number of natural hedges in the market, proportionately is getting less and less, and therefore the relevant to the contract starts to get less and less. So there’s no doubt that there has been an underlying concern for many years, and will continue to be I mean, people almost make a profession of trying to second guess what it should be. And the same occurs with hogs. And I think the cut out in a way, going into that with hogs is a way to answer that concern. And I would only hope that at some point we get a beef cut out contract.

 

Jeff Malec  57:45

Well, to our CMA sponsors if you’re listening give us the beef cut out. Contract Come on. Alright, few other things here, I got it, we got to talk bacon before we let you off, because that’s how we care about here in the states is don’t mess with my bacon. So what are what’s bacon prices look like? That’s all pod price.

 

 

Simon Quilty  58:11

Yeah, you’ve got to really look at the bellies to give you a good and that is one of those parts of the market that is truly evolved. It probably the best comparison is FTS and Belize to me 50s in in fresh 50s in in the beef side of things, and, and Belize within pork only because so much of that is driven by that fast food sector, the seasonal demand period. And also it can be so easily influenced by exports and other factors. So to answer your question, you know, bacon is so tied closely with that Belize market. What we’ve seen over the last year is that that retail pricing, both in beef and pork, but in has seen at times where demand from the from consumers has been exceptionally high. And there’s been a challenge in which to try and bridge that wholesale price and that retail price and it’s been difficult but I think as we go forward here in the pork sector anyway, the expectation of tightening in the market next year hopefully will help bridge that gap as the market tightens.

 

Jeff Malec  59:32

In your all your world travels and all these different countries you deal with on the beat. Meat exports is any country. Can they hold a candle to us in terms of our love of bacon?

 

Simon Quilty  59:45

Possibly Canada.

 

Jeff Malec  59:47

Okay, well they’ve got their own. They’ve got Canadian bacon. Yes ham.

 

Simon Quilty  59:52

I You and I have a particular level of streaky bacon myself. You know, it’s funny in Australia, we consume on a per capita basis, around about 50 kilos a year of chicken. Beef sits at about 19 and a half kilos, so less than half pork at 27 kilos. And lamb is the lucky last at about six to seven kilos. So your love of pork, maybe our love of chicken in Australia, we truly eat a lot of chicken.

 

Jeff Malec  1:00:31

I do this thought experiment with people all the time. I’m like, how many hold chickens? Do you think you eat a year? And people are like, I don’t know. 510 15? I’m like, Alright, just call it 10 for the sake of argument, 300 million people 10 chickens a year, right? Like, 3 billion chickens, you think all you’d see around the US is trucks full of chickens driving, right? And maybe they are they just don’t read the feathers aren’t flying out the side. But that’s this whole worldwide thing, like half the trucks and ships got to be filled with all this meat.

 

Simon Quilty  1:01:05

Yeah, there’s a lot. I mean, you know, so let’s touch on the phase one agreement that you that Donald Trump put in place. And I’ve got to say, from a meat point of view, and in particular beef, it is probably one of the best agreements that were ever negotiated globally, ever. It was extraordinary reward you achieved. And as a result of that, you’ve seen weekly shipments to America go up dramatically. I mean, you’ve gone from zero to hero. And today, you’re surpassing Australia as a bigger exporter of beef into China than what we are. And once we held that mark. So the expansion of exports out of the US, it now sits at about 14% of your total production is exports in beef. But in actual fact, the value of the caucus, it’s more like 25%. So exports for beef in America actually is incredibly important.

 

Jeff Malec  1:02:19

And you’re saying because that we have a higher quality beef so that the value of it is higher? I think

 

Simon Quilty  1:02:24

1. And also higher value cuts are being exported. So that lifts the overall value of the animal and the carcass value.

 

Jeff Malec  1:02:32

And now let’s get into so a lot of arguments out there. Beef is terrible for the planet, takes a lot of water eats grass, methane, kills the planet, right? So is it ethical to have all this beef? Does anyone care? China doesn’t care, right? They’re just gonna keep as their GDP grows as their middle class grows. And all these countries are just gonna want more and more beef. So who leave? climate change and beef being bad for the planet with with the world? We will?

 

Simon Quilty  1:03:06

Well let’s let’s talk about one of the potential solutions is plant based proteins. The company beyond meat may ring a bell to you.

 

Jeff Eizenberg  1:03:19

Yeah, KFC has beyond chicken and I don’t even know, what is the, the impossible

 

Simon Quilty  1:03:25

burger? Yeah. So, so what we found there was that what’s developed in the last year, you know, three or four months ago, we had this phenomenal growth in alternate plant proteins last year, during COVID, where people were locked up and got very concerned about their health. And the growth in plant based proteins was astronomical, it was up 120 120% 150% compared to 2090. Now we roll the camera forward to this year. And it’s nowhere near what it was the demand in actual fact, growth in that sector. For three months in a row is negative, it’s down to 3%. And we’re starting to wonder whether the bubble has possibly burst on the growth and demand of these plant based

 

Jeff Eizenberg  1:04:31

price of grains that go into those beyond meats through the roof, you know, up 40% that’s you know, naturally going to cause a cause contraction in demand right prices up.

 

Simon Quilty  1:04:43

That correct. And when you you know, when you pull apart the numbers of beyond meat, I mean their sales figures are fantastic, but their profit they’ve yet to make a profit in five years or since their conception in 2016 I I think the total losses so far are about 63 million. So it really does to me beg the question whether that part of the market is possibly run a trace. Now, in terms of retail sales, I think the number is about 83 billion of, you know, beef. No, it’s, they make up point 5% of the market. So if you look at all retail sales in America, beyond meat, and the alternate meat, plant, protein only makes up half a percent of the entire market. What are still minute,

 

Jeff Malec  1:05:45

one half of 1%?

 

Jeff Eizenberg  1:05:47

Correct? Definitely not enough for the CME to launch beyond meat futures product.

 

Simon Quilty  1:05:53

Well, that’s

 

Jeff Malec  1:05:54

right. It’s the it’s the soybean crush. But um, but that if I’m on their side, I’m like, hey, that’s the whole point. Right? If that number goes to 8%, this is one of the most successful companies of all time. But you’re saying like, Well, everyone tried it, and it’s ugly. Now it’s coming back down?

 

Simon Quilty  1:06:16

I think, you know, there’s definitely a role and a place for it. And I’m not naive enough to think otherwise. I think it’s going to be, you know, a lot, a lot of the time these niche items, find a, whether it’s 5%, or whatever it is that the market, it will find its role and its place. But will it be 50% of the protein market? No, it will never be that much. I think that the demand for proteins, as we know it, globally is far too strong. And, you know, when we look at the expected GDP over the next 10 years, and you look at the enormous population growth, we know that if you look at the IMF figures on beef needs, we’ve fall 8 million tons short, globally, meeting all the needs of beef for the next 10 years, meaning there’s just simply not going to be enough beef available globally. The same with pork, I think it sits at about 15 million tons for pork. And similar for chicken, simply the world is growing faster than what protein can keep up with.

 

Jeff Malec  1:07:33

And is that a, you’re tying it back to GDP, so that’s a wealth effect also. So that’s more expensive protein I can buy?

 

Simon Quilty  1:07:43

Exactly. And beef is the perfect example. There’s a 98% correlation over the last 30 years between consumption of beef globally, and the growth of GDP.

 

Jeff Malec  1:07:57

And it seems right like I’m forgetting I’m trying to look up on my phone of the Breton economic substitute. There’s a fancier word that I’m not thinking of. But the argument for the longest time is like fine. If beef gets too expensive, I switch to chicken, chicken, I switch to pork, you’re saying maybe people are switching the lamb. So it’s all kind of fungible at some level, right? So like, if we keep right if What if there keeps being drought? If the planet goes to hell in a handbasket rather quickly here, like you’re almost get forced off beef? And then it becomes Okay, what’s the economic substitute if it you know, if beef is $6,000 a pound or something ludicrous, right? Because there’s only a couple of cows in the world.

 

Simon Quilty  1:08:40

But that’s right.

 

Jeff Malec  1:08:41

Yeah, yeah.

 

Jeff Eizenberg  1:08:42

Thank you. Jeff. kangaroo is angry.

 

Simon Quilty  1:08:45

The market will, of course adjust. But what we found is that there are three price sensitive market, no world that will adjust chicken in preference to beef and pork, America, Australia, and Japan. So right now is a great example where beef prices kept going higher pork prices kept going higher. So this year, exports into Japan, I think pork is down 4%. Beef is down 2%. And chicken is up 6% and pound for pound. The difference. So if you add the other two that have fallen, it exactly matches the increase in chicken volume. There’s a great example of where the market will sort itself out. But then you go to somewhere like China, who lost half their hog herd. Chicken prices since 2018 have flatlined in China. Even though pork went through the roof. Beef has gone through the roof. Chicken remained flatlined in price. It’s The poor man’s meat, there is, you know, every man his dog, though, wants to eat beef, that is that it’s got a lot of status it, they believe it’s good for their children, you name it, they want their beef. So every markets different. And as supply gets tighter globally or demand grows with the population, you know, my feeling is that beef will continue to be a dominant player in the market. And I’m expecting that the peak in global beef prices will be 2023. And my expectation is we’re looking at around about an 8% increase on on this year’s average, over the next two years for beef to be 8% higher in value.

 

Jeff Malec  1:10:49

And all of that is not based on inflation whatsoever, right? Like you’re not saying this as a macro call. This is just based on the local supply denied demand d