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

Episode Date: October 14, 2021

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. Chapters: 00:00-02:44 = Intro 02:45-07:18 = From Dancing Lessons in Melbourne To Escaping Tiananmen Square 07:19-23:04 = How Big is the Global Meat Market? Who has it? Who needs it? 23:05-36:59 = Big Player’s Concerns & the Tightening of the Global Beef Supply 37:00-57:57 = The Hedgers Toolbox: Futures, Cutouts, Swaps & Offsetting Risk 57:58-01:15:12 = Bacon Lovers, Beyond Meat as a Bust, and a Little Lamb 01:15:13-01:18:34 = Favorites Follow along with Simon on Twitter @SimonQuilty and for more information visit the website at globalagritrends.com  Don't forget to subscribe to The Derivative, and follow us on Twitter at @rcmAlts and our host Jeff at @AttainCap2,  or LinkedIn , and Facebook, and sign-up for our blog digest. And visit our sponsor, the CME Group at www.cmegroup.com to learn more about futures and options. Disclaimer: This podcast is provided for informational purposes only and should not be relied upon as legal, business, or tax advice. All opinions expressed by podcast participants are solely their own opinions and do not necessarily reflect the opinions of RCM Alternatives, their affiliates, or companies featured. Due to industry regulations, participants on this podcast are instructed not to make specific trade recommendations, nor reference past or potential profits. And listeners are reminded that managed futures, commodity trading, and other alternative investments are complex and carry a risk of substantial losses. As such, they are not suitable for all investors. For more information, visit www.rcmalternatives.com/disclaimer

Thanks for listening to The Derivative. This podcast is provided for informational purposes only and should not be relied upon as legal, business, investment, or tax advice. All opinions expressed by podcast participants are solely their own opinions and do not necessarily reflect the opinions of RCM Alternatives, their affiliates, or companies featured. Due to industry regulations, participants on this podcast are instructed not to make specific trade recommendations nor reference past or potential profits, and listeners are reminded that managed futures, commodity trading, and other alternative investments are complex and carry a risk

of substantial losses. As such, they are not suitable for all investors. Welcome to The Derivative by RCM Alternatives, where we dive into what makes alternative investments go, analyze the strategies of unique hedge fund managers, and chat with interesting guests from across the investment world. I think the next year gets really interesting, Jeff, because U.S. production is expected to fall by 3.1% due to the drought that you've got. So herd liquidation, the USGA's latest figures. We've got Brazil with an expectation of a 7% fall. Argentina's had its own headaches this year with their quota scheme

that the government introduced. Liquidation, I think, going on in Uruguay. And Indian buffaloes have 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, and an 8% fall out of Argentina.

And when you add that together, just those three alone, that's 2.1 million tonnes less beef globally. That points to higher prices beef-wise around the world. All right. Hi, everybody. We're switching things up today in what's going to be a new series on the pod here. We talk 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 quantz 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 on 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 RCM's other podcast, The Hedge Edge, each month. Say that 10 times fast. Hedge Edge. Each month, talking with 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 meats, with our guest, Simon Quilty.

He of Wangaratta. Did I say that even close? I think you're close. Wangaratta, the aboriginal. The 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 R in there, right? Pretty good. Pretty good.

So before we dive in, tell us about your little town. How in the world you ended up there? It's my family, my wife's family's town and my own family grew up an hour away. So it's a classic love story of shepherd and boy meet, finger at a girl. And we met at university in dancing classes. So down in Melbourne. And then Jeff Eismer, you had a story about Simon in Tiananmen Square. Yeah, I had the opportunity to meet Simon. And boy, it's been over a year ago now. And as 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 immediately stopped the presses. Let's just start over. What happens and how do you even get out of there? Quickly is my advice. Tanks are 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 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 was in lockdown you know two factions of the army fighting each other. Tiananmen Square was as bloody as you can imagine. I think it was 14,000 people killed students during it. And I'd been there the day of the massacre and left that evening unknowing 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 called Suzhou. And there 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. Well, you're here to tell the story. So we're glad to have you. And thanks, Jeff, for having me on the derivative, by the way. Thank you. Let's do it.

And so were you doing Meatsway back then? And what was it, 89? No, 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 and 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, you know, stop advertising for a new research officer. I will be back. All right. So that was my fear that they'd just say, oh boy, we've lost him.

And let's find a new research officer. I love it. So if we can, I kind of want to start talking meats, exactly what that means. Right. Us 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 3,000 miles up.

And you got some slides here you're going to show us. So go for it. That's right. Just to help clarify things. So, you know, the total amount produced globally of beef is about 73 million tonnes. Poultry, about 124 million tonnes, and pork, 110 million tonnes. And sheep meat is a poor cousin to all of them at 15 million tonnes. 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's where, you know, half the world's pork come from. So during African swine fever, that changed 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 and i'm going to test your math here but maybe you can tell me if uh how many pounds are in a ton uh 2.20462 to be exact nice so there's what i was just roughly summing that up there's about 350 million tons there so yeah so 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 that's right and we're going to look at that ratio but that's about 770 million you know um well i have to times that by another thousand to um give it in pounds equivalent but 7.7 billion pounds correct

you guys are doing some high level math here i I think we need to get back to the metric system. Yeah, exactly. We may be a long time waiting for America to do that. So, you know, 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 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's lost a bit of ground with African swine fever, but at 44 million tons, they're the largest producer globally. And it's about a third, you know, America's about a third of China's total volume. The EU sits closer to slightly below half or at half, and then Brazil's comes in at 4 million. And then when we look at poultry, once again, China is dominant. America's just below half the poultry production.

And then you've got Brazil and the EU running an equal third. And then last but not least is beef. And they're all pretty close in that 7 to 13 million tonnes globally produced in beef. And then Australia and Argentina are fairly sizeable in their own rights. And what's more important is how much goes export. So when we look at population, Jeff, both Jeffs, and here I've got, you know, the size, you might say, within China, 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 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 markets for each of these proteins. And it's obviously going to be sizable as we move forward and so these are the estimates sorry just those three u.s brazil and eu are something like what 80 of all exports of meats around the world pretty well they dominate it yeah um 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, well, Australia and India, we all vie for the top beef spot each year. And it sits somewhere around 1 and a half million tons per year so yes the it's pretty sizable all those players. I have a question on on that so is this all because of the arable land and and or technology what drives it to be you know happening only in the US and China, Brazil? I mean, why is it not happening more out of Europe? Or is China going to be able to catch up because of technology?

I mean, this seems out of balance to me. Yeah. I think, one, 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 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 large production is because you become very good at intensive agriculture.

And that occurs in hogs and in chickens as well. 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 it 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% soybeans. 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 u.s

you've uh and jeff add to that now ethanol production is it yeah it's just tightened that need and it's a three-way contest between human consumption, energy, and the livestock needs. So, yes, in terms of exports, USA, Brazil, and the EU dominate. And, you know, part of the challenges with droughts, flooding, and the uncertainty globally about markets is that those volumes change dramatically every year. And the ability to hedge or manage risk is challenging for a lot of markets. 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 U.S. is the only place globally that with confidence, I think, manages price risk better than anywhere else in the world. Love it. So get more into that. I had two quick questions.

One, buffalo, you mentioned in India, that's not the buffalo that us Americans think about? That's not bison? It's water buffalo. Water buffalo. It is. It's a relation, but it's water buffalo. But it 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, and that's a by-product really of their dairy herd, which is 310 million head. So a third of it's made up of buffalo, the dairy herd, and two-thirds regular dairy-type animals. So 100% of buffalo is exported because of religious reasons, but cow meat cannot be exported because the cow is sacred. So there you have India is a very important player,

and pricing-wise sits at about half the price of Australian and US 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. And what are they used? Like, I'm not going to go into a restaurant and see water buffalo steak, right?

So is it used in dog food or like what kind of stuff is it? No, no, no. It's used in manufacturing for producing meatballs, hamburgers, ground beef. It's a slow cooked item, but it's used right across Southeast Asia and the Middle East. Okay. What about kangaroo? Oh, come on. I don't see kangaroo on the list East. Okay. What about kangaroo? Come on. I don't see kangaroo on the list here, Simon. And, you know, you're in Australia, so tell us.

What was the story you told me? There's two Australians for every kangaroo? Is that what it is? It's getting closer to, I think, three. I think it sits at about 60 million, 66 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, I think. So last trip I went on, there was something like 30 kangaroos on the side of the road. So, yeah, there's a lot of them.

And you told us Australia is the only country that puts roadkill on its flag, right? That's correct. We are proud of our roadkill. Good idea. So as we move along from looking at who the major players are jeff and jeff um the standouts are cargill tyson veon smithfield jbs and brf and when you're home 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, they're number two. Their net global revenue is $52.4 billion. And to me, this is a really interesting success in so many ways. When, you know, dietary needs are changing and chicken's 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 model that they've truly shown how to you might say spread your supply risk and they really leverage this to the maximum where where are they headquartered their headquarters in brazil yeah okay and like so i know smithfield everyone in

the u.s knows tyson for the most part but we're not used to buying jbs bacon or something so they're not a brand name right there so they're just behind the scenes providing all this they they have a number of um pilgrims pride is probably that i think the number one one that you would know of um so and then smithfield used to be a u.s company and then the chinese bought smithfield right or at least the wh group correct yeah yeah so um and that really puts i guess in terms of that tie 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. And if I have 10 million tons of pork produced in a Smithfield plant in the US, does that count as Chinese production or US production?

That's US production. Okay, good. But I like the way you're thinking. So what I think is interesting about these revenue for last year is cargo in the middle there. It stands out at $135 billion. And I think you've got to separate out their meat interests from their grain and all their other value added businesses they've got. So, you know, they are a trading house in their own right, you know, whether it's energy or the various commodities we're familiar with. They value air.

They've got an enormous number of brand names in the frozen food sector in America. They are very strong, obviously. They're present in Australia. They're 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.

So these guys are huge, which is what we're showing here. Everywhere from $4 billion, the smallest player, up to $50 billion purely just on proteins for JBS. So how do they think about this market? What are their concerns? Are they constantly worrying about having to hedge this $50 billion in revenue? Yeah, 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 operations. I don't know, but I do know that labor is one of the critical factors, Jeff. And shipping, right? So you start seeing in the news here, we've got Walmart buying their own ships, Cargill buying their own ships. I mean, these companies here probably on comparison are near the size of some of these large U.S. wholesalers.

Are we going to see JBS owned ships, Cargill owned ships and, you know, that they're going to be trying to ensure food security and maybe even another question is are countries like china and the u.s going to sit there and say we need to make sure that our food supply is is uh uh protected and help these companies secure shipping lines i mean yeah yeah It's really interesting. It is. Look, I do know, even within Australia and New Zealand, that chartering of vessels is occurring more and more. So effectively, you're not owning it, but you're taking control of that vessel over a full year or whatever's required. There's no doubt that the last year and 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 are 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 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-

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 rounded up, I get slaughtered. What's what's that journey look like? You could, well, 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 parts of you are shipped out.

You're drawn and quartered and quartered to each part of the world. 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 cow meat, you'll go in as 90 CL to end up in a hamburger. In China, they take everything. They'll take the highest value wagyu that we produce

and the lowest value cow meat. And there's a place for everything within China. Japan, they are very selective. Often it's chilled, often it's grain fed, and it's very high end. Though that market has 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 is where you end up. But I'm thinking more of like it gets slaughtered somewhere there it gets put on a train does it get frozen on site like what does that whole thing yes it gets frozen

on site in australia and then truck cool port and then shipped out um and so you know the major cities brisbane uh sydney melbourne where the bulk of the um the out, Brisbane being the largest hub for beef out of Australia. So, yes. And then 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 the...

It does. So you raise a really good point that with all the slowness that's going on globally with entries into 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.

And what's the, so if they pull back from chilled, what's the alternative? Jerky? Frozen. Oh, okay. So chilled is, what's the difference there chilled and frozen well basically when you selling something as chilled you it goes in a form that um when you freeze something the meat is somewhat denatured to a certain extent um the quality is not as good, whereas with chilled, you know, it comes out fresh and eats 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. Simon, this is starting to sound like a, like a start to a bad joke or something. What happens when we take you to a steak restaurant in Chicago? You're going to be critiquing all of the meat that comes across the plate or what? Well, dare I say, I may be saying this steak is not good enough. All right. To be honest, I've be saying this steak is not good enough. All right.

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. Perfect. We'll take it. And 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 got. So herd liquidation, the USGA's latest figures.

We've got Brazil with an expectation of a 7% fall. Argentina's had its own headaches this year with their quota scheme that the government introduced. Liquidation, I think, going on in Uruguay. And Indian buffaloes have 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, 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 you can't put this out uh all the hedge funds are going to be piling in and uh following your your twitter here trying to figure out what to do they just boom they already know what to do um and tighten that up for me if i'm tighten it no intended, but I'm having trouble thinking, is that to me when you say the supply is tightening, that the herd goes down? That's correct. But if the herd goes down, you had to kill it, slaughter it,

and then you have more supply, right? Well, that happened during – we're in that phase right now, and the markets absorbed that and still we've had rising prices so you always know demand's good is when supply is up and still prices continue to rise so next year with a contraction in supply globally expect even higher prices got it and you can't right the cure for high prices is 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 and then and uh the other

part of this 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, 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 a head and farmers are exiting the industry so we think somewhere between 30 to 50 percent 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 supporting those global markets. And will the people eat the disease pig? Do they slaughter it and try and sell it

or it just gets burned? So what happens why prices fall so quickly and it's 65 to 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 it than to get nothing so the farmers just said i'm not going to wait for the disease i'm just going to sell the pigs yeah yeah right why fatten it up only for it to get sick and then you're then you're done die and you get nothing so there's we've seen that rush 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. And what do you say to, I'm jumping off script here a little bit, but 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 if they could just dictate that nobody gets protein for the next five years. 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 the herd yeah unfortunately as you rightly point out high prices fix high prices um and even china has its limits so yeah you'd have another bout of tiananmen square exactly and and so that your points correct jeff that you know there is this need and desire to have a certain amount of imports 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 on to how all these big players we talk about, what you do day in, day out, what Jeff and our ag group does. How do they think about hedging this stuff?

What tools are in the toolbox? And go from there. So we've got, as I said earlier at the start, 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 finished state. Once again, that trades in 40,000 pound increments. And those two are critical, but let's quickly look at the lean hog futures as well. Real quick, is there anything magical about this 40,000 pound number? Is that like what- No, it's just been an industry standard that has been in place for years and suits, I guess, the lot sizes within America. Yeah, we learned on our lumber group, what's that contract size? 108 board feet or something like that? 110,000 board feet.

Right, which is what fits on a flatbed rail car. Sure. So I'm sure it's probably grounded in something similar of like, that's what can fit in a refrigerated truck or something. 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 livestock futures contract, whether it's live cattle, feeder or hogs, during that period in which suddenly workers got sick, panic buying, you saw retail prices in America and wholesale prices go through the roof. At times it doubled. 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 manage meat, you were 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 its wisdom developed another contract and this is the hog or pork cutout contract. So this effectively is the cutout is like the wholesale prices

of all the various components of the animal glued back together to give the carcass price value. As I said, it's all the meat without the bones. That's it, yes. So once again, this was introduced about six months ago with the real purpose, Jeff, of trying to provide risk management so that that discourse that occurred because of the disruption in supply of cattle, the bottleneck in the meatworks,

and the fact that prices to the consumer doubled, 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 is it a little 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 those 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 finished exactly the finished product

so quick study there jeff good work thanks only been doing it 30 years 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. 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 a 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 markets. So the hog market 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 saw here's the beef cutout value where prices just went through the roof and live cattle prices fell. But here's the the beef cut out once again we're

moving probably more into a traditional seasonal low um and then as we get towards your um uh season in terms of festivities and christmas um thanksgiving it'll start to pick itself back up and help i'm just going to dig in on this uh 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. Yes. Got it. Okay. So that's what spiked in the live product had trouble keeping up. 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 it. 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. That's right. So at the time, I think on a per head basis, the pricing or the profits got up to around about $1,500 per head in America, even higher. So last year and a good portion of this year, revenue or returns for meat process, but in particular beef, have been extraordinary. Well, Simon, I think just 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 you and I work on on a day-to-day basis. And I think it's really important to bring this up because it's somewhat of an unknown market to many. And quite honestly, there's a lot of opportunity for people to consider those markets for both hedging and maybe even speculators. I'd be interested in your opinion. Yeah, that's exactly right. So as we the um that squeeze that you see right in front of you there that in pork they've done the pork cut out but in beef there is no cme um hedging mechanism for that processed um 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. 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 carcass itself or to individual items depending on the items that's involved. But, you know, the more items, the better the, the sharper the pricing becomes. So that can be most people.

What are 90s and 50s? So 90 CL is fresh 90s. That's how we measure grinding meat. And, you know, a hamburger is a blend of 50s and 90s. So a 50 CL grinding meat is fat meat. 90 CL is lean meat. And you blend the two. CL is cut lean or something lean?

Chemical lean. Chemical lean, okay. And it's the way in which the industry for 50, 60, 70 years has measured the fat content fat content within uh within grinding meat or ground beef so you blend the two to make a hamburger which is normally around 76 77 cl um 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 twelve month period where pricing is very very difficult so a lot of end users are using swaps to manage that price risk out front

and then we're talking like Wendy's or McDonald's or Burger King or someone like that? Exactly, yeah, or a 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, the cutout is available. It's thinly traded at the moment. And also, once again, we tend to be pricing up hams, 72 CL pork trim, 42 CL pork trim.

These are done daily. Bellies is another one that's highly volatile. So once again, it's removing that basis risk from the value of the carcass to the individual cut. 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. So I'm going to pull on that thread if I can for a minute. So I'm Texas Roadhouse. I'm going to buy T-bones. We'll keep it simple, right? I want a couple million pounds of T-bones. If I just hedge with the outright live cattle futures i've got two problems right one it's the live cattle it might fluctuate two 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 um so how will 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 yeah because they can't suddenly okay um so but there's no on your head you've lost both ways so how how are the hedgers though how do they all are not the hedgers but the people offering those swaps, 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 themselves

for that swap? They're offsetting their risk all day long. Either they're doing it by trying to find like with like, so T-bone with T-bone, or they've done their homework and they've found a customer that's willing to look at a cutout, beef cutout value, that they're happy with that basis risk. So they may be offering the sale on the T-bone, but they're buying on the opposite side, a carcass or a cutout value, and they're wearing that basis risk themselves, and they're happy to do so. If you just follow the supply chain, Jeff, you have obviously the grain and everything goes into the cattle, you've got the feeder cattle, then you've got the live cattle, they go to slaughter, and then they go to slaughterhouse. The slaughterhouse then sells it to a processor and the processor sells it to the end user. So we've got people all along the way, like effectively needing to hedge and manage their risk. And so, you know,

when you see these transactions all along the way, each time it's, it's laying off risk, lay off risk. And then at the end of the day, um, you know, someone has to bear the other side. And it's either going to be a match like Simon saying, where they'll, you, I love saying Simon says, you know, Simon says, you know, you know, go fish, but, um, uh, 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 to, and the counterparties to neutralize the risk. And what do you see, right? Like I'm used to talking to people who want to be a fly on the bull's backside, right? Pun intended there, the bull, 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? Of like, they're going to be bigger than the volume that day or they are the volume of that day in the swap?

Well, 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 are 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 carcass that they enable to be offset. Because they can get closer to the futures contract. Exactly. Or to a carcass. The market maker or the person trying to offset the risk can get closer to the futures. Correct. Exactly. So it helps the closer you are to the complete cutout, 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,

it's just not analysing 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. I would add the last thing I want to add to that is Jeff, you and I have talked about this with you know,

the floor is 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 they're 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 this physical, maybe it's the physical traders. And what does that physical space look like just walk us through a trade you're you're on the phone someone needs wants to buy six million pounds of uh indian buffalo and you got to work out the logistics to get it to south korea or something bids and offers the quibble you name it jeff everything that goes with it um do is there the uh do they have the right documentation meeting all the halal requirements whatever so 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 bought an apple. So 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. Biodynamic. What does that mean? That's the next level up from organic. Got it. Yeah.

That's where superfoods exist. Oh, I love it. And do you ever consider, any of these people ever consider what managed money is doing, right? Commodity trading advisors might come in in 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 got to be careful around this level because all this technical buying might come in or something of that nature? That's definitely been a concern 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 cutout, there's been a strong push to try and have a beef cutout for exactly that reason, Jeff, that the number of natural hedges in the market proportionately is getting less and less. And therefore, the relevance of the contract starts to get less and less. So there's no doubt that that 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 cutout 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 cutout contract well to our cme sponsors if you're listening give us the beef cutout contract come on all right a few other things here i gotta we gotta talk bacon before we let you off because that's all we care about here in the states is don't mess with my bacon um so what are what's bacon prices look like that's all time hog prices yeah you've got to really look at the bellies to to give you a good and that is one of those parts of the market that is truly volatile and it's probably the best comparison is 50s and bellies to me, 50s in fresh 50s in the beef side of things and bellies 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 belly's market. both in beef and pork, but has seen at times where demand 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. And all your world travels and all these different countries you deal with on the meat exports, is any country, can they hold a candle to us in terms of our love of bacon? Possibly Canada. Okay.

Well, they've got their own. They've got Canadian bacon. Yeah. I hear you. And I have a particular love 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 may be our love of chicken in Australia. We truly eat a lot of chicken. I do this thought experiment with people all the time. I'm like, how many whole chickens do you think you eat a year? And people are like, I don't know, five, 10, 15. I'm like, all right, just call it 10 for the sake of argument.

300 million people, 10 chickens a year, right? Like 3 billion chickens. You'd think all you'd see around the US is trucks full of chickens driving around. And maybe they are, they just don't, right? The feathers aren't flying out the sun. But that's this whole worldwide thing. Like half the trucks and ships

gotta be filled with all this meat. Yeah, there's a lot. I mean, you know, so let's touch on the phase one agreement 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 what 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 market, 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 carcass, it's more like 25%. So exports for beef in America actually is incredibly important. And you're saying because we have a higher quality beef, so the value of it is higher? I think so. And also, higher value cuts are being exported. So beef so that the value of it is higher i think so and also higher

value cuts are being exported so that lifts the overall value of the animal um and the carcass value uh 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, 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 going to keep, as their GDP grows, as their middle class grows, and all these countries are just going to want more and more beef. So climate change and beef being bad for the planet with the world we live in. Well, let's talk about one of the potential solutions is plant-based proteins. Yeah.

The company Beyond Meat may ring a bell to you. Yeah, KFC has Beyond Chicken. I don't even know. What is that? The Impossible Burger. Yeah. So what we found there was that what's developed in the last, you know, three or four months, so 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%, 150% compared to 2019. 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 2% to 3%. And we're starting to wonder whether the bubble has possibly burst on you know

the the growth and demand of these plant-based price of uh grains that go into those beyond meats through the roof you know up 40 that's you know naturally going to cause uh because contraction and demand right price is up that's correct and 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 think their total losses so far are about 63 million. So it really does, to me, beg the question whether that part of the market has possibly run its race. Now, in terms of retail sales, I think the number is about 83 billion of beef. No, they make up 0.5% 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. So it's still minute. One half of 1%. Correct. Definitely not enough for the CME to launch a Beyond Meat Futures product. That's correct. It's the soybean crush.

But 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 like now it's coming back down. 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 of the time these niche items find, whether it's 5% or whatever it is at the market, it will find its role in 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 IMF figures on beef needs, we fall 8 million tonnes 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. And is that a, you're tying it back to GDP, so that's a wealth effect also? So the more money I have, the more expensive protein I can buy? 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 and it seems right like i'm forgetting i'm trying to look up on my phone of the right an economic substitute like 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 if chicken i switch to pork you're saying maybe people are switching to lamb so it's all kind of fungible at some level right so part of me is like if we keep right if what if there keeps being drought if the planet goes to hell in a handbasket rather quickly here, you almost get forced off beef. And then it becomes, okay, what's the economic substitute? If beef is $6,000 a pound or something ludicrous, right? Because there's only a couple of cows in the world.

That's right. Yeah. Kangaroo, Jeff, kangaroos. Kangaroo. The market will, of course adjust but what we found is that there are three price sensitive markets in the 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 four percent beef is down two percent and chicken is up six percent And pound for pound, the difference.

So if you added the other two that have fallen, it exactly matches the increase in chicken volume. There's a great example, Jeff, 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 and 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 market's 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 this year's average over the next two years for beef to be eight percent higher in value and all of that is not based on inflation whatsoever right like you're not saying this is a macro call this is just based on the local supply demand dynamics

correct which is a leading question what is the inflation picture due to that whole thing? Well, I think it just fuels it even more. You know, and we could talk about the super demand cycle, about where, you know, I've got a graph that I was to put up, but instead I'm holding it. But if you were to look at every individual component in terms of commodities, still this year-on-year is up 275%. Oil out of soybean oil, 139%.

Pork belly is 134%. The list goes on and on. So the question is, are we part of a larger super commodity cycle that has longevity? I think there's so much about today that resembles the 70s when demand was through the roof. Yet, the difference is that beef supply went up in the 70s, and I'm expecting beef supply to fall. So therefore, a sustained period of global beef prices probably for about eight years, and that includes last year and this year, so another six years to go. Before ramping higher?

Before who knows what? Before probably falling lower. But eventually the demand and supply will get back into it. But it's going to be a sustained period of strong global demand for most meat items, but in particular beef. I love it. And then I'll let you, I know you have a little lamb, I was about to say. No, that was Mary. You had a little lamb. You have a little lamb've fallen in love with lamb over the last year.

So sales out of Australia of lamb since January this year, if you look at lamb racks, lamb legs, shank, are up somewhere around 160% in volume. So it truly is the love affair with lamb is on, and it's found itself at that niche end of the market. The average value in terms of through retail outlets sits at around $9.80 per pound for lamb and beef I think sits just at around about above $6.20 US cents a pound on average so there's your price differential with the average value um you know just produce uh from an Australian point of view um i think given the uh i guess high price record prices of cattle and if you're trading here lamb is looking far more attractive and i think over the next five years there'll be a migration across to more lamb so sounds like a little

bit of a homer bias there je've got to be honest with you. Isn't New Zealand a big lamb producer? They are. So between Australia and New Zealand, we produce about 80% of the global lamb production. He's talking up his book. He's talking up his book. So the size of the New Zealand flock sits at about 24, 25 million.

We're at 24 million in Australia. And the US is at 5 million and it's falling. Oh, wow. Okay. Nobody wants lamb here. Well, it's struggled in your environment for whatever reason. I have one more question, Simon. Did you purposely color coordinate the red filing cabinet, the red binders back there, and this red folder organizer there?

It's very nicely done. If you looked at the rest of the room and my underpants, you'd find that they're all red. Perfect. All right, some quick favorites before we let you go favorite color blue and red let's say red uh favorite uh australian custom or yeah favorite australian custom beer drinking Yeah, favorite Australian custom. Beer drinking. Beer drinking. Perfect. What's your favorite beer down there, down under? We have many. VB is popular, Victorian bitter. Yeah.

So let's stick with VB just to make life easy. Okay. Favorite Australian athlete? Well, we have many good cricketers in Australia. Okay. Favorite Australian athlete. Ooh. Well, we have many good cricketers in Australia. Dare I say, yes, probably one of our cricketers. Yes. We'll just leave it as.

You caught me on the spot. I wanted one of the uh female uh olympic swimmers uh i can't remember her name now but uh she was good i don't think they're available okay uh favorite restaurant in melbourne well we love indian no matter where it is so um there's a number of restaurants indian all through melbourne and each of them are very good love it uh favorite australian band there's only one right answer in excess oh good there's two right answers okay in excess i was gonna go with men at work oh yeah that's true. They're not bad. Yeah. All right.

Midnight Oil. Midnight Oil. You're good. Or dare I say The Wiggles is the last one. Those guys were making like $10 million a year at the end. That's brilliant. And lastly, favorite Star Wars character? You can look on the cheat board here behind me if you need to.

Yeah. I will go with R2-D2. If that's, yeah. R2-D2. Love it. All right, Simon. It's been fun. I've had on every time I talk to you, I tell you I'm going to come visit you, but I will.

One of these days. I'm going to get out there. Melbourne's the only place in Australia I haven't been. Well, not the only, but the only main city I haven't been. It's on my list. Perfect. Thank you, Jeff and Jeff. Thank you.

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