The trade war with China is now in its 16th month with little evidence of an end in the near future. It appeared that an agreement was imminent at one point but no deal was struck in that round. Agriculture has faced some of the most significant impacts from retaliatory tariffs placed on U.S. commodities shipped to China. Just last week, USDA announced a second round of support for specific farmers impacted by the tariffs. This list does not include beef cattle.
Meanwhile, the cattle markets have been in a pretty sharp decline downward over the past 6 weeks. The August feeder cattle futures prices are down about $17 per cwt since mid-March and down $27 per cwt from the contract high on April 18th. Similar declines have occurred in cash markets. Southeastern states’ auction averages have dropped approximately 10 percent in the past five weeks.
So a natural question is, are the two related? Are Chinese retaliatory tariffs causing cattle prices to decline? To answer this, we are going to look at the direct impacts of Chinese tariffs, the impact on inputs like corn, the impact on competing meats like pork, and the impact of overall market uncertainty.
The direct impacts are fairly straightforward. As part of the overall trade retaliation, China placed additional tariffs on U.S. beef. Because tariffs act similarly to taxes, this means U.S. beef became more expensive in China. After the latest round of increases, the tariffs on U.S. beef range from 37 to 50 percent. Those tariffs have a negative impact on U.S. beef exports to China. However, we really don’t export much beef to China. We have only had access to Mainland China since June 2017. Since that time, our exports to China have averaged about one percent of our total monthly exports. An argument could be made that the additional tariffs are hindering the expansion of exports to China, but the direct impact of the retaliatory tariffs on cattle prices is likely small.
Next is the impact of the tariffs on inputs such as corn and soybeans. Soybeans, in particular, have been hit hard by the Chinese tariffs. The U.S. was exporting approximately one-third of our soybean production to China pre-tariffs. China needs soybeans. They produce and consume a lot of pork and need to feed those hogs. U.S. Soybean markets fell sharply last summer and remain depressed. Corn is not nearly as reliant on Chinese exports as soybeans and faces a smaller direct impact. The indirect impact on cattle is that Chinese tariffs on soybeans and corn lowered demand and therefore the price for those products. Lower input prices are generally positive for cattle prices. Corn prices have spiked recently which is very likely one cause of cattle market weakness. But this spike is due to weather and historically slow planting in the Midwest. Here is a good summary from American Farm Bureau.
The impact is similar for competing meats, specifically pork. Generally speaking, lower pork prices suggest some consumers might choose pork instead of beef if beef prices stay the same. The Chinese tariffs on pork indeed led to lower U.S. hog prices in the summer of 2018. But the bigger story recently is the spread of African Swine Fever (ASF) in China which is decimating the hog population. This has caused hog markets to spike significantly due to fears of lower supplies. Altogether, the indirect impact on cattle prices due to Chinese tariffs on pork is likely small, especially in recent months.
The final point to consider is the impact the trade war has had on general market uncertainty. This is not specific to cattle markets but rather the U.S. economy as a whole. More tariffs and more time before a deal is struck lead to investors being less confident in U.S. markets and can lead to increased volatility. The short-term impact of increased uncertainty on cattle markets is difficult to separate from other market forces with any confidence, but it is likely negative for prices. But it is probably not so negative that it should be considered the primary reason for the recent cattle market decline.
In total, the impact of the trade war with China on cattle markets is mixed but likely small compared to other factors. On the trade front, much more important are the continued trade negotiations with Canada and Mexico because those are major markets for U.S. beef. The announcement on Friday that the U.S. will place a 5% tariff on goods from Mexico was a shock to markets due to fears that Mexico might retaliate with tariffs on U.S. products such as beef.
Concerning the recent drop in cattle prices, there are a lot of factors at play. Seasonality, a bearish April Cattle on Feed report, continued large supplies, weaker export totals, and the recent corn market rally has left cattle markets without much good news in recent weeks. Have the futures markets overreacted? Possibly. Markets rarely make soft landings.