U.S. Beef on China’s List of Proposed Tariff Responses

China announced last week that U.S. beef is one of the many products on which they will increase tariffs by 25 percentage points.  The tariffs would raise the current tariff on U.S. beef products from 12 percent to 37 percent (see more details here). This is all part of the ongoing trade tit-for-tat in which the U.S. and China are currently engaged. Including beef, China listed 106 U.S. products that will be subject to a 25 percent increase. Approximately one-third of the products targeted are agricultural products.

China’s announcement came as retaliation to a U.S. proposal that would impose 25 percent tariff increase on imports of about 1,300 Chinese products – a total value of about $50 billion. The U.S. tariffs were proposed in reaction to the findings of the USTR 301 investigation and the alleged theft of American technology. Even more recently, President Trump asked the U.S. Trade Representative to consider an additional $100 billion in tariffs against China.

It is important to point out that these tariffs have not been enacted – they are proposed. A hearing on the tariffs imposed by the U.S. is set for May 15th. After that, up to 180 days is allowed for a final decision by the administration. It is possible that this could all get worked out before these tariffs are actually enacted.

While additional tariffs are certainly a bad thing for U.S. cattle and beef producers, it is a mistake to point to this development as the sole reason for declining market conditions over the past few weeks. Expected larger supplies are still the primary driver for lower prices. More so, mainland China has not yet become a major destination for U.S. beef. U.S. beef exports to China just resumed last June, and it will take a while for that market to fully develop. As shown in the figure above, the amount of beef we export to China is still small compared to Japan and South Korea.  However, trade issues can hinder the growth of U.S. beef in China.

The impact of the tariffs on beef is pretty easy to grasp. They would make U.S. beef more expensive in China. This would likely slow the growth of the U.S. beef sales there. Also important are the indirect effects of the tariffs on other products. Pork is a prime example. If less pork is exported to China, it may end up with a lower price on the U.S. market – next to beef on the shelf. Perhaps the biggest underlying story in both beef and pork is that we are already dealing with large supplies here in the U.S. Exports are always important, but especially when beef and pork production is growing like it has the past few years. If the tariffs are imposed, that will likely decrease the amount of pork and beef that we export to China. That meat will either end up on the U.S. market or it we’ll try to find another outlet for it. Either of those options leads to lower value for producers.

Livestock Marketing Risk Management Workshop

Mississippi Farm Bureau and Mississippi State Extension Service are teaming up to host a Livestock Marketing Risk Management workshop on April 24, 2018. This workshop is designed to provide ranchers, livestock producers and others engaged in the livestock sector with an introduction to tools for managing marketing risks.  This workshop will focus on budgeting and break-even analysis, futures and options, price basis risk, livestock and forage insurance, market fundamentals, and hands-on exercises.

This workshop is free to attend and will be held at the Mississippi Farm Bureau Building in Jackson, MS. Please RSVP to Bill Herndon to assist in meal planning at cwh1@msstate.edu or 662-325-0249. The full schedule is available at the link below.

RiskWorkshopFlyer

7.3% More Cattle Placed on Feed

The latest Cattle on Feed report released last Friday continued the trend of larger placements and a larger number of cattle on feed. Placements were 7.3% or about 123,000 head greater in February 2018 as compared to February 2017. Meanwhile, marketings were up only 1.6% above year-over-year. The report showed a total of about 11.7 million head of cattle on feed in feedlots with at least 1,000 head capacity. This is 8.8% above March 1, 2017 and is the largest total for any March 1st since 2006.

While placements were up yet again, the primary concern is the pace of slaughter. Slaughter rates the past three weeks have been about 2 percent lower than the same time last year as pointed out in the latest Daily Livestock Report. The chart above shows fed cattle marketings as a percentage of the number of cattle on feed. This percentage in February was below the five-year average. If lower slaughter rates continue, coupled with the known increases in the number of cattle on feed, concerns arise about a large number of market-ready cattle in the coming months.

Why does a potentially large number of market-ready cattle matter to producers with no stake in live cattle? A bottleneck at any level of the beef production chain is generally a bad thing for producers. Calves from cow-calf country ultimately end up in the feedlots – even if they trade hands a few times on the way. An efficient marketing pace ensures that market-ready cattle are moved out and space frees up for new placements to move in. A large supply of market-ready cattle all at once can lead to low live prices due to excess supplies and those cattle may stay in feedlots longer. This can have two primary negative effects on feeder cattle prices. First, more market-ready cattle waiting in feedlots can lead to less feedlot demand for placements. Second, lower live prices lead to lower breakeven prices that feedlots can pay for feeder cattle.

Feeder Cattle Futures Prices

The trend over the past month in feeder cattle futures prices has been negative (bearish) for the April, May, and August contracts. This follows a month-long increasing (bullish) trend to start 2018.

A quick futures refresher: the prices associated with each contract above come from the futures market. Futures contracts are exactly what the name implies: a contract for something at some point in the future. These contracts expire during the contract month. So if you purchase an April 2018 feeder cattle contract at the current price of around $140 per 100 pounds (cwt), you must to sell or settle that contract sometime before or on the last Thursday of April. Unlike some contracts where you can deliver the physical commodity to settle the contract, feeder futures are cash-settled.

The structure of futures contracts allows for market participants (i.e. hedgers and speculators) to take positions on prices in the future. If you think that price will be higher in late April than the current price, then you can buy a contract and hold it hoping it will go up. If you think it will be lower, you can sell a contract and hope it goes down. It can also be used as a risk management tool for producers wanting to minimize price risk. If you purchased a load of stockers that you plan to hold until May, the futures market can be used to hedge by selling a May contract (50,000lbs). If prices go up, that’s bad for your futures contract but good for your stockers. A hedge swaps price risk for basis risk (i.e. the difference in cash and futures prices). To calculate basis for any given time period, just subtract the closest-to-expiration futures price from your local cash price.

A key benefit resulting from futures markets is that it allows forecasts based on market information. The current price for the August 2018 contract of $145 is the market’s estimate of what feeder cattle prices will be on in August. We can take that price, add in the estimated local basis, and arrive at a market estimate of cash prices. Using Mississippi as an example: the average basis (cash minus futures) during the month of August over the past five years has been about -$17 per cwt for 700-800 pound steers. If we expect that to be true this year, then the current August 2018 futures price suggests a forecast of $128 for those steers in August of this year. The same process can be used for other contract months, too.

The bearish trend of late is a signal of concern of feeder price weakness as we approach and enter the summer months. The same May 2018 contract that was worth $152 on February 16th was only worth about $139 today.

Boxed Beef Cutout Value Tops $220

The boxed beef cutout value added to its rally with another strong week last week. The weekly weighted average for choice beef was $221.18. This is up $4.65 over the previous week and up nearly $13 over two weeks ago. As you can see in the chart above, 2018 value has been above 2017 values for every week so far. This continues to tell the story of strong beef demand. You may recall the sharp Spring rally in the beef market that occurred last year. While the current value is above year-ago levels, market fundamentals are a little different this year.

The BBCOV is reported by the USDA Agricultural Marketing Service and it provides an overall performance indicator for the fabricated beef industry. It is an estimate of the dollars per cwt for a fabricated carcass. It is not an observed price for an entire fabricated carcass sold in boxed form. Rather, the BBCOV estimates the value of a beef carcass based on prices paid for individual beef items from the carcass. Values of primal cuts (i.e. Rib, Chuck, Round, Loin, Brisket, Short Plate, and Flank) are calculated from prices paid for sub primal cuts. The BBCOV is then calculated using the estimated value for each primal and the average industry cutting yields.

As we discussed in last week’s article (available HERE), the magnitude of the 2017 Spring rally may be harder to attain this year due to the timing of larger supplies. Larger beef production is expected during the second quarter of 2018 than in 2017 which will provide more product for retailers to purchase. The Livestock Marketing Information Center projects a 6.3 percent increase in the amount of beef production during Q2 of 2018 as compared to Q2 of 2017.

 

Cattle on Feed up Nearly 8 Percent

The latest cattle on feed report showed that 11.6 million head of cattle were on feed as of February 1, 2018. This is the largest total since March of 2012. This is 848,000 more head of cattle than were on feed on the same date last year — a 7.9 percent increase.

The biggest surprise came (again) from the placements numbers. Pre-report expectations predicted placements to be about the same as during January of 2017. However, the report indicated a 4.4 percent or 87,000 head increase in the number of cattle placed during January 2018.  Much of this increase again came from the Southern Plains region with Texas showing significant increases. However, the story is a bit more complicated this time around as the increases were also in heavier-weight cattle. These increases were seemingly bearish to traders on Monday as both Live Cattle and Feeder Cattle futures were lower.

There is certainly some shock factor to these numbers. Eight percent larger on anything is a big number. However, the story should not be taken as bearish as the title might suggest. Marketings were strong again – up 6.1 percent over last year and feedlots remain relatively current. The story is still about beef demand and its ability to pull cattle through feedlots at an efficient pace. However, these larger supplies will make it more difficult to see the same magnitude of a Spring rally that we saw last year. This is not shaping up to be a year when there will be a shortage of market-ready cattle during April and May.

Do We Really Have a Cattle Shortage? Not Really.

This week’s article comes from Dr. David Anderson at Texas A&M. There have been a few stories floating around about one particular calculation from the cattle inventory report: the number of cattle outside of feedlots. These stories suggest that since this number is lower than last year, we might have a shortage of feeder cattle. In the article below, Dr. Anderson does a good job of explaining why that logic is shaky after looking at the underlying data.

 

After digging through USDA’s cattle inventory report, I thought a couple more comments were in order.  I noticed several articles announced that we had a shortage of cattle and that calf prices would remain high due to this shortage. Let’s take a look at the data contributing to this statement.

The idea that there is a shortage of feeder cattle is based on the estimated feeder cattle supply outside of feedlots. This number is calculated by analysts as a potential measure of feeder cattle supplies that might be coming to market in the Spring. Several numbers out of the inventory report are used to estimate this data point, including steers over 500 pounds, other heifers, steers, heifers, and bulls under 500 pounds, and the number of cattle on feed. Several factors can influence how this number works out including the calf crop. A larger calf crop results in more calves available. (It’s interesting to note that while the cowherd was up 3.5 percent in 2017 the calf crop was only up 2 percent. That might suggest some future revisions.) More rapid placements of the year’s calves would result in fewer feeder cattle outside feedlots. More heifers not being held for replacement yields a larger number outside feedlots, or more in feedlots.

So, how does the report shake these numbers out compared to the year before? The calculated number of feeder cattle supplies outside feedlots was 26.1 million head, down 607,000 from the year before. The number of steers 500 pounds and over was down 32,000 head. The number of steers, heifers, and bulls under 500 pounds was up 41,000 head. The number of “other” heifers was up 322,000 head. But the biggest change was the number of cattle on feed, up 939,000 head, or 7.2 percent. So, why was the number of feeder cattle outside feedlots down from the year before? Because they already went to feedlots. Derived demand from packers and feedlots for cattle, fueled by profits pulled cattle ahead. Good beef demand, both domestic and export (record beef export volume), pulled beef ahead. And, the building drought in wheat pasture country led to light weight calves going to feedlots rather than wheat.

Feeder cattle supplies outside feedlots is often used as an anecdotal look at available supplies for the next few months. In this case, it’s viewed as a reason for strong calf and feeder prices this Spring. The fact that lightweight feeder cattle went to feedlots instead of wheat pasture could be seen as an argument for a smaller than seasonal decline in feeder cattle prices this spring. The feeders coming off wheat pasture won’t be there. It’s worth remembering that there is also a demand for feeder cattle. There may also be less demand for those “wheat pasture” feeder cattle because feeders already bought them and put them on feed – back in October, November, and December.

Two other things about the calculated feeder cattle supplies outside of feedlots. One is that it is a residual calculation. The residual is what’s left over. There can be a lot left in, or out of it. The second thing is that while it is an interesting number that can give some insight, it has never proved to be worth much as a predictor of later prices. Many analysts, including this one, have tried to develop models using this statistic with insignificant results.

It doesn’t look like there is a shortage of cattle. A smaller calf crop than expected, drought, and good demand have conspired to move cattle faster through the system.

State Breakdown of Cattle Inventory

Last week we discussed the cattle inventory report as a whole. This week, let’s dig into some of the state-by-state numbers.

In the Southeast, all states other than Florida and Georgia saw an increase in the number of beef cows in their states. Mississippi was up 25,000 head and Alabama up 21,000 head of beef cows. Mississippi, Alabama, and Louisiana each increased their beef cow herds by a little over five percent as compared to January 1, 2017. Missouri increased the number of beef cows by 111,000 head – this is a 5.4 percent increase over last year. This moved Missouri slightly ahead of Oklahoma to once again rank as the second largest beef cow state in the country. Florida, long a top ten beef cow state, dropped to 13th place with 886 thousand head on January 1, 2018; behind Arkansas with 924 thousand head and Tennessee with 910 thousand head.  This is the first time Florida has had fewer than 900 thousand head of beef cows since 1964.

Texas had 125,000 head more beef cows this year than last. This is a 2.8 percent increase. While Texas had one of the largest increases this year, it is interesting to note that they are the state with perhaps the most room for further increases. Even with the recent increase, the number of beef cows in Texas is still 565,000 head lower than it was in 2008.

In the northern plains states, drought conditions did not result in net herd liquidation year over year. South Dakota added the largest number of cows of any state in 2017. The beef cow herd in South Dakota increased 8.2 percent, to 1.8 million head. Beef replacement heifers in South Dakota were up 10.1 percent, suggesting that aggressive beef herd growth will continue in 2018. The beef cow inventory in Montana grew 0.7 percent to 1.5 million head while in North Dakota, the beef cow herd grew 3.2 percent to 985,000 head. This is the largest North Dakota beef herd level since 2002. The drought impacts show in the beef replacement heifers numbers in both states — 8.2 percent smaller in Montana and 7.3 percent smaller in North Dakota. This probably indicates lower growth potential in 2018 in these states.

 

 

 

 

U.S. Herd Expansion Slowed in 2017

The USDA-NASS Cattle report was released last week and it reports the annual cattle inventory estimates for the U.S. There were no big surprises found in this report but it does provide support for the projections that cattle inventory is still expanding but at a slower rate than in past years.

Dissecting this report gives us a little more detail on specific numbers that are of interest to producers. The U.S. beef cow inventory was up 1.6 percent over January 1, 2017, to 31.7 million head. Perhaps the most positive (for prices) indication from this report was that beef replacement heifers were down 3.7 percent from last year to 6.1 million head.  While beef replacements may have shrunk in 2017, this should not be confused with herd declines. Rather it should be attributed to slower growth during 2017. What does this mean for 2018? It’s hard to make very strong conclusions. Some will look at this report and suggest that herd expansion will end during 2018. However, the data suggest that low levels of expansion are still possible and maybe likely.

The 2017 calf crop was 2 percent larger at 35.8 million head. The current larger beef cow inventory has set the stage for a larger calf crop in 2018. The report also showed feedlot inventory 7.2 percent to 14 million head. This feedlot inventory number is a little different from the monthly cattle on feed number because it includes all feedlots while the monthly report only surveys feedlots with over 1,000 head capacity.

We’ll dig into some of the state-by-state breakdowns next week. But my primary takeaway from this report is that any beef herd expansion in 2018 would likely be limited. However, that will obviously be driven by market conditions in 2018.

January 1 Cattle on Feed Report

The latest cattle on feed report showed the total number of cattle on feed was 8.3 percent higher on Jan. 1 2018 than it was on New year’s day in 2017. In total, 11.5 million head of cattle were in feedlots. This is the largest January 1 total since 2012.

Placements of lightweight cattle continued to outpace year-ago levels during December of 2017. The total number of cattle placed into feedlots was up by 0.8 percent over December 2016 levels. However, a deeper look at this number shows that cattle weighing less than 600 pounds were the primary driver of the increase. The number of cattle placed weighing more than 600 pounds was about 21,000 head below a year ago levels. However, placements of cattle weighing less than 600 pounds increased by 35,000 head. This was an eight percent increase for that weight class over December of 2016 and it continues the trend of larger placements of lightweight cattle that we’ve seen over the past few months. Placements of cattle under 600 pounds were 20 percent larger in the fourth quarter of 2017 than during the fourth quarter of 2016. Poor winter grazing conditions are a primary reason that cattle are coming to feedlots earlier and lighter that might normally happen.

Marketings were either down or up depending on how you look at the numbers. The report shows that marketings were 1.4 percent lower than during December of 2016. This was in line with pre-report expectations. However, there was one less business day during December 2017 than in 2016. So daily average marketings were actually higher than a year ago. On a daily average, marketings were greater than 2016 for every month of 2017. The marketing rate remains important as the increased supplies continue. 

Also in this report was the breakdown on the inventories of steers and heifers. The inventory of steers in feedlots is 4.5 percent higher than a year ago. The inventory of heifers is almost 16 percent higher than a year ago. This implies that a slowdown in heifer retention has occurred. However, the percentage of heifers in the feedlot mix doesn’t yet rise to the level that might suggest herd contraction is in the near future.

Next week I’ll discuss the annual January 1 cattle inventory report that will be released on January 31st.