Uncertainty is Impacting Cattle Prices

This week’s article was written by Dr. Derrell Peel at Oklahoma State University and is a great addition to the discussion on trade from last week available here

Cattle and beef markets have decreased from April highs with uncertainty in a variety of factors weighing on markets the past month.   The latest threat of additional tariffs on Mexico rattled many markets last week, including cattle and beef markets.  It appears that the threat was removed over the weekend and cash and futures markets may stabilize somewhat this week; but ongoing uncertainty about trade and the politics of trade continue to take a toll on agricultural and other markets.

Weather is another source of uncertainty negatively impacting cattle markets.  While good moisture conditions bodes well for forage growth in general, ongoing flooding and excessively wet conditions is limiting grazing and hay production in some regions.  Sloppy feedlot conditions continue to hamper feedlot production in some areas. Additionally, the record late planting of corn and soybeans this year is adding uncertainty about corn acreage and yield and is beginning to push corn prices higher. There is little doubt that the corn crop will be smaller than anticipated just a few weeks ago but carryover levels are still expected to be adequate. While significantly higher feed prices are not anticipated at this time, the uncertainty remains.

Weaker beef demand may be the biggest threat to cattle and beef markets for the remainder of the year.  Strong beef demand supported cattle and beef markets in 2017 and 2018 but there are signs that some weakness may be developing in beef demand in both domestic and international markets.  While unemployment remains very low, other indications of weakness in the macro-economy are concerning and have led to reduced forecasts for U.S. economic growth in 2019; largely due to ongoing impacts of tariffs and trade disruptions.  Relatively slow domestic income growth and higher prices for major consumer items, such as gasoline, combined with record large supplies of beef, pork and poultry may be limiting domestic beef demand going forward in 2019.  Relatively wet and cold weather thus far has likely stifled summer beef demand somewhat and probably contributed to an early seasonal peak in boxed beef prices and recent weakness in wholesale beef values.

Reduced beef exports and higher beef imports through the first four months of the year, combined with weak pork and broiler exports suggest that the meat complex is struggling so far this year in international markets.  The uncertain but undoubtedly large impact of African Swine Fever in China and other countries, may provide some boost to protein markets in the coming months.  Increased demand in China for pork as well as poultry and beef will likely provide some support, directly and indirectly, to protein markets around the world.  The U.S. exports little beef to China and that’s not likely to change anytime soon, but U.S. beef markets may enjoy some indirect support as a result of the protein deficit in China

The uncertainty plaguing cattle and beef markets probably should not change most producers’ strategic plans for this year but it will be important to watch the multitude of volatile factors that may continue to or further impact markets.  Short run volatility may impact timing and other tactical considerations for production and marketing and highlights the value of flexibility and the ability to be nimble in these uncertain times.

More Heifers in the Feedlot Mix

The latest USDA Cattle on Feed report included the quarterly feedlot inventories for steers and heifers. An estimated 4.5 million head of heifers were on feed on April 1st which is the largest April total on record and the largest total for any quarterly report since January 1, 2001.  The number of heifers on feed was up 7.6 percent year-over-year while the number of steers in feedlots was down 1.1 percent compared to the same time last year.  The mix of heifers and steers in feedlots provides some information about the overall herd changes. During the past 5 years of expansion, heifers in feedlots averaged 34.4 percent of total feedlot inventories. For the two quarterly reports released in 2019, heifers have accounted for 37.7 percent of total feedlot inventories. This information is likely an indication that heifer retention has slowed over the past two quarters.

The total number of cattle in 1,000 or more head feedlots on April 1 feedlot was estimated at just under 12 million head. This was 2 percent larger than a year ago and a record April level going back to at least 1996. March feedlot placements were up about 5 percent. The weather impacts on Nebraska were shown in this report with placements down 11 percent in Nebraska.  The daily average of feedlot marketings was slightly higher in March 2019 compared to a year ago, though the report shows a 3.4 percent decrease for the month. This is due to had one fewer business day in March this year compared to 2018.

Large Estimates Push Corn Prices Lower

The USDA Prospective Plantings and the Quarterly Grain Stocks reports were released at the end of March and showed an increase in expected corn acres above 2018 levels. Corn planted area is estimated at 92.8 million acres which is four percent or about 3.66 million acres above last year. The 92.8 million number was on the high end of expectations going into the report. Combined with larger than expected stocks reported, there was a bearish impact on markets. December Corn futures prices dipped 18 cents in a day in reaction to the reports.

 

The increase in corn acres comes at the expense of soybean acreage. Soybean planted area for 2019 is estimated at 84.6 million acres which is down five percent from last year. Soybean expected margins are very tight as prices continue to be pressured by large supplies and tariff concerns. March 1 soybean stocks were 29 percent larger than a year ago and a record-high 2.72 billion bushels. It should be noted that the survey for the planning report was administered in the first two weeks of March and might not reflect the impact of the major flooding seen in many areas of the country.

So what are the implications for cattle markets? The cattle markets pay attention to corn prices because it is a primary input for adding pounds to cattle. The estimate that there should be plenty of corn this year is positive for feedlot demand. The primary costs associated with a finished steer are the cost of the calf purchased and the cost of the feed. All else equal, if the cost to feed a calf declines, a feedlot operator can pay a higher price for the calf without reducing their expected profit.

Of course planting intentions are not the same as bushels harvested. There is still plenty of uncertainty to go around as farmers navigate another crop season. Volatility in corn markets in the coming months is likely as prices are usually sensitive to weather and crop progress reports. However, the outlook for now is larger corn production and ending stocks and lower corn prices than expected just a few weeks ago.

2019 Meat Production and Consumption

This week’s article is from Dr. Derrell Peel at Oklahoma State University and discusses expected changes in meat production and consumption in the coming years.

Total 2019 meat production in the U.S. is currently projected to reach another record level of 103.3 billion pounds, up 1.3 percent year over year.  However, per capita meat consumption may decrease slightly to 217.3 pounds from the 2018 level of 218.6 pounds.  The decrease in per capita meat consumption reflects improved meat trade with projected decreases in meat imports and increased meat exports along with normal population growth. Total 2019 meat imports are projected to decrease to 4.3 billion pounds, the lowest since 2013, with record meat exports of 17.4 billion pounds.  Total meat includes beef, pork, broiler, turkey, other chicken, veal and lamb.

Record per capita meat consumption occurred in 2004 at 221.9 pounds. At that time lower population, higher meat imports, and meat exports less than half of today’s level were sufficient to increase per capita consumption despite lower total meat production in 2004 which, at 85.1 billion pounds, was 17.6 percent smaller than today.

Beef production in 2019 is projected to increase to another record at 27.2 billion pounds, up about 1.1 percent over last year.  Weather impacts are holding carcass weights well below year ago levels so far this year and annual average carcass weights are projected to only increase slightly year over year.  Cattle slaughter is projected to increase about one percent year over year.  With beef imports projected to decrease and beef exports expected to increase again in 2019, per capita beef consumption is expected to decrease to 56.8 pounds (retail basis), down from 57.1 pounds one year ago.

The March Hogs and Pigs report from USDA-NASS showed continued growth in the U.S. pork industry with year over year increases in all hog, breeding hog and market hog inventories.  Pork production in 2019 is projected to increase about 2.9 percent to 27.1 billion pounds.  Per capita pork consumption is expected to increase slightly from last year to 51.0 pounds per capita.  An improved pork trade balance is projected with year over year decreases in pork imports and significant increases in pork exports.  Higher projected pork exports are partly due to anticipated increases in pork imports in China as a result of losses in Chinese pork production due to African Swine Fever.

Broiler production estimates have been trimmed from earlier expectations with current projections of a 1.1 percent increase in broiler production in 2019 to 42.6 billion pounds.  Per capita broiler consumption is projected to decrease fractionally year over year to 92.0 pounds in 2019 with increased broiler exports taking up most of the increase in production.  Turkey production and consumption are both projected to decrease in 2019.  Total poultry, including broiler, turkey and other chicken production is projected to be fractionally higher in 2019.

These projections reflect estimates and analysis by the Livestock Marketing Information Center and me.  Of course, the estimates are likely to change as market conditions change and new information becomes available.  Many factors may impact meat production and consumption this year including weather, disease, trade, U.S. and global macroeconomic conditions, feed markets and others.

2018 Beef Exports

December trade data was released on a carcass weight basis by USDA Economic Research Service (ERS) on March 7 and it showed the 2018 totals to be a record year for beef exports at nearly 3.2 billion pounds. Beef exports ended the year 10.3% larger than during 2017. You may recall that 2017 was also a great year for beef exports. Over the past year, beef exports had six months in 2018 with double-digit gains and 10 months of gains over 5%.

2018 was the 3rd consecutive year for export increases. The U.S. shipped 296 million more pounds worldwide, and 165 million more pounds to South Korea, representing about 56% of the growth in the year over year change. Most major beef export markets were higher with Japan almost 7%, South Korea up 35%, and Mexico up 7%. Canada and Hong Kong were the 4th and 5th largest export markets but both saw 3 and 8 percent decreases during 2018, respectively.

Beef exports have been a bright spot for the U.S. beef industry for the past few years. The growth in exports has helped absorb some of the increase in beef production during the herd expansion since 2014. Beef exports also add value because much of the export demand is for lower-value products that are not as demanded by the U.S. market.  An example is that much of the growth in beef exports has been in products from the chuck. These products have a higher value as exports and thus add more value to the carcass.

Learn Economics. Work for Amazon, eBay, [insert tech company name here]…

This working paper from the Harvard Business School by Susan Athey and Michael Luca was recently brought to my attention by Dr. Alba Collart. The authors discuss the increasing role of economists working for tech companies like Amazon, eBay, Google, Airbnb, etc. Fascinating stuff!

I’ll list what I thought were some of the highlights:

  • Not only is the number of economists employed in this sector growing rapidly, but economists are playing more central roles in company decision-making.
  • What are the skills these companies want that economists have? (1) identifying causal relationships, (2) designing incentives to improve business outcomes, (3) disentangling the complexities of market equilibria.
  • Economists take on a wide variety of roles, from data analysis to experiment design, to public policy work.

And economists at these companies are working on topics like:

  • How to increase online advertising revenue?
  • What types of email language lead not only to more people opening them but to increased sales?
  • How do changes in the app user interface affect consumer behavior?
  • How can bias in online reviews be minimized?

And economists work on the complex interactions of these ideas as well. One example given is how eBay at one point changed its user interface to make it easier to compare prices across products. Well, this affected consumer choice, which in turn affected prices charged by sellers, all of which, over the long run, affected whether consumers used eBay at all.

I should mention that the focus of the article is on PhD economists, and I know a great place to get started in the field of economics if you’re interested!

August 2018 Cattle on Feed Report

The latest USDA Cattle on Feed report was released this past Friday. This report included estimates for the number of cattle placed into feedlots, marketed out of feedlots, and the total number of cattle on feed for the month of July ending on August 1, 2018.

The report showed a 7.9 percent increase in cattle placed during July 2018 as compared to 2018. This was higher than the average pre-report expectation of a 5 to 6 percent increase but was within the range of estimates. While the total number of placements might get the most attention, perhaps the most interesting information lies in the weight categories.

The less than 600 pounds category was up 13.9 percent over last July and the 600 to 699 category was up 23.4 percent. This increase corresponds with the increased auction receipts of lighter weight feeders in July. The total increase of cattle placed weighing less than 800 pounds was 135,000 head or 13.8 percent over July 2017. Placement of cattle weighing more than 800 pounds was about the same as a year ago.

Marketings were up 5 percent over July 2018 which was very close to pre-report expectations. There was one additional slaughter day in July 2018 as compared to 2017 so the daily average was approximately the same. While we continue to see record large number of cattle on feed, the marketing rate is mostly keeping pace and working through the large supplies.

The total number of cattle on feed estimate landed at 11.09 million head for August 1. This is 489,000 more than the same date in 2017 and is (again) the largest August 1 total on record going back to the start of the report in 1996. This is a 4.6 percent increase over August 1, 2017.

The summer has been a bit surprising in the continued large number of placements. Back in the Spring, the large number of lightweight cattle placed provided evidence for projected similar to year-ago total cattle on feed numbers by August and September. The rationale was that those larger lightweight placements earlier in the year would lead to fewer heavier cattle to place in the summer. However, continued large placements have occurred and total cattle on feed is still pushing 5 percent above year-ago levels as we head into the seasonally heavy-placement Fall months.

 

 

 

 

Tariffs and Beef Trade

Wherever you get your news, you likely couldn’t avoid hearing a particular T word last week: tariffs. On the heels of the announcement that the U.S. will impose a 25 percent tariff on steel imports and a 10 percent tariff on aluminum imports, many prognosticators were taking sides on the impact the tariffs would have on businesses and consumers. Don’t worry, this article is not about metals and I’m no forecaster of those industries. However, tariffs are something that those in the beef industry have been talking about for a long time. Also released last week were the latest monthly U.S. beef trade data that show continued impressive growth of U.S. beef exports. So while we have a tariff example fresh in the news and a report of strong beef exports, perhaps it’s a good time to touch on some of the tariffs facing U.S. beef entering other countries.

Beef exports were up 9 percent on a tonnage basis and 21 percent in value year-over-year during January 2018 according to a recent report by USMEF and data from USDA. These are impressive totals, especially since January 2017 had relatively large export totals, too. Exports to Asian markets continue to be strong for U.S. beef. However, this strength is certainly influenced by tariffs both in absolute terms and in relation to lower tariffs faced by other exporting countries.

A quick, simplified, definition of a tariff is that it is a tax on foreign goods to enter a country. Using the U.S. steel example, if someone wants to import $100 of steel from a foreign country that is subject to the tariff, they will have to also pay the government $25. Of course, this effectively raises the price of that foreign steel and makes domestic production relatively more competitive. So if U.S. beef faces a tariff to enter another country, that beef becomes more expensive for consumers in that country.

The tariff on frozen U.S. beef entering Japan (the most valuable U.S. beef export market) is normally 38.5 percent. However, the rate has been 50 percent since last August due to a triggered safeguard tariff that will revert back to 38.5 on April 1, 2018. Meanwhile, the tariff for Australian frozen been to enter Japan is only 27.2 percent and is scheduled to continue to decline. The major difference: Australia has a trade agreement with Japan. While U.S. beef is at a disadvantage in Japan, a bilateral trade agreement with nearby South Korea is reducing the tariff on U.S. beef. It is currently at 21.3 percent and is set to gradually reduce to zero over the next eight years. This tariff on U.S. beef is lower than the 26.6 percent faced by Australian beef entering South Korea and is scheduled to remain about 5 percent lower over the next decade as both countries tariffs are gradually reduced to zero.

U.S. beef exports continue to be a bright spot for the beef industry. The exceptional growth of exports in 2017 is credited as a primary reason for the strength of cattle markets. However, a snapshot of the different tariff situations for U.S. beef entering Japan and South Korea shows the impact that trade agreements can have on the export environment. Scheduled tariff reductions are leading U.S. beef to become relatively cheaper for consumers in South Korea while frozen U.S. beef entering Japan remains subject to a high tariff as competitors’ beef becomes relatively cheaper. U.S. beef exports to Japan have been undoubtedly strong, but they would likely be even stronger at tariff levels similar to those of competing export countries. So while everyone continues to discuss tariffs on steel and aluminum, take the opportunity to consider and discuss how tariffs impact the beef industry and cattle markets.

The risk of a trade disruption for American Agriculture

Risk remains one of the salient features of commodity agriculture. We usually discuss weather or market price risk, but we also need to be mindful of policy risk. Macro-economic policy in the 1980s and more recently the Renewable Fuel Policy of 2007 are examples of policy decisions that shocked commodity prices. When I teach risk management, I tell students that risk = probability of a bad event x the severity of the event. Much of what challenges us in risk management is how to deal with the low probability but severe negative event.

Current discussion regarding NAFTA, recent withdrawal from the Trans-Pacific Partnership, and other looming threats make trade disruption increasingly probable events. However, if there is a sudden trade disruption in our crop sector, what happens to U.S. producers? Most economist suggest the price of our agricultural commodities could fall, perhaps dramatically. Trade disruptions may occur for a variety of reasons such as disease outbreaks, a trading partner’s economic turmoil, or war.
So here is the question. To what extent would our current farm safety net mitigate a sudden shock to crop prices due to a trade disruption?

Crop Insurance – Based on planted acres, crop insurance would protect against a price shock only if it occurred during the growing season. Since price guarantees are reset with the futures markets every year, a new lower equilibrium futures price in the following year would be used to value insurance losses. Thus, the economic adjustments to lower price levels would be unprotected by this program.
Agricultural Risk Coverage – To the extent base acres match planted acres, ARC would mitigate the decline in price, but would only cover a 10% band of crop value. ARC would provide some protection over the next few years, but the Olympic average used in ARC would gradually adjust over a 5 year period.

Price Loss Coverage – uses base acres as does ARC and protects against prices below a legislatively set reference price. If a medium term price shift occurred (3-5 years), these programs would provide a significant protection but at a high budgetary cost.

Ultimately, our farm safety net is not designed for such a shock. Maintaining trade flows and reducing barriers to trade has a strong economic justification. There are clear benefits to consumers and agricultural producers.

U.S. Beef Exports Continued Upward in June

The latest monthly meat trade data were released this morning and showed further increases in the amount of beef exported in June. U.S. beef and veal exports totaled 238 million pounds during the month of June. This was about a 12 percent (or 25 million pounds) higher than June of 2016. As shown in the chart, this continues the trend of boosted exports in 2017

The largest increase in exports was in Japan. Nearly 8 million more pounds of U.S. beef was exported to Japan in June of 2017 than in June 2016. This further highlights the potential impact of the increased tariff on U.S. beef in Japan (discussed here). Since it takes a while to collect the data, exports under the increased tariff will not show up in trade data for another 2 months.

Second and third on the increased exports are South Korea and Hong Kong. Just these three countries make up 18 million of the 25-million-pound increase in U.S. exports over last year. There are a few countries in which U.S. exports have actually decreased this year. Canada is the largest of these as one of our primary trade partners. Exports to Canada have decreased by about 3 million pounds from June of 2016.