Exports Impact Marketing Decisions
As you prepare for marketing calves and making replacement decisions, I would recommend keeping an eye to both current and future price expectations.
The USDA’s July 1 estimates show the national cow herd is bigger than any time in the last decade. The current calf crop is estimated to be 3.5 percent larger than last year. Also, the forecast is to see an additional increase in calves next year. The Livestock Marketing Information Center (LMIC) is therefore forecasting depressed calf prices in 2018, both due to downward pressure from increased production and potentially higher feedstuff costs.
Simple economic principles dictate that increases in supply lead to decreases in market prices. The easiest way to move more beef – and consequently feeder and fed animals – is by lowering prices. I know a lot of producers are hopeful that the export markets can pick up some of the excess production and alleviate some of the downward price pressure. However, there are a few concerns to be had in the global market that I think are worth watching.
The figure to the right shows the top four export markets in terms of volume for U.S. beef in recent years. The first column shows average annual exports over the first five years of this decade, and the last two bars show actual exports over the last two years.
While the surge in exports to Japan is encouraging, I expect we will lose market share there in the coming years. First, we saw an increase in exports due to the decreased production coming out of Australia as that country rebuilt from a large, nearly national drought. Australia will be back to producing normal amounts of beef in the coming years, and their proximity to Japan means they can compete on price as shipping costs are a lot lower than ours.
Second, Japan recently increased their tariffs from 38.5 percent to 50 percent on frozen beef imports, unless countries have specific trade agreements with them. As the U.S. pulled out of the Trans-Pacific Partnership (TPP), we will face the full 50 percent tariff until at least next March. Australia will not face that increased tariff, as they have an existing trade agreement with Japan. Compounding that fact is that the European Union (EU) just negotiated a trade agreement with Japan that was very similar to the TPP, at least as beef trade is concerned, so not only are they exempted from the increased tariffs, but they will see tariffs decrease to nine percent over the next 15 years.
Also, note that South Korea, Mexico and Canada round out the top four destinations for U.S. beef. I would keep an eye on any North American Free Trade Agreement (NAFTA) renegotiations, as changes to that agreement could also impact beef exports and subsequently cattle prices in the coming years.
Will China help pick up exports? In the long-term, maybe, but I am skeptical of a lot of help in the short-term. The three major restrictions on shipped beef could limit the ability of much of the current production from reaching China. While most of what we ship meets the rule of less than 30 months of age at slaughter, not very much of our current production meets the traceability or lack of growth promotants required to get into China.
One recent estimate by the Foreign Agricultural Service is that over 90 percent of cattle on feed would currently be prohibited from the Chinese market. We may be able to change that over time if packers see some profitability from meeting requirements and are able to convince feeders and ultimately cow/calf producers to provide eligible cattle, likely through premiums associated with certification and verification.
But remember, there will be added costs associated with access to China, and those costs will be spread across all the market participants. And in the meantime, I suspect that shipments to China will have less impact that a lot of people initially hoped. U.S. beef has already been getting into China but has been getting there via trans-shipments through Hong Kong. As we begin to see more beef headed directly to China, I would expect to see a continued decline in beef headed to Hong Kong, which is currently our fifth highest beef export destination.
So, where does that leave us as we head into marketing and replacement decisions this fall? Continued increases in production will surely continue to put downward pressure on prices. I am less than confident that we will see enough uptick in exports to counter that pressure in the coming year.
If you are still considering building your herd, recognize that may be a risky strategy, unless you think that prices will improve in the near- and mid-term. One of the major costs of developing a breeding cow is the cost of the heifer. Keeping back lower-value heifers is one way to keep herd costs down. If prices to continue to fall, next year’s heifers will be cheaper options for replacement.
But also, remember the lag from retention to calving can be an important consideration. We want to manage our herd to ensure we have calves available to take advantage of the next time prices move up. However, the Food and Agricultural Policy Research Institute (FAPRI) out of the University of Missouri doesn’t expect to see an uptick in calf prices until at least 2020, so delaying heifer retention for a year shouldn’t be too detrimental to long-term profitability.
As for marketing decisions, I would suggest you rethink the standard response of weaning and shipping to market for a cash sale. A lot of research suggests that, in years where prices are depressed, forward contracting cattle can be far more profitable compared to selling at auction in the fall. It may be a little late to participate in those markets this year, but I would suggest studying your alternatives this year and be prepared to participate next year, especially if we continue to see pressure on livestock prices.