Safeguard Trigger Penalizes U.S. Beef in Japan

The Japanese government announced on Friday that imports of U.S. beef reached the level to trigger an automatic increase in the tariff rate on frozen U.S. beef. Japan is the top export market for U.S. beef and 2017 has seen impressive increases in the amount of beef shipped to Japan. Unfortunately, it is that impressive increase that led to higher tariffs through March 31, 2018. Tariffs will increase from the normal level of 38.5 percent to 50 percent for the next nine months.

The safeguard was triggered because U.S. exports of frozen beef to Japan were more than 17 percent higher in the first quarter of 2017 than in 2016. The 17 percent threshold was established in a 1994 World Trade Organization agreement that allows Japan to maintain safeguards for frozen and fresh beef imports.

This action could lead to significant market distortions. It will certainly not shut down the shipment of frozen U.S. beef to Japan. However, it will make it more expensive and less competitive with other exporting countries. Australian exporters are likely poised to gain the most from this safeguard trigger. Australia already had a trade advantage over the U.S. due to the Japan-Australia Economic Partnership Agreement. The tariff on Australian beef is 27.2 percent, about half of the increased U.S. tariff. This development further emphasizes the need for a U.S. trade agreement with Japan.

Cattle Market Notes Week Ending July 21, 2017

Cattle Quick Thoughts

The cattle on feed report showed a 4 percent increase in the number of cattle on feed on July 1 over last year. It also reported a 16 percent increase in placements and a 4 percent increase in marketings in June of 2017 as compared to June of 2016. This is much larger than expected and cattle futures prices have opened significantly lower today in response to this report and the cattle inventory report. To continue reading this article click HERE…

 Cash Cattle:

Cash traded fed cattle prices were mostly steady last week. Live cattle were down 15 cents to an average of $119.33 while dressed steers were down 34 cents to an average of $189.74.

Feeder cash prices were higher last week in Mississippi. Mississippi feeder steers weighing 450-500 pounds were up $1 to an average of $153.50 while 750-800 pound steers were up $1.50 to $130.50. Average feeder prices last week in Oklahoma City were at $171.87 for 500-550 pound steers and up $3.02 to $153.24 for 750-800 pound steers.

[ … For more in depth Livestock Prices and Production data and trends CLICK HERE… ]

Futures:

Futures prices were lower at the end of the week. August live cattle were down $1.63 to $116.43 while October live cattle were down $1.43 to $117.40. August feeder cattle were down $1.85 to $152.95 while September feeder futures were down $1.50 on the week to $153.15. Corn futures prices were lower with September and July down a nickel to $3.72 and $3.85, respectively.

Beef:                                                                                          

Boxed beef values fell further last week. Choice boxes averaged $207.88, down $5.05 from a week ago. Select boxes averaged $195.39, down $3.53 from last week. The choice-select spread shrunk to $12.49, down $1.52 from last week.

Note: all cattle and beef prices are quoted in dollars per hundredweight and corn prices are quoted in dollars per bushel unless stated otherwise.

July 1 Cattle on Feed Report is a Bear

The cattle on feed report showed a 4 percent increase in the number of cattle on feed on July 1 over last year. It also reported a 16 percent increase in placements and a 4 percent increase in marketings in June of 2017 as compared to June of 2016. This is much larger than expected and cattle futures prices have opened significantly lower today in response to this report and the cattle inventory report.

There are a few reasons this report put downward pressure on the futures prices. For starters, the 16.1 percent increase in placements is about 10 percent higher than most analysts expected. Analyst expectations are not perfect, obviously. However, when expectations miss the mark by this much, the report suggests information that the markets had not absorbed before. In this case, the July 1 cattle on feed report, when combined with the large placements in the past few reports, suggests there may be larger supplies of 2017 feeder cattle available in the U.S. than previously expected. Cattle markets are driven by expectations of what will happen in the future. If buyers expect prices to be lower in a few months when they will be sellers, that puts downward pressure on prices today.

The drought in the Northern Plains must be considered as a potential reason for the larger placements. The argument is that producers in that region had to sell calves they would not have otherwise sold and that many of these calves ended up as placements into feedlots. This is absolutely a factor. However, it is not the only factor nor is it the largest. If we dig into the data a bit, we see that placements into South Dakota feedlots were 67 percent larger than last year. But in terms of head, a 67 percent increase is only about 16,000 head. Meanwhile, placements into Texas feedlots increased by 70,000 head over June of last year. There were similar increases in other major feeding states, too. The larger placements are an industry-wide event and not just a reaction to a specific region. I do expect that we will also see another significant boost in placements in South Dakota in July as the drought continues.

The fact that many of the placements were light-weight cattle that won’t hit the fed market anytime soon is encouraging. This suggests that some of the increase is due to cattle being pulled forward. Therefore these cattle reduce the number of feeder cattle available for placements in future months. Further, there are actually fewer market-ready cattle (on feed longer than 90 days) right now than there were last year. However, this won’t last for long due to the increased placements over the past few months. Larger fed supplies will pressure fed prices lower. Demand will need to continue to outperform in order to provide price support.

The Use of Enterprise Units in Crop Insurance

The 2008 Farm bill provided for an alternative level of crop insurance subsidies for Enterprise Units relative to Basic and Optional Units.  As you can see in Table 1 the subsidy for enterprise units are sometimes as much as 20% higher than for the same coverage with basic and optional unit structures.

Coverage Level Basic & Optional

Subsidy %

Enterprise Unit Subsidy %
50% 67% 80%
55% 64% 80%
60% 64% 80%
65% 59% 80%
70% 59% 80%
75% 55% 77%
80% 48% 68%
85% 38% 53%

A brief review of unit structures is as follows:

  • Basic unit – All insurable acreage of the insured crop in the county on the date coverage begins for the crop year: (1) In which a producer has 100 percent crop share; or (2) Which is owned by one person and operated by another person on a share basis.
  • Optional Unit – Subdivision of basic unit.
  • Enterprise unit – All insurable acreage of the same insured crop or all insurable irrigated or non-irrigated acreage of the same insured crop in the county in which a producer has a share.

Importantly, because enterprise units are aggregated from basic units the base rates for enterprise units are generally lower than for the basic units from which they are aggregated.  Thus, higher subsidies and lower rates lead to significantly lower producer paid premiums for enterprise units.

A review of RMA participation data from 2009-2016 reveals the choices farmers have made.  The results are reported by crop.  For the six major row crops enterprise units have covered at least 27% of acres since 2009.  However, it appears enterprise units are far more popular for corn and soybeans than the other four crops.  More than ½ of corn and soybean acres have been insured with enterprise units.  In contrast, ½ of wheat acres have been insured at the optional unit level.

Percent of 2009-2016 Acres Insured with Basic, Enterprise, or Optional Units
Crop Optional Unit Basic Unit Enterprise Unit
Corn 28% 18% 53%
Cotton 42% 25% 33%
Rice 12% 54% 33%
Sorghum 34% 38% 29%
Soybeans 28% 20% 52%
Wheat 50% 23% 27%

Source: USDA RMA County Summary Data

Cattle Market Notes: Day Change and Cattle Inventory Report

**Notice of Change to this Newsletter**

This Cattle Market Notes Newsletter is moving to a Monday release. The reason for this change is to provide a more accurate weekly update by better aligning the prices reported. For example, the “weekly” fed cattle prices that I have reported in past Friday editions were actually the averages for Monday through Thursday. Some full weekly averages for prices reported in this newsletter are not available until Mondays. This change will allow for comparison across more similar prices. If you have a specific need for particular prices on Fridays, just let me know and I’ll be happy to help. You will receive an email from me on Monday, July 24th with the new-and-improved weekly Cattle Market Notes newsletter. Until then, below is a special edition of the newsletter discussing the mid-year cattle inventory report released this afternoon.

 

July 1 Cattle Inventory Report Implications

The July 1 Cattle Inventory report showed a 103 million head total for all cattle and calves in the U.S. Compared to other July inventory reports, this one ranks as the largest since 2008 in terms of total herd size.

One key takeaway from this report is the size of the current and expected 2017 calf crop. This report estimates the 2017 calf crop will be 36.3 million head, a 3% increase over 2016. This would be the largest calf crop since 2007 and 73 percent of these 2017 calves have already been born. This implies 1.2 million head more calves to be born in 2017 than in 2016. For comparison, there were about 1 million more calves born in 2016 than in 2015.

This July report is more difficult to measure than usual because we don’t have a July 2016 report for comparison. This clouds measures of herd expansion. Comparisons of the herd size between the July and January reports should be done with extreme caution as the methods used are different and the reports are at different times in a seasonal industry. The July report will always show a larger number of total cattle because significantly more calves are born in the Spring than in the Fall.

In summary, this report tells a lot of what we thought we already knew. We are going to have more calves flowing through the system than we have had in a decade. However, demand has outpaced supplies in the first part of 2017 to provide support for stronger prices than many expected. That storyline will remain a key driver of prices in the second half of 2017.

Cattle Market Notes Week Ending July 14, 2017

Cattle Quick Thoughts

The drought conditions in the Northern Plains continue to worsen and are impacting the cattle herds in the region. The latest USDA drought monitor (available here) shows that approximately half of the counties in North Dakota are under an extreme drought (D3 intensity). Most of South Dakota and eastern Montana are also in drought conditions. The drought-induced shortage of forage has led to the sale of many replacement heifers and pairs that would have otherwise been retained. Emergency grazing of CRP land is helping some producers as well as relatively low grain prices in the area. This is important to producers across the U.S. because approximately 11 percent of the cattle in the U.S. are currently in drought conditions – mostly in the Northern Plains area. Cattle that cannot be supported in drought areas are either being sold and moved to other areas or they are entering the slaughter market. Either instance leads to lower cattle numbers in these areas.

Cash Cattle:

Cash traded fed cattle prices showed some strength this week. Live cattle were up $1.96 to an average of $119.48 while dressed steers were up $2.21 to an average of $190.08.

Mississippi feeder steers weighing 450-500 pounds averaged $152.50 while 750-800 pound steers averaged $129. Average feeder prices this week in Oklahoma City were $150.22 for 750-800 pound steers. There were no prices reported during the previous week due to the holiday.

[ … For more in depth Livestock Prices and Production data and trends CLICK HERE… ]

Futures:

Cattle futures prices showed significant gains this week. August live cattle were up $2.80 to $118.05 while October live cattle were up $4.68 to $118.83. August feeder cattle were up $9.30 to $154.80 while September feeder futures were up $9.15 on the week to $154.65. Corn futures prices were lower this week with July and September down 12 and 14 cents to $3.69 and $3.77, respectively.

Beef:                                                                                          

Boxed beef values were lower this week. Choice boxes averaged $212.93, down $8.16 from a week ago. Select boxes averaged $198.92, down $5.84 from last week. The choice-select spread shrunk to $14.01, down $2.32 from last week.

Note: all cattle and beef prices are quoted in dollars per hundredweight and corn prices are quoted in dollars per bushel unless stated otherwise.

Cattle Market Notes Week Ending July 7, 2017

Cattle Quick Thoughts

The European Union (EU) and Japan agreed in principle to the Economic Partnership Agreement (EPA) this week. This is a large scale trade agreement of which beef is just one piece. This agreement will lower the import tariff for EU beef entering Japan in the coming years. Currently, EU beef imported by Japan is subject to a 38.5% tariff, the same as the tariff for U.S. beef. However, under the EPA, the import tariff for EU beef is proposed to gradually decrease to 9% over 15 years. This is significant for U.S. beef producers because it gives beef producers in the EU a trade advantage. The EPA will lower the cost of EU beef for Japanese buyers when compared to U.S. beef. The EU is not a major competitor to the U.S. for Japan sales currently, but lower tariffs are likely to increase imports from the EU. This could erode the U.S. market share of beef in Japan. Lowering tariffs through this type of agreement is what the Trans-Pacific Partnership (TPP) would have done for U.S. beef. Australia already has a similar deal in place with Japan that provides lower import tariffs. Japan is one of the largest buyers of U.S. beef with a total value of over $1.5 billion in 2016. The EPA is anticipated to be implemented in early 2019.

Cash Cattle:

Cash traded fed cattle prices were down slightly on average this week. Fed steers were down $1.13 to an average of $117.52 for live sales through Thursday. Dressed steers were down $2.08 to an average of $187.87.

Mississippi and Oklahoma auctions were closed this week for Independence Day. I hope you enjoyed beef while celebrating our great nation.

[ … For more in depth Livestock Prices and Production data and trends CLICK HERE… ]

Futures:

Cattle futures prices were lower again at the end of the week. August live cattle were down $1.03 to $115.25 while October live cattle were down $1 to $114.15. August feeder cattle were down $2.70 to $145.50 while September feeder futures were down $2.85 on the week to $145.50. Corn futures prices were up this week with July and September each up 11 cents to $3.81 and $3.91, respectively.

Beef:                                                                                          

Boxed beef values continued to slide this week. Choice boxes averaged $221.09, down $9.95 from a week ago. Select boxes averaged $204.76, down $8.07 from last week. The choice-select spread was $16.33, down $1.48 from last week.

Note: all cattle and beef prices are quoted in dollars per hundredweight and corn prices are quoted in dollars per bushel unless stated otherwise.

Cattle Market Notes Week Ending June 30, 2017

Cattle Quick Thoughts

The South Dakota state court defamation lawsuit for Beef Products Inc. (BPI) against ABC News settled outside of court this week. This is the suit that alleged ABC published “false and disparaging” statements about BPI’s lean finely textured beef back in 2012. This is the beef that became known as “pink slime.” In reality, it is just 95 percent lean beef trimmings that get mixed in with other trim to make ground beef. In the aftermath of the reporting, BPI’s sales decreased from about 5 million to 2 million pounds per week and they were forced to lay off over 700 workers. BPI sought as much as $5.7 billion in damages while ABC argued that it was protected under the First Amendment and that it never reported the beef was unsafe to eat. The terms of the settlement were not released, but BPI’s attorney said they were “extraordinarily pleased with the settlement” and he believed they “totally vindicated the product.” The North American Meat Institute established a website (available here) dedicated to discussing the safety of leanly fine textured beef and to debunk some common myths.

Cash Cattle:

Cash traded fed cattle prices were lower through Thursday. Live cattle were down $2.86 to an average of $118.65 while dressed steers were down $3.85 to an average of $189.95.

Feeder cash price movements were mixed this week in Mississippi. Mississippi feeder steers weighing 450-500 pounds were down $1 to an average of $150.50 while 750-800 pound steers were up $10 to $137.50. Average feeder prices this week in Oklahoma City were down $3.85 to $172 for 500-550 pound steers and down $6.93 to $148.16 for 750-800 pound steers.

[ … For more in depth Livestock Prices and Production data and trends CLICK HERE… ]

Futures:

Futures prices were mostly higher this week. June live cattle were down 10 cents to $119.10 at the close of the contract while August live cattle were up $1 to $116.28. August feeder cattle were up $3.40 to $148.20 while September feeder futures were up $3.95 on the week to $148.35. Corn futures prices were up this week with July and September up 11 and 14 cents to $3.70 and $3.80, respectively.

Beef:                                                                                          

Boxed beef values dropped off significantly this week. Choice boxes averaged $230.64, down $14.26 from a week ago. This is the largest weekly decline this year. Select boxes averaged $212.83, down $5.93 from last week. The choice-select spread shrunk to $17.81, down $8.33 from last week.

Note: all cattle and beef prices are quoted in dollars per hundredweight and corn prices are quoted in dollars per bushel unless stated otherwise.