Moving into the first full marketing week of August, cattle buyers will go about their standard chores of collecting showlists Monday. We expect the new fed offering to be steady to somewhat larger than last week. The relative firmness of country sales last week and the ability of futures to rebound off extreme discounts will probably encourage beef producers to at least initially price ready steers and heifers higher (e.g., $120 to $121 in the South, $190 to $192 dressed in the North). That said, the cash trade probably won't be tested until Wednesday at the earliest. Live and feeder futures should open on a mixed basis thanks to a slow combination of spillover selling and the premium status of cash markets.
Hog buyers seem ready to resume work Monday with bids ranging from steady to $1 lower. The belly market has been the backbone of carcass value over the last 30 days or so, but there are signs that bacon demand is beginning to fade. Specifically, for the first time since late April, the belly primal lost money last week (i.e., off $7.44 from Friday to Friday). Although we could see seasonal strength endure for another week or so, it seems like a good bet that the pork wholesale trade will start having a tougher time holding up in the face of bigger and bigger kills. Lean futures should also begin with mixed action tied to competing factors like follow-through buying and early-week long liquidation.
| BULL SIDE | BEAR SIDE | ||
| 1) | Total live cattle open interest continued to decline through last week, dropping by more than 19,000 contracts from Thursday to Thursday. Now totaling nearly 346,000 contracts, overall commitment is the lowest since the early part of March and 20% smaller than the early May peak. Impressively, the board has exhibited relative resilience in the face of the liquidation of the nearby contracts (e.g., spot August remains in the middle of the rather broad $6 trading range that has been in place since mid-June). | 1) | Beef cutouts turned significantly lower late last week as packers capped the largest cattle kill since early July. |
| 2) | U.S. employers added 209,000 jobs in July. Economists had been expecting a gain of only 180,000, so the actual data is a sign that the economy is growing faster than other indicators had suggested. | 2) | For the week ended Aug. 1, the net-long position in live cattle futures held by noncommercials slid another 2,300 to 107,600 contracts, the seventh straight week of declines. |
| 3) | From Friday to Friday, spot August closed last week over 180 points higher at $83.23, a 345-point discount to the most recent CME two-day settlement index value. The short-term trend has shifted into a neutral/positive position. | 3) | The pork carcass value slipped nearly a buck lower on Friday, pressured by softer demand for bellies, loins and picnics. The cutout will start out Monday at its lowest level since June 16. |
| 4) | While the cash hog trade has clearly topped for the season and now has a softening undertone, country sales are holding up much better than many expected so far into the third quarter. While the cash index is slowly eroding, the downward pace is nowhere near what the industry anticipated. | 4) | For the week ending Aug. 1, noncommercial traders liquidated their net-long position in lean hog futures to 55,000, a reduction of 5,800 contracts. |
CATTLE: (beefmagazine.com) -- U.S. beef exports to Japan have been very successful in 2017, especially in the higher-value chilled category. But even with chilled U.S. exports expanding at such a rapid pace—through May, chilled volume was up 45% from a year ago to 58,000 metric tons (mt), valued at $414 million (up 42%)—the Japanese market still has a strong need for frozen imported beef.
The first quarter of Japan's fiscal year (April-June) saw substantial year-over-year growth in its frozen beef imports, triggering Japan's frozen beef safeguard. This happens when imports exceed the year-ago level by more than 17%, and by the slimmest of margins—just 113 mt—this threshold was crossed.
Now Japan's already-lofty 38.5% duty on imports of frozen beef increases to 50% for the remaining eight months of the fiscal year, through March 31, 2018. The higher rate applies only to imports from countries that do not have a trade agreement with Japan. Among major suppliers, this includes the U.S., Canada and New Zealand.
Australian beef will not be affected by the triggering of the safeguard, due to the Japan-Australia Economic Partnership Agreement (JAEPA), which took effect in 2015 and includes a separate annual safeguard that is based solely on imports from Australia. The current JAEPA duty rate of 27.2% will remain in effect until the end of the current fiscal year, when it is due for another decrease. In-quota imports from Mexico—which also has a trade agreement with Japan—will remain at 30.8%.
Japan's safeguard dates back to the WTO Uruguay Round in 1994, and has not been triggered since 1996 (a separate safeguard for chilled beef imports was last triggered in 2003). On more than one occasion, Japan's safeguards for frozen and chilled beef have created anxiety for Japanese importers and U.S. exporters alike, causing port clearances to slow and creating logistical bottlenecks near the end of a quarter.
Because of the trade disruptions and associated damage to long-standing business relationships when safeguards are triggered, the United States has sought to eliminate them—or at least reduce their impact—through free trade agreements. For example, the Trans-Pacific Partnership (TPP), which was strongly supported by the U.S. beef industry, would have reduced the likelihood of the beef safeguard being triggered and softened the impact through lower duty rate increases. TPP also would have set the duty rates on beef imports from any participating country at the same level, with the rate for all TPP suppliers dropping to 9% over 15 years.
One of the frustrations with Japan's beef safeguards is that the Japanese beef industry has gone through fundamental changes since the mid-1990s and is no longer nearly as vulnerable to lower-priced imports as it was at the time the safeguard provision was negotiated.
The safeguards aren't needed to bolster Japan's cattle producers, so they essentially just add costs to imported beef and place U.S. beef at an even greater disadvantage compared with Australian product.
Japanese consumers are essentially stuck with a large tax increase on a product they clearly want and enjoy. But, especially in the short run, this added cost will be shared among U.S. exporters, Japanese importers and their downstream customers. Some Japanese end users may shift to Australian beef to capitalize on the huge duty advantage, but Australia can't supply the volume of short plate necessary to offset the upward pressure on prices.
One segment of the Japanese foodservice industry hit especially hard by the triggering of the safeguard is gyudon beef bowl restaurants. These establishments rely heavily on U.S. short plate as the primary ingredient for their tremendously popular and budget-priced lunch dishes, and they endured a major setback when U.S. beef was absent from the market due to BSE.
This sector has recently enjoyed robust growth due to greater availability of U.S. beef and strong consumer demand, but it now faces tough decisions about whether to increase menu prices and how to procure enough beef to maintain sales.
Can Japanese buyers shift to chilled beef?
Some can, and likely will. But chilled beef does not work for every customer due to the higher product and shipping costs, which could offset the lower duty. And if the higher frozen duty rate causes a shift toward chilled imports, this increases the possibility that the chilled beef safeguard could be triggered later in the fiscal year. The chilled safeguard operates on pre-BSE 2002/03 import levels and is not currently at risk of triggering. But this could change later in the year, if there is a shift toward chilled imports.
What can be done to resolve this issue?
The Japanese government's decision to trigger the safeguard raises the question of what can be done to reduce the chances of this happening again in the future. As noted above, TPP would have addressed this issue. But with the fate of TPP now in doubt, it is a strategic priority of the beef industry that the U.S. and Japanese governments find ways to modify the current safeguard mechanism so that it is less disruptive to the U.S. industry and our Japanese customers.
HOGS: (pig-world.co.uk) -- Chinese pork imports fell by around one third on a year earlier during Q2 which is the first time since the end of 2014 that quarterly imports have not increased on the year, according to a new report from AHDB pork.
Chinese fresh/frozen pork imports fell a noticeable 34% year-on-year during Q2, totalling 316,000 tonnes according to Chinese customs. The decline increased throughout the quarter, with June shipments alone 54% behind the month in 2016. The weaker import demand comes as Chinese domestic production has finally begun to recover. Production had come under pressure over the past two years, following the implementation of strict environmental regulations by the Chinese government. However, it seems the extremely high pork prices achieved in China last year did ultimately encourage some reinvestment. As such, according to the Chinese Ministry of Agriculture, slaughterings were almost 1% higher year-on-year in the first 5 months of 2017.
On top of this, consumer demand for pork in China has also been under pressure. The second quarter is traditionally the weakest for pork sales, but this year strong price competition from poultry meat also reportedly impacted on demand.
As such, wholesale pork prices in China have declined considerably from the 2016 level. Prices were 17% lower than the start of the year for week ended 18 July. Live pig prices have also followed a similar trend. With domestically produced pork becoming more affordable, the incentive to import is reduced.
So far, most of the major suppliers have followed the overall trend and exported less than in 2016 during Q2. The EU was particularly affected, with imports falling 43% year-on-year leading to a 10 percentage points drop in market share. Tight supplies, high European pig prices and bans on trade from some German plants likely influenced this. Following from this, the US was proportionally less affected, with shipments only declining 29% on Q2 2016.
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