If the government shutdown persists this week, market reporting will be quite challenging. We'll do our best to pass on information from private sources regarding cash cattle and wholesale beef sales, but the market picture will remain quite fragmented and certainly tough to compare with last week. It remains to be seen how futures will react to the lack of price monitoring by the USDA. Lets hope Washington finds a way to get things plugged back in as soon as possible.
Having said that, the cash cattle trade should be typically slow Monday as packers focus on the collecting of new showlists. We expect the new offering will be about steady with last week (though it's certainly possible that the winter storm could take some steers and heifers off the list). Look for live and feeder futures to open at least moderately higher, supported in large part by greater packer spending that surfaced on Friday.
Hog buyers should open with steady bids, but it remains to be seen how the winter storm will impact country movement. Between early-year holidays and bitter cold temperatures, it has been very difficult to assess real market supplies and currentness so far in 2018. It looks like this week may be yet another disrupted schedule, further perplexing that assessment. Processing margins look acceptable yet have certainly narrowed from late 2017. Lean hog futures should open higher, boosted by the premium of the cash index and firming carcass value.
| BULL SIDE | BEAR SIDE | ||
| 1) | Feedlot managers demonstrated excellent leverage and currentness on Friday by selling live steers and heifers as much as $3 higher. The new blast of winter weather further underscores that bullish reality. | 1) | Between the rising cost of live inventory and faltering carcass value, beef processing margins have narrowed significantly. According to the DTN model, gross packer margins lost as much as $60 per head last week, a reality that could prompt more defensive procurement through the balance of the month. |
| 2) | Despite Friday's sell-off, live cattle futures scored significant technical progress last week. Indeed, both spot February and April will start out Monday firmly above 100 day-moving averages. | 2) | For the week ending Jan. 16, noncommercials reduced longs and added to shorts in live cattle futures, reducing their net-long position by 5,900 to a total of 82,400 contracts. |
| 3) |
For the week ending Jan. 16, net pork export sales surged to 26,400 metric tons. Increases were reported for Mexico (10,000 MT), South Korea (7,600 MT), Japan (4,800 MT), Canada (2,000 MT), and Colombia (800 MT). At the same time, actual pork exports totaled a respectable 21,200 MT.
| 3) | If immigration reform remains a sticking point in getting the government back online, heated rhetoric could further compound the problem of renegotiating NAFTA. |
| 4) | The pork carcass value scored decent progress on Friday, supported by better demand for hams and bellies. | 4) | The fact the spot February lean futures has slipped more than $1 below the cash index may indicate a lack of trade confidence relative to further cash strength in the immediate future. |
CATTLE: (University of Illinois farmdoc daily) -- For ten consecutive years, Japan has increased its meat consumption; consumption increased by 3.4% last year over the previous year to produce the highest level of growth in five years. Beef consumption, in particular, is expected to grow nearly 4% this year after two straight years of decline. Japan is already one of the world's leading countries when it comes to beef consumption, both in terms of total tonnage and per capita. Japan has also consistently been one of the top beef buyers in the world, with 851,000 metric tons imported in 2017, making it the third largest import market in the world. Thus, Japan is an essential market for beef, especially for the United States.
Japan has long been a top consumer of U.S. goods. In 2016, Japan is the 4th largest importing country for both U.S. agriculture and total goods. Total agriculture exports to Japan in 2016 totaled $11 billion (roughly 8.5% of overall U.S. ag. exports), of which $1.5 billion was beef. Since 2010, Japan has been the United States' number one export market for beef. Before 2003, the U.S. and Australia were essentially splitting the Japanese beef market, but in late 2003, Japan banned U.S. beef because of U.S. cases of bovine spongiform encephalopathy (BSE, or "mad cow disease"). Notably in the context of NAFTA, during the ban, Canada and Mexico replaced Japan as the top export destinations for U.S. beef.
The U.S. cannot rest on its laurels in the Japanese market. The U.S. competes with Australia, New Zealand, and to a lesser extent, Canada and Mexico for the Japanese beef market. After the BSE crisis, Australia replaced the U.S. and is now the largest beef exporter to Japan, with exports totaling $1.8 billion in 2016. The US has been rebuilding since the 2003-2006 ban and currently supplies just under half of all imports. One factor in Australia's success has been the Japan-Australia Economic Partnership Agreement (JAEPA) of 2015, which lowers the import tariffs it faces. This disparity is only going to grow with President Trump's withdrawal of the U.S. from the Trans-Pacific Partnership (TPP).
The World Trade Organization (WTO) states that member countries can't discriminate against other member countries and can't offer special favors or rates without making them available to all members--known as most-favored-nation (MFN) treatment. However, the WTO does have exceptions in place that allow members to set up trade agreements or economic partnership agreements that only apply to goods traded within the group. JAEPA, and as stated in a previous article, NAFTA are two examples of this WTO exception. The TPP would be as well, superseding WTO rules and allowing TPP members to receive a better-than MFN rate. The Trump Administration, however, pulled the U.S. out of TPP roughly a year ago.
The lack of an economic partnership agreement between the U.S. and Japan has become evident in the last several months. Japan has enacted emergency tariff safeguards, increasing tariffs on frozen beef to 50% from 38.5%. This increase is allowed under WTO rules when imports rise more than 17% from the previous year in any given quarter. When frozen beef imports increased 17.1% from April to June 2017 (Japan's first fiscal quarter), the emergency safeguard was triggered. The rate increase will be in effect until the end of Japan's fiscal year (March 31, 2018). By contrast, Australia faces a tariff rate of 27.2%.
The TPP would have exempted the U.S. from this "global snapback" tariff as JAEPA has exempted Australia. JAEPA exempts Australia from tariff increases but has also lowered their tariff rate. The standard beef tariff of 38.5% the U.S. faces is just 30.5% for Australia on frozen beef (phasing down to 19.5% over 18 years), and down to 32.5% for fresh beef (phasing down to 23.5% over 15 years). Not only would the U.S. be saved from tariff increases under the TPP, but the TPP would have set a new fresh and frozen beef tariff of just 27.5% in the first year of the agreement, gradually decreasing each year until the final rate of 9% in year 16. For evidence that these tariffs matter, look at Japan's beef imports for August 2017 (first full month of increase). Frozen U.S. beef imports fell 26% while Australian imports increased 30%. The increased tariff also lead to a shift towards chilled beef--which isn't subject to the increase--seeing U.S. imports rise 55%.
JAEPA, with its lower tariffs and exemption from emergency rate increases, gives Australia a substantial competitive advantage in the Japanese beef market. Australia already accounts for over half of all Japanese beef imports, a market share that is all but guaranteed to grow with the United States' withdrawal from the TPP. Just as a final note, even though the U.S. withdrew from the TPP, the TPP isn't going away. Negotiations are currently ongoing without the U.S., opening up the U.S. to further market loss if Australia, Canada, and New Zealand are all afforded the lower beef tariffs under the TPP.
HOGS: (NPPC) -- The U.S. Department of Agriculture has finalized a new pork processing inspection rule, a decision strongly supported by the National Pork Producers Council. As a result, the USDA's Food Safety Inspection Service (FSIS) HACCP Inspection Model (HIMP) will be expanded from five current pilot locations to full-scale implementation.
"We support the USDA's decision to advance HIMP as it introduces new pork production efficiencies while encouraging the deployment of new food safety technologies in packing plants," said NPPC President Ken Maschhoff, a pork producer from Carlyle, Illinois. "The pilot program yielded very positive results; expanding the program is another step forward in the industry's ongoing focus on continuous improvement of food safety and cost efficiency."
The new inspection model assigns increased inspection responsibility to plant operators, allowing the USDA to dedicate its resources to general oversight of food safety standards and the overall inspection process. Plants can choose to adopt the HIMP model or continue operating under the current inspection system.
Maschhoff added, "The U.S. pork industry is the most competitive in the world because we have built a reputation for quality, affordability and food safety. We applaud the USDA for taking this step to strengthen our competitive position."
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