July 10, 2019
America's beef boom peaks at a murky trade cross-roads
Cattle herd restocking and export growth level out amid uncertain trade war outcomes.
By Eric J. Brooks
An eFeedLink Hot Topic
After several years of good returns and balanced growth, US beef cattle, beef production and trade are peaking amid much uncertainty. In the years after 2015, a booming US economy coincided with unexpectedly strong domestic beef demand and strong Asian beef import growth.
With domestic consumption growing only nominally, trade saved the day in 2018, with exports rising 10.4% to a new record of 1.432 million tonnes, from 1.297 million in 2017. Moreover, beef export value per head of fed cattle averaged ofUS$320.72 in 2018. That is up 14% from US$280.70 in 2017 and breaks 2014's record US$300.00 per fed cattle.
Japan was US beef's largest foreign customer and boosted its 2018 import volume 18% on-year, to 330,000 tonnes. The trade performance was further augmented by free trade agreement powered 34% growth in shipments to South Korea, to 240,000 tonnes. It was complemented by a strong 33% increase in beef exports to Taiwan (to 59,694 tonnes) and a collective 22% rise in Southeast Asian shipments to Philippines (+31%, 12,222 tonnes), Vietnam (+23%, 12,083 tonnes) and Indonesia (+15%, 7,386 tonnes).
NAFTA trade partner Mexico recorded a 7% increase in 2018 beef shipments to 142,514 tonnes but is expected to see faster growth with the resolution of its trade dispute. Now however, US beef's formerly buoyant supply, demand and trade fundamentals are giving way to uncertainty.
On the supply side, strong prices and recovering, formerly parched US pastureland boosted cattle inventories ahead of expectations –but this market cycle is topping out. Oklahoma State University Livestock Extension economist Derrel Peel states that "Demand, both foreign and domestic, has supported cattle prices even as we have seen increasing supplies of beef and competing meats."
As a result, H1 2019 has seen an extension of 2016 to 2018 market conditions, with live cattle trading mostly trading in the US$1.05/lb to US$1.25/lb range. On one hand, this is nearly 33% lower than the US$1.30/lb to US$1.65/lb range they traded in from 2014 through 2016, which motivated the restocking of US cattle herds from a sixty-year low point.
On the other hand, beef cattle's long, multi-year grow out time means that its supply-side response lags behind these market signals. Consequently, even as prices slowly deflated from their mid-decade record peaks, improving post-2016 pastureland conditions made herd growth peak in early 2016, when both beef cattle (+2.9%) and all cattle (3.1%) by approximately 3% from opening 2015 levels. By the start of 2017 growth momentum shifted to boosting beef cattle (3.5%) numbers on-year, as their profitability now exceeded that of the overall herd (+1.9%).
On one hand, post-2016 30% cattle price deflation means that in both 2018 and 2019, opening beef cattle (+0.9%) and overall cattle numbers (+0.6%) increased far more slowly than in the previous two years. Even so, with cattle numbers at their highest levels since 2007, the rapid post-2015 herd expansion resulted in the fastest beef output growth rate seen in decades.
From 10.817 million tonnes in 2015, beef output will have expanded by an average of 3.6% annually through the end of 2018. At 12.44 million tonnes, 2019's USDA projected beef production is poised to finally break 2002's 12.427 million tonne record –but this may represent the cresting high point of the current cattle market cycle.
The higher output coincided with an economic boom that saw beef consumption grow by over 2.3% annually since 2015, which was its fastest demand growth in decades. Finishing weights also increased as farmers sought to take advantage of high prices. While the rising cattle herd and higher grow out weights boosted beef production faster than consumption, this has not been a problem.
The last decade saw China beef import volumes undergo exponential growth, rising from near zero to overtaking Japan as the world market's largest buyer --with US beef's share of this new, large market near 0% for most of this time. Since 2015, China's rising beef demand has more than offset slacker Middle Eastern growth and coincided with a resumption of strong import volume growth in mature wealthy Asian markets such as South Korea and Japan, which have a long history of importing US beef.
Hence, unexpectedly strong domestic supply growth dovetailed with foreign demand, such that exports increased faster than the USDA initially forecasted. They rose at an11.7% annual rate from 1.028 million tonnes in 2015 to 1.432 million tonnes in 2018, more than 100,000 tonnes above the USDA's 1.3 million tonne estimate for last year. A perennial net beef exporter in value terms, rapid post-2015 supply growth made America's a net exporter by volume after 2017 and the world market's fourth largest supplier.
But now all of US beef's once rapidly growing supply, demand and trade fundamentals are sharply decelerating. With cattle numbers topping out, beef output growth of 6.4% in 2016 and 3.8% in 2017 fell to 2.6% last year and only 1.5% this year. Similarly, consumption growth of 3.6% in 2016 and 3.2% in 2017 has fallen to slightly over 1% in both 2018 and 2019.
Supply-wise, early 2019's bad weather coincided with deteriorating profitability. The coldest winter in more than a decade was followed by record Springtime flooding through parts of the northern plains (where an increasing proportion of US cattle are raised). That made significant amounts of pastureland unavailable for grazing, making feed costs and profitability move in opposite directions. That, in turn, could impact the herd expansion plans of some cattle ranchers.
Consumption-wise, by delaying the start of America's high demand mid-year beef barbeque and grilling season, unseasonably cool, wet spring and early summer weather may have impacted beef demand. As the USDA's 2019 beef output predictions were made before the full extent of this Spring's flood damage and impact on demand was known, it would not be surprising if output rises by less than the USDA estimated 1.5% and consumption the 1.2% predicted respectively.
While supply is predictably decelerating and consumption growth appears to be tapering off, US beef's greatest uncertainty is its foreign volatile trade status, which very much depends on the Trump administration's mercurial policy decisions.
Less than two years ago, Beijing finally allowed US beef into China and it started rapidly taking market share away from once-dominant Australia. –But no sooner was China was on its way to becoming US beef's fastest-growing export market when it became a casualty of an ongoing trade war. It was slapped with a 25% import duty and 2019 shipments to China are expected to be negligible.
But there's a more at stake for US beef than the loss of China's market. After the late 2000s, US beef was allowed back into North Asia, Japan became US beef's most important market. America unseated Australia to become Japan's biggest beef supplier. According to US Meat Export Federation (USMEF) economist Erin Borror, Japan accounted for 331,000 tonnes or 23% of its 1.43 million tonne 2018 export volume.
Japan also made up 25% or US$2.1 billion of its US$8.3 billion beef export value. Of the US$320.71 in exports per head of fed cattle, shipments to Japan accounted for 26% or US$82.75 per head. –but that is now under threat.
Things were not supposed to go this way. The Trans Pacific Partnership (TPP) agreement was intended to reduce Japan's tariff rate on all types of US beef from the current 38.5% to 9.0% --Unfortunately, Donald Trump's administration canceled the TPP just in time for Japan to sign a trade liberalization agreement with Australia.
Before this new Australia-Japan trade agreement was signed, American and Australian beef both faced a 38.5% import duty. With the tariff on US beef stuck at 38.5%, on April 1st Japan cut import duties on Australian chilled beef to 29.3% and frozen beef to 26.9% respectively. By the early 2020s, Australian beef will only be taxed at 19.5%, approximately half the current US import duty. Moreover, even if the US concludes a trade agreement with China, Australian beef is already taking advantage of a trade liberalization pact to enter that country more cheaply.
This is unfortunate, as Australia's trade advantage kicks in just as Japan's beef import volume is showing significant growth for the first time since the early 2000s. Moreover, the impact of China's 25% import tariff on US beef and Australia's new trade advantage has already impacted US beef's trade performance.
--The USDA had forecast a much smaller 3.1% increase in 2019 exports to 1.48 million tonnes but H1 numbers have come in significantly below expectations. Instead of increasing, January to May exports are down 3% --with shipments to top buyer Japan staying flat in volume terms, but not in terms of value or market share. Standard beef exports to Japan fell by 5% but were counterbalanced by a proportionate rise in exports of lower value-added organ meats.
With Japan projected to import 4.1% more beef in 2019, flat export volumes are disappointing. From January through May, a US$21 million 3% drop year-on-year drop in the value of standard beef exports was partly offset by a rise in the value of organ meat exports. This has kept the value of 2019 exports constant in a year when Japan is expected to spend 5% more on beef imports. It also is reducing the revenue per unit earned on beef exports to Japan –with Australia taking up most of the resulting lost market share.
Due to the ongoing US-China trade war, exports to China and Hong Kong (which are frequently smuggled into the Mainland) are down 20.6% and nearly 10,000 tonnes from the 48,300 tonnes shipped in the first five months of last year.
With the USMCA agreement replacing NAFTA but still awaiting Congressional ratification, January to May exports to NAFTA partners Canada and Mexico are down by 13% and 8% respectively, translating into a cumulative 6%, 8,800-tonne decline.
In the rest of the world trade tensions were not a factor and January to May exports continued to grow led by South Korea (+10.8%, +9,886 tonnes), Taiwan (+11%, +2,250 tonnes) and Southeast Asia (+18.7%, +3,451 tonnes).
As the numbers above demonstrate, the recent Korea-US free trade agreement did much to counterbalance the loss of China's fast-growing market. USMEF president Dan Halstrom concurs that "Korea is a great example of what's possible when tariffs are less of an obstacle." –But even the combined weight of South Korean, Taiwanese and ASEAN buyers cannot counterbalance flat exports to top buyer Japan, the closing off of China's large, fast-growing beef market and trade friction with its North American trading partners.
Over the short-term, the worst is probably over: Beef exports were down more than 5% below 2018 totals going into April but May and June's export uptrend may leave H1 2019 shipments level with those in the first six months of 2018. Even if the US-China trade war continues, with the latter's African Swine Fever epidemic pulls too much Australian or Canadian beef into China, exporters in the rest of Asia will have no choice but to substitute additional imports of US beef in their place.
Hence, the odds are still good that H2 2019 beef exports will recover and shipments will rise a USDA forecasted 3% to near 1.5 million tonnes in 2019. With the post-2015 cattle herd rebuilding trend having peaked, any future significant expansion of US cattle herds and beef production is being held hostage to murky trade war politics.
A mature market with high per capita consumption and less than 1% annual population growth, America leads the world in beef production but relies on exports to sustain long-term 2% to 3.5% annual growth. Until it finalizes trade liberalization agreements with large importing nations including China and Japan, it will have trouble maintaining trade growth momentum.
Halstrom notes that while "The explosive growth U.S. beef has achieved in Korea and Taiwan is a testament to the quality of the product", he cautions "For Japan to remain the 'strong growth' column… it is essential It is absolutely essential that the US secures a [trade] agreement that will level this playing field."
With the post-2015 cattle herd rebuilding boom now over, future investments in US beef production capacity expansion will depend on access to large importing nations more than they will on short-term feed and cattle price fluctuations.
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