WLI

Cattle futures started Friday on soft footing and lost ground from there, with some attributing pressure to Japan’s announced tariff increase on U.S. beef imports through next March (see below).

Live Cattle futures closed an average of $1.10 lower through the front five contracts (87¢ to $1.40 lower) and then 32¢ to 62¢ lower.

Feeder Cattle futures closed an average of $1.52 lower across the front half of the board ($1.05 to $1.85 lower) and then 22¢ to 52¢ lower except for 2¢ higher in March.

Choice boxed beef cutout value was 21¢ lower Friday afternoon at $206.22/cwt. Select was 16¢ higher at $196.82.

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Major U.S. financial indices closed narrowly mixed on Friday amid apparent profit taking and news that included softer quarterly earnings at Amazon, as well as estimated second-quarter GDP of 2.6%, which was in line with expectations.

The Dow Jones Industrial Average closed up 33 points. The S&P 500 closed 3 points lower. The NASDAQ closed 7 points lower.

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The tariff rate for U.S. frozen beef exports to Japan will increase 11.5% (from 38.5% to 50.0%) Aug. 1, due to implementation of Japan’s quarterly beef safeguard mechanism. The increased tariff will be in place through March of 2018.

As agreed to in the 1994 World Trade Organization Uruguay Round, Japan maintains separate quarterly import safeguards on chilled and frozen beef, allowing imports to increase by 17% compared to the corresponding quarter of the previous year, according to the U.S. Meat Export Federation (USMEF). The duty increases from 38.5% to 50.0% when imports exceed the safeguard volume. Japan’s frozen beef imports in the 2016 Japanese fiscal year were lower than in previous years, thus the growth in imports during this first quarter of the current fiscal year exceeded 17%, driven in part by rebuilding of frozen inventories and strong demand for beef in Japan’s foodservice sector. The most recent quarter saw strong growth in imports from all of Japan’s main beef suppliers.

Japan was the top export market for U.S. beef, valued at $1.5 billion in 2016. According to data compiled by the USMEF, first quarter U.S. beef sales to Japan increased 42% over 2016. In addition to the United States, the 50% percent safeguard tariff also applies to imports from Canada, New Zealand, and other countries that do not have a free trade agreement with Japan.

“I am concerned that an increase in Japan’s tariff on frozen beef imports will impede U.S. beef sales and is likely to increase the United States’ overall trade deficit with Japan,” said U.S. Agriculture Secretary Sonny Perdue, in a statement on Friday. “This would harm our important bilateral trade relationship with Japan on agricultural products. It would also negatively affect Japanese consumers by raising prices and limiting their access to high-quality U.S. frozen beef. I have asked representatives of the Japanese government directly and clearly to make every effort to address these strong concerns, and the harm that could result to both American producers and Japanese consumers.”

The implications for U.S. beef exports are significant because U.S. frozen beef now faces an even wider tariff disadvantage compared to Australian beef, according to USMEF:

“The duty on U.S. frozen beef imports (effective Aug. 1, 2017 through March 31, 2018) will be 50% while the duty on Australian beef will remain at the current rate of 27.2%, as established in the Japan-Australia Economic Partnership Agreement (JAEPA).

“Through the JAEPA, Japan transitioned from quarterly safeguards to annual safeguards, which are much less likely to be triggered. The snapback duties on Australian beef have also been reduced, minimizing any potential impact on trade. Japan also agreed to similar terms in its economic partnership agreement with Mexico and in the Trans-Pacific Partnership (TPP).

Moreover, the folks at USMEF point out that conditions have changed since the quarterly safeguards were established in 1994, and the growth in Japan’s imports this year has not adversely impacted Japan’s domestic beef producers. Prices for wagyu carcasses and wagyu feeder cattle are down from the record highs of last year, but are otherwise the highest in recent history.

Sluggish cash fed cattle on Thursday continued mainly $1-$3 lower than the previous week at $117-$118 on limited trade and light demand.

More than anything, it appeared that light trade enabled Cattle futures to shrug off early pressure to close higher.

Except for unchanged and 20¢ higher in the front two contracts, Live Cattle futures closed an average of 70¢ higher (42¢ to 90¢ higher).     

Feeder Cattle futures closed an average of $1.56 higher ($1.35 to $1.87 higher).

Choice boxed beef cutout value was 64¢ lower Thursday afternoon at $206.43/cwt. Select was $1.21 lower at $196.66.

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Apparently profit taking balanced optimism on Wall Street, as the tech-based NASAQ closed lower, despite positive quarterly earnings, including Facebook.

The Dow Jones Industrial Average closed up 85 points. The S&P 500 closed 2 points lower. The NASDAQ closed 40 points lower.

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Further perspective on the mid-year cattle inventory report from USDA last week:

“Although it’s not clear from the report that beef industry expansion has come to a grinding halt, it does suggest expansion interest is waning,” says James Mintert, agricultural economist at Purdue University, in the University of Illinois’ Farmdoc Daily earlier tis week. “For example, the number of beef heifers being held by producers for herd replacement July 1 was 2% smaller than in 2015 and, when expressed as a percentage of the beef cow inventory totaled just 14.5%. In contrast, when the beef industry was expanding rapidly this ratio climbed above 15%. Additionally, the ratio of female (cow and heifer) slaughter relative to steer slaughter has been above a year ago five out of the last six months, the exception occurring in February. The increase in female relative to steer slaughter suggests herd expansion has slowed, if it has not actually come to a complete halt.”

The overall weighted average of $117.68/cwt. for the weekly Fed Cattle Exchange auction was just 59¢ shy of the previous week’s average. About a third (772 head) sold out of the 2,119 head offered—most for delivery at 1-9 days.

Eventual country trade in Nebraska basically mirrored the pace. Live prices were $1-$3 less than the previous week at mostly $117/cwt. Dressed trade was $2 lower at $188.

Cattle futures were a roller coaster, swinging from early support to mid-session pressure and then mostly back to gains for the day.

Except for $1.12 higher in spot Aug and 2¢ lower at the very back, Live Cattle futures closed an average of 43¢ higher (12¢ to 62¢ higher).  

Feeder Cattle futures closed narrowly mixed (15¢ lower to 40¢ higher).

Choice boxed beef cutout value was 55¢ lower Tuesday afternoon at $207.07/cwt. Select was $1.06 lower at $197.87.

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Major U.S. financial indices closed higher on Wednesday, with support including higher oil prices, positive quarterly earnings report and the widely anticipated decision of the Federal Reserve to leave interest rates unchanged following their most recent meeting.

The Dow Jones Industrial Average closed up 97 points at a new record high. The S&P 500 closed fractionally higher. The NASDAQ closed 10 points higher.

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Increased international demand for U.S. hay is changing the face of U.S. production and prices, according to a new report—Foraging for Higher Prices—from Rabobank International RaboResearch Food & Agribusiness (RRFA).

“We’ve seen the top six hay importers – responsible for buying over 95% of U.S. hay exports –increasing their import volumes and paying a premium for higher-quality hay, supporting prices at their current levels. As a result, prices will likely continue moving in an upward trend,” says RRFA Dairy Analyst, James Williamson.

According to the report, seven states (AZ, CA, ID, NV, OR, UT and WA), produce 18% of U.S. hay and nearly 90% of U.S. hay exports.

Moreover, RRFA analysts explain hay production in California declined by 33% since 2008, due to water restrictions.

“Water restrictions aren’t limited to California,” Williamson explains. “Increasing pressure to conserve water resources around the world, specifically in areas such as Saudi Arabia, will continue to drive demand alfalfa and other hay. This is going to be the new normal.”

Support included the monthly Cold Storage report released earlier this week (see below), as well as another day of stable to higher wholesale beef values.

Live Cattle futures closed an average of $1.26 lower (70¢ to $1.62 lower).

Feeder Cattle futures closed an average of $1.27 lower ($1.07 to $1.92 lower), except for an average of 33¢ lower in the back two contracts.

Choice boxed beef cutout value was 16¢ higher Tuesday afternoon at $207.62/cwt. Select was $1.04 higher at $198.93. At $8.69, the Choice-Select spread was the narrowest since April.

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Major U.S. financial indices closed sharply higher on Tuesday, boosted by stronger than expected quarterly earnings from folks like McDonalds and Caterpillar, as well as another day of rising oil prices.

The Dow Jones Industrial Average closed 100 points higher. The S&P 500 closed up 7 points at a new record high. The NASDAQ closed 1 points higher.

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After spending all of May and June above $16/cwt. ($16.17 to $30.92), the Choice-Select spread narrowed to less than $10 for the past two days—the least since April.

“The widening and narrowing of the spread was mainly due to demand factors as opposed to supply factors,” says Andrew P. Griffith, agricultural economist at the University of Tennessee, in his weekly market comments. “Since April, the weekly percentage of beef grading Choice has ranged from 69.8% to 73.2% and it is difficult to see much correlation between percent of beef grading Choice and the Choice-Select spread over that time. From the demand standpoint, consumers were hungry for middle meats, as was the export market during May and June. However, domestic consumers have shifted focus to ground beef as is evidenced by the price increase in fresh 90% lean beef from $218 to $233 (7% increase).”