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LIVESTOCK MARKETS: Chinese tariff impact to be minimalLIVESTOCK MARKETS: Chinese tariff impact to be minimal

Hog sector headed for losses in last quarter of 2018.

Krissa Welshans 1

April 5, 2018

6 Min Read
LIVESTOCK MARKETS: Chinese tariff impact to be minimal

The U.S. meat industry has been very vocal this week about the possible implications of China’s proposed retaliatory tariffs on U.S. pork and beef, but David Williams, director of global protein for Informa Economics IEG, said the impact will likely not be that large.

Specific to pork, the U.S. sold 525 million lb. of pork to China worth $1.1 billion in 2017 -- 9% of the total export volume last year. The purchases represented only 2% of U.S. production.

Today, Smithfield supplies about 75% of China's total U.S. pork imports, Williams noted, but since Smithfield is owned by Chinese company WH Group, it will be unaffected, because Smithfield would get the tariff back in a rebate from China.

Williams said Seaboard Foods is probably the other larger-percentage supplier of the imports, but even so, the impact is going to be very minimal.

He explained that there are other ways product can get to China. For example, product can be routed through Hong Kong.

In addition, muscle meats were the only products included -- not offal.

“It is a very minimal effect overall,” Williams reiterated.

Purdue University agricultural economist Christ Hurt noted that the U.S. pork prices will drop due to China's tariff, which, in turn, could spur some domestic demand. In addition, he said an increase in European Union and Canadian export volumes to China will mean those countries will export less to some countries that the U.S. then likely will be able to capture.

“The point is that, even if we lost all of the Chinese business, there will be some compensating increases in the volume sold domestically and to some alternative export destinations,” he said.

Hurt also mentioned the ongoing North American Free Trade Agreement (NAFTA) negotiations, pointing out that while China bought 2% of U.S. production in 2017, Mexico purchased 7% and Canada bought an additional 2%, for a total of 9% of U.S. production that could be affected in NAFTA talks.

“The trade hammer has fallen on the U.S. pork industry. Chinese tariffs on U.S. pork, along with rising costs, have shifted the outlook for 2018 to losses expected to be about $12.50 per head. Uncertainties surrounding NAFTA remain a grave concern as well,” Hurt said.

He said a lot needs to be sorted out, and U.S. agriculture must continue to argue for the merits of free and fairer trade.

“If the current outlook shift toward losses prevails, all expansion projects still currently on the drawing board should be reconsidered," Hurt said. "Further, if the current negative outlook prevails, some downsizing of the breeding herd into 2019 may be needed to move supply downward to provide breakeven prices.”

Regarding China's proposed beef tariffs, U.S. Meat Export Federation (USMEF) president and chief executive officer Dan Halstrom said if an additional import tariff is imposed on U.S. beef, the constructive business relationships -- and opportunities for further growth -- that have occurred over the past nine months since China reopened to U.S. beef will be at risk. Nonetheless, USMEF is hopeful that this trade dispute can be resolved without China introducing additional obstacles for U.S. beef.

Halstrom pointed out that in the second half of 2017, following the market reopening, U.S. beef exports to China totaled 3,020 metric tons valued at $31 million. In January 2018, exports reached the highest monthly volume to date, at 819 metric tons valued at $7.5 million.

“With U.S. exporters facing tariff and non-tariff barriers in China and other key markets, it is especially important to expand and diversify our export destinations for U.S. red meat. USMEF is working constantly to identify new and emerging markets in regions such as Central and South America, Southeast Asia and Africa and to expand our customer base in mainstay markets such as Mexico, Japan, South Korea and Canada,” Halstrom said.

Sector performance

Williams said the hog sector is really bearing the brunt of everything right now, explaining, “They’re in the weakest position right now; they’re going to have the most issues going forward.”

This, he said, is due to the large supply. The U.S. Department of Agriculture's “Hogs & Pigs” report released last week showed 2.8% more in inventory for the quarter. Additionally, the new Clemens Food Group plant in Coldwater, Mich. and the Seaboard Triumph Foods plant in Sioux City, Iowa, are working towards bringing second shifts on line.

Williams said this fall, the daily kill will be around 480,000 hogs. Prices for the October-to-December time frame will likely be around the upper $50s/cwt. to low $40s/cwt.

“That’s not going to be profitable for a hog producer that didn’t lock in a hedge. We think the breakeven will be somewhere in the $64 range,” he said.

Williams said packer margins will remain strong, but not as strong as last year, and while packers won’t make $40/cwt. per head, they’ll probably make close to $20.

Further processors will make money, as will the retailers, he said, "but the hog producer is going to feel the brunt of some pretty heavy losses as we get into late summer and all the way through the end of 2018.”

On the cattle side, the futures have bottomed out, Williams said, adding, “We did get to my target that we talked about near the beginning of the year.”

June cattle dropped under the $100 mark at around $98/cwt. but have since rallied.

“We’ve gotten too cheap too fast. Now, we’re kind of getting to those target points," Williams said. "It’s a buy now. People are forward-contracting meat at those prices.”

He said the markets continue to march higher.

“Cash cattle are coming down, but we still have a $6-8 basis today on futures versus cash for April, and we’re in delivery period,” Williams said.

This will narrow during the last two weeks of the month, he said, noting, “We think we will be somewhere in the cash range of $116-117 by the time we get there.”

Market recap

June live cattle futures hit a low this week, closing lower Tuesday at $99.625/cwt. before rallying to a higher close of $105.05 on Thursday.

May feeder cattle futures followed the same trend. Contracts closed lower Tuesday at $130.975/cwt. before closing higher at $138.05 on Thursday.

The Choice beef cutout closed lower at $215.09/cwt., while Select closed higher at $206.31/cwt.

May lean hog futures fell into Tuesday’s close of $61.20/cwt. before recovering the losses and closing higher Thursday at $65.85.

Pork cutout values were lower this week. The wholesale pork cutout closed lower at $68.91/cwt. Loins were lower at $67.57/cwt., while hams were higher at $52.96/cwt. Bellies were lower at $102.45/cwt.

Hogs delivered to the western Corn Belt were lower, closing Thursday at $46.08/cwt.

The U.S. Department of Agriculture reported the Eastern Region whole broiler/fryer weighted average price on March 30 at $1.0605/lb.

According to USDA, egg prices were steady, with a sharply lower undertone. Offerings were light to moderate, while supplies were mixed. Demand was light to fairly good.

Large eggs delivered to the Northeast were unchanged at $2.67-2.71/doz. Prices in the Southeast and Midwest also were unchanged at $2.79-2.82/doz. and $2.63-2.66/doz., respectively. Large eggs delivered to California were unchanged at $3.35/doz.

For turkeys, USDA said the market was steady, with mixed undertones. Offerings and demand have been light to moderate. Prices for hens and toms were lower on the lower range at 73-84 cents/lb.

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