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Opportunities and Obstacles in China Beef Market

By Matt Hoesing, retail commercial beef lender

The re-opening of the Chinese beef market comes as the U.S. beef industry is in growth mode and reliant on exports to help support prices. But experts caution that the Chinese beef import market poses as many obstacles as opportunities.

For producers such as Bill Brush, whose Almeria Feeding Co. near North Loup, Nebraska, is hormone free and traces the origin and age of its animals, China could be a viable market.

“Our sustainably produced NHTC (non-hormone treated cattle) beef has a following in Europe,” Brush said. “There will be consumers in China who will want to know how the cattle are raised and will want to try our beef.”

For U.S. producers who use synthetic growth promotants, marketing to China might be too pricey a prospect. Brett Stuart of Global AgriTrends calculates the cost of foregoing growth promotants to comply with China’s hormone ban to be as high $275 a head.

“We are good at doing what we get paid to do,” Stuart said. “And we cannot afford to forego hormones on a large scale.”

Even so, Stuart and CattleFax’s Kevin Good hail the China trade deal as good news for U.S. beef producers.

“We must exploit any crack in the door we can get and they have cracked the door open,” Stuart said.

A shipment in June marked the first time China allowed U.S. beef into its country since a heifer slaughtered in Washington in 2004 tested positive for mad cow disease. In the intervening years, China’s appetite for beef has grown while the country’s ability to meet domestic demand has fallen to 88 percent, down from 99 percent just five years ago, Stuart said.

Between 2010 and mid-2015, China increased beef imports tenfold, and many put the value of the Chinese beef import market at $2.5 billion. In reality, Stuart said, as much as $7 billion worth of beef flows into the Greater China region, including Hong Kong and Vietnam.

These kind of numbers are tantalizing to U.S. beef producers, who are adding 800,000 head this year and looking to exports to take much of this growth off the U.S. market, Good said. About 45 percent of last year’s increased beef production was exported and about 55 percent of this year’s additional production will be exported.

Good said the forecast for the next couple of years calls for soft beef prices, unless exports expand. Stuart, however, cautioned against looking to China as an export elixir. There are a number of constraints to overcome for U.S. beef to gain a major foothold in China, including:

  • U.S. beef is at a cost disadvantage in a price sensitive market like China’s.
  • The U.S. produces beef with the white fat preferred by Chinese consumers. But U.S. beef is not widely known and the Chinese market is crowded with competitors familiar to consumers.
  • It is estimated that less than 5 percent of U.S. cattle currently meet China’s traceability requirements.
  • China has zero tolerance for beta agonists – and will test for any trace of synthetic hormone residue.

China’s ban on growth promotants isn’t discriminatory to the U.S. – it applies to all trading partners, Stuart said. The difference is that the U.S. is one of only a couple countries that widely uses synthetic growth hormones in beef production. These compounds, Stuart notes, are FDA approved and safely used.

Where China is unique is in establishing a zero-tolerance standard for growth promotants. This runs counter to world standards of safe residue levels, Stuart said.

Beta-agonists and hormone additives are unlikely to drop out of U.S. production on a large scale, he predicted. That makes China largely a niche market for U.S. beef producers.

At Almeria Feeding Co., Brush and his partners have been certified for nine years as hormone-free. A ranch-to-rail operation, Almeria backgrounds calves from its own herds and delivers them to a packer that specializes in non-hormone treated cattle. The packer is one of only four initially recognized by China as eligible for processing beef to their standards.

Almeria plants cover crops on fields cut for silage, Brush said. Its herds and feeders graze and feed on or near the fields. Both practices are integral to sustainable beef production – the cover crops building soil health and the manure supporting plant growth. Background feeders are on full feed to meet the packer’s six-month harvest schedule, Brush said.

“Sometimes the grazing runs past optimum corn planting dates,” Brush said.  “This would cause heart failure for a corn farmer, but the ranch-to-rail operation values the grazing days, and the irrigated corn and cane is chopped for silage.”

Brush said that in an operation like his, it is critical to get the size right — large enough to supply finished cattle when the packer wants to pull them, but small enough to adhere to sustainable growing and feeding practices.

“From the breeding and gestation period until the carcass is on the rail, it may be as long as 25 months,” Brush said.

The costs of ranch-to-rail sustainably produced NHTC beef are significant, he said. Almeria’s Samson vertification process, for example, is time consuming and an expense non-certified operations do not have. Nevertheless, Brush said, projections show the operation will be profitable at current prices.

“We think that beef consumers worldwide would like to eat the beef from this and other sustainable ranch-to-rail operations,” Brush said. “I think consumers would pay a higher price for this as branded beef. In a perfect world, the producer and the packer would be partners; the packer would try to sell the beef at a higher price and the beef producer would get part of that extra premium.”

To those who are wondering if they should tag calves this fall for traceability or hold off on hormones, Stuart advises doing some homework. Then apply those practices for which you are paid.

“Check with buyers. Sure, if someone is willing to pay you to (tag and forego hormones), do it,” he said. “But have a deal in place.”

Cattle Transition Part Two: Cow/Calf Caution

Cattle feeders aren’t the only ones who have seen price adjustments as production ramps up. Calf prices – including seedstock – have moved in lock step with fed cattle prices, narrowing cow-calf margins as well.

“I think margins will get tighter faster than anyone thought they would,” said Jay Wolf, a member of the third generation at Wagonhammer Ranches, Bartlett, Neb., a family-owned business that’s been in operation more than 100 years. “Everyone manages costs even in good times, but in this environment, some equipment acquisition might be put off for a time.”

University of Nebraska economists have run 2016 budgets for several sizes of operations in several locations, employing data from a survey of producers. Their conclusion confirms Wolf’s observation: Profits have declined compared with 2015 in every budget group.

Lower revenue is a primary cause, as it has dropped 65 percent to 74 percent year-over-year. However, increases in feed costs also contributed to the squeeze in three of four budgets the economists ran. With a cost increase of $251/calf, the budget for 500 cows in the Sandhills showed the greatest bump. This was due to strongly higher grazing lease costs.

Sandhills also saw the largest decrease in profitability – a substantial $916/calf, from a positive $492 last year to an estimated $424 loss this year.

“Lower cattle prices and higher feed costs explain all but $19 of this decline,” according to Roger Wilson, University of Nebraska budget analyst.

In fact, he reports that a 750-cow budget, representative of the Central Agricultural Statistics District in the state, is the only one with a positive profit for 2016 – $218/calf, a $562 decline from last year’s $780.

“Budgets for ranches that rely primarily on owned grazing land may still show substantial profits given the current price structure, if they are not including an opportunity cost for grazing land,” Wilson said. “It may be that the profit is a return on land investment rather than profitability of the cow operation.”

However, Jim Van Kirk, vice president of credit at Frontier Farm Credit, observes that an unprecedented number of good years has generally left cow-calf operations in sound financial condition.

“We expect the price impact of bigger calf and beef supplies to continue and even accelerate in the next few years,” he said. “The higher grazing cost is a significant factor that may need to be adjusted going forward.”

Pasture outlook for 2016

With the exception of California and the Southwest, the United States has started the growing season with very favorable pasture and forage conditions. Only 10 percent of total acres were rated poor or very poor, down from 13 percent last year and a five-year average of 21 percent. The Great Plains, at just 8 percent poor/very poor, and the Western region, at 12 percent, have seen the most improvement, while the Southern Plains and Corn Belt are about even with last year.

The Climate Prediction Center’s three-month outlook for May to July promises additional moisture across the southern half of the United States, before the June to August and July to September outlooks shift to neutral — equal chances of above, normal or below rainfall.

Cow market

As producers adjust to existing and expected lower cow-calf profits, beef cow slaughter is up 4 percent from last year’s levels, while dairy cow slaughter is level, bringing total cow slaughter to about 1 percent over 2015. Bred cows averaged $1,350 to $2,100 in western markets and $1,600 to $2,350 in the Midwest in April; bred heifers, $1,550 to $2,100 in the West and $1,700 to $2,300 in the Midwest; and pairs, $2,000 to $2,500 in the West and $2,100 to $3,000 in the Midwest.

Market cow prices have been quite disappointing, near 91 on CattleFax’s Seasonal Utility Cow Price Index, compared with 104 last year. CattleFax expects cow prices to be flat through spring and summer, in the $70s/cwt. range, dropping to a fall low in the $50 to $60 area.

Hence, the balance is swinging from producers facing a decision between keeping cows to produce another high-priced cow versus selling for a good slaughter price to a decision of keeping for a lower-priced calf for selling for a lower slaughter price.

Wolf expects that in areas such as Nebraska, which remained fully stocked through the liquidation, the decision will be steady as she goes. In areas such as Oklahoma and Texas, where drought forced cattle off the land, additional herd rebuilding is more likely and replacements have gotten more reasonable.

Seeking Efficiency

“In this part of the cycle, it is even more important to know your cost of production at every level of production,” said Jud Jesske, Frontier Farm Credit vice president, agribusiness lending. “It’s a time to make decisions geared to boosting efficiency.”

Main measures that separate high-profit from low-profit operations include calf-crop percentage, weaning rate, calving interval and weaning weight.

An increase in the percentage of cows successfully bred and delivering a calf will have a large impact on profitability. Reducing calf loss will have a similar impact.

The more calves for sale, the more the income and the less expenditure without return on investment. A study from the University of Georgia identified 85 percent as the level required to meet production expenses, on average; 90 percent is considered a well-managed herd. And a goal of a 95 percent calf crop during a 60-day calving season is a target that can be reached, according to Ted G. Dyer, Extension animal scientist at the university.

The chart below illustrates the impacts of percent calf crop and average weaning rate. For instance, if a ranch has a weaning rate of 85 percent and weaning weight of 500 lb., over all cows in the herd, that would be equal to 425 lb. per cow. At 90 percent, pounds produced increases to 450 lb.

Pounds of Calf Produced per Cow

SOURCE: UNIVERSITY OF GEORGIA

An improved calving interval not only means less cow downtime, but the more calves born on the early end of the calving season, the more pounds there will be at weaning. For instance, a calf born 15 days earlier will weigh about 30 lbs. more if one assumes a 2- lb.-per-day rule of thumb for gain.

One recent survey found a 50 lb. difference in weaning weight between high-return and low-return producers. At last year’s prices, that would have been about $125/calf in added return.

“We expect several years of tighter margins and Frontier Farm Credit is looking at all options to help producers get through this challenging time,” said Jesske. “It may be early to say this, but at times, that means looking beyond cash-flow and considering restructuring loans to provide working capital or even considering different business models.”

Transition Time for the Cattle Business: Part 1, Feedlots

Cattlemen are experiencing both long- and short-term effects of the transition to more beef production.

“The feedlot business has really seen a boom–bust move over the past few years,” said Jay Wolf of Wagonhammer Cattle Company, part of a diversified Nebraska ranching business that has been family owned for more than 100 years. “At our Albion feedlot, we often own animals for more than 12 months. We thought that sometime during that period we’d see an opportunity to at least lock in breakeven but that has not occurred.”

Looking at the most recent move, June fed cattle prices, which had traded in the $132/cwt. area in mid-March, fell to $114 in late April before more recently improving to $122 to $124. Negative price action in April took many by surprise since it came during a month when prices usually trend higher, before dropping to summer lows (see seasonal price chart).

Choice Steer Chart
The reason: Slaughter picked up before grilling season demand was able to do so. The last two weeks of April saw steer/heifer slaughter near 590,000 head/week – more than any other week since August 2013 – and the month’s total was 6 percent over a year earlier. Analysts had expected numbers to be flat or lower compared with last year. A fairly large kill is expected to continue through May.

Packers had seen their bottom line move into the black and encouraged pulling sales forward to take advantage of April futures being sharply discounted to cash prices. That now has reversed because they were forced to discount boxed beef prices to move product.

The good news is the industry now is current. As the USDA’s May 12 data in the chart below show, weights now have fallen to 2015 levels. Given the seasonal pattern, it’s likely they’ll begin heading higher again in the next few weeks.

Weekly Steer ChartRetailers are well stocked and should have enough beef to run features through May, fueling up grills as Memorial Day approaches, albeit six days later than last year.

“The big question for the short-term now is whether beef demand will be sustained after the holiday,” says Steve Meyer, coauthor of The Daily Livestock Report.

With recent high numbers moving, fed-cattle supplies are projected to slide lower into July. In this month’s Cattle on Feed report, cattle on feed 150 days or more are projected to be 14 percent below last year, according to Steve Kay of Cattle Buyers Weekly. CattleFax estimates a reduction of just 1 percent. This could lead to contra-seasonal price strength during June (see seasonal price chart), some analysts believe.

In addition, beef supplies in cold storage are being drawn down: In its April report, USDA reported inventories dropped 5 percent from the prior month and were down 10 percent from two months earlier. Compared with a year ago, there was 3 percent less on hand at the end of March than a year ago and a half percent less than the five-year average. Lower imports are helping reduce available supplies.

Demand side

Not only are we entering a seasonally stronger time frame for beef, but exports are showing signs of improvement as well – especially in Asian markets such as South Korea and Taiwan, where volume in the first quarter jumped 25 percent and 20 percent above the same time last year. Our long-term top market, Japan, boosted purchases by a more modest 9 percent from a year ago. First-quarter exports to Canada fell 9 percent and to Mexico, 14 percent, mainly due to exchange rates.

“Exports are critical to beef producers,” said Wolf, “And the last year or so was frustrating, both because of the strong dollar and the fact that Australia was able to negotiate lower tariffs in Asia, putting the United States at a disadvantage. It is encouraging to see some improvement in 2016, but the beef industry really would like to see the Trans-Pacific Partnership signed into law.”

What’s Next

The earlier-than-expected downturn created some potential for producers to lock in breakeven or even a small profit on the next turn of cattle, noted Adam Wacker, Frontier Farm Credit vice president, credit – beef industry.

“By at least one profit estimate, cattle put on feed in the second week of May had a projected breakeven of about $116/cwt. and the futures price for when they leave the feedyard in mid-May was about $118/cwt., implying some profit potential, subject to basis at the time of sale.

Click to read Part two in the series on Cattle Transition: Cow/Calf Caution