The Trump Bump and Cattle
October 19, 2017
What's that foreign feeling in the air at your local livestock auction? It's a strange euphoric feeling we haven't felt since the good old days way back in 2014. Could it be, nah, it couldn't be optimism, could it?
Last autumn we'd all been a bit down in the dumps due to historic declines in the cattle market, but ever since Donald Trump got elected to be our 45th President cattle prices have been on a steady rise. This begs the question, was Trump responsible? Are market fundamentals now giving cattle prices a more firmer footing, or are prices just being driven by the paper players in futures markets who are playing momentum swings? Just how much, if any, of the renewed optimism that has cattle traders now putting money back on the table, due to a Trump bump?
On The Other Side
Ag economist David Kohl compared the rise and fall of cattle prices to climbing Mount Everest and says we are now safely on the other side. Cattle prices bottomed out in the fall of 2016, right before the election. Back then, 550 pound steers were fetching, on average,$1.34 per pound and 750 pound steers were selling for $1.22. But in the first week of May 2017 those same 550 pound steers were bringing $1.68 for a 25 percent rise since the election, and 750 pounders rose 20 percent to $1.46. Granted, those prices aren't the highs we saw back in the glory days of 2014 but they really aren't all that bad.
It doesn't seem that long ago when we were all wringing our hands and worrying as we pondered the almost guaranteed election of Hillary and a further deterioration in the cattle market. Farm economists were predicting even lower lows and the NCBA was urging Congresspersons that we simply had to have the passage of the Trans Pacific Partnership or we'd revisit the wreckage.
It's amazing what one election can do! Now we have President Trump dismantling the regulators and sending the TPPers packing. And lo and behold, instead of falling, the market rose dramatically. Each week finds packers caught short of their own inventory and having to pay sharply higher prices to fill orders. One week saw cattle rise $10! IN ONE WEEK! The Sterling Profit Tracker showed for the week ending May 12th that feedyards saw $536 per head gains. To take advantage of the profit margins packers were sending ever-greener cattle to town.
So many green fat cattle are being sold that the spread between Choice and Select grew to $20 and carcass weights are down 3.8 percent With so much less beef being produced, and retail ground beef prices at their lowest point in five years, the beef market is sizzling. USDA's cold storage report indicated that red meat supplies in freezers were down 4% from last year and the market for beef seems to be creating its own tailwind.
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Compare this to post-Trumpian times when feedyards were holding cattle long after their due-date for lack of bids, hoping and praying for higher prices. Carcass weights grew to an all-time high. Now we have even grumpy cattle traders calling the Trump rally "spectacular" and there have even been sightings of that most endangered species of all: the wrinkle horned flush green smiling cattle feeder.
Sizzling Like A Good Steak
Cooler heads aren't giving Trump all the credit. They contend the current market is being driven by packers having to do something totally out of character: they are actually bidding competitively to keep up with domestic beef demand and export sales. It seems the American consumer has reclaimed her joy of eating quality beef at an affordable price.
In 2014, when beef prices at every level were sky high, meat consumption fell to 202 pounds per person. That was down 9 percent from a record 222 pounds produced in 2007. Now in 2017 per capita red meat and poultry consumption is on pace to reach 218 pounds and economists are predicting American consumers will eat 223 pounds of meat per person in 2018, a new record.
One economist even went on record as saying that the increased cow slaughter numbers we're seeing are an indication that cow herd expansion may already be over. As this is written there were 16.4 percent more heifers coming to market than the year before.
The other reason prices have made such a comeback is a sizzling export market. For the first quarter of 2017, U.S. beef export tonnage was up 22% from a year ago and the value of those exports was up 23 percent.
It wasn't supposed to be this way. Prior to the election economists were predicting that the cattle market would crater under a Trump Presidency because of his intentions to refuse to sign the TPP deal and to withdraw from NAFTA. Immediately after the votes were tallied the markets did perform exactly as predicted and beef prices followed the Dow down. Then something inconceivable happened: we experienced a Trump rally. And it wasn't the kind of rally where Trump fans wait in line.
As markets continued to climb the anti-Trumpeteers had to find some other reason for the bounce back. It couldn't have been the Donald. They found a likely candidate in a white hot export market. The export share of U.S. agricultural production currently represents more than 20% in volume and value that's double the norm. The cattle market got another nudge higher when Trump switched from canning NAFTA, to simply wanting to renegotiate it.
Lifting The Beef Barricade
The NCBA and others predicted that without the Trans Pacific Partnership, Japan and the rest of Asia would turn elsewhere to meet their meat needs. Exactly the opposite has happened as both beef and pork exports to Asia are up sharply to date despite tariffs that reach as high as 38 percent.
Of course, the biggest news in the cattle market was after a 14 year hiatus in the importation of American beef due to Mad Cow, China lifted their beef barricade against U.S. beef. American beef could be back on Chinese shelves by the time you read this. This is big news because China represents a potential $2.6 billion beef market and China already accounts for 12 percent of the world's beef export business.
There are a couple snags that need to be smoothed out before we begin shipping China boatloads of American beef. One of the major stocking points is our lack of a mandatory traceability system. John Nalivka, President of Sterling Marketing wrote in Drovers CattleNetwork that all the other countries who export beef to China have mandatory animal ID systems in place, but only 15% of our cattle are age and source identified through voluntary ID systems. Additionally, the Chinese may demand hormone free or GMO free beef.
There is reason to believe that a voluntary traceability system in the U.S. would be acceptable to the Chinese. "One thing we've tried to stress in meetings with the Chinese," said Senator Max Baucus, "is that we can address their concerns. We have some voluntary programs already in place that allow a traceability component. If there is a requirement we want to make sure that anything involving traceability would be voluntary. China is a very important market. At the same time, we don't want any overly burdensome requirements on our producers who may choose not to produce beef for China. We want an agreement that is commercially meaningful, but also meaningful for U.S. beef producers and Chinese consumers."
China In Charge
Before we get all overheated about the Chinese appetite for American beef we should remember one thing: when it comes to feeding their people, China wants to be in charge. So how do they do that? Nalivka reminds us that the minute China started eating American pork in great quantities a Chinese company bought Smithfield Foods. That's a pretty good bite full, accounting for 28% of U.S. pork production. According to Nalivka, they added to that purchase recently by buying Farmer John in California which brought their share of U.S. pork production to 30 percent. "Every pound of pork produced by Smithfield can be sold to China," says Nalivka.
"Chinese food companies have also acquired three beef plants in Uruguay as well as several dairy operations in New Zealand," wrote Nalivka in Drovers CattleNetwork. And then Nalivka wrote something that should scare the chaps off U.S. ranchers. "I submit," wrote Nalivka, "that at some point a Chinese interest will purchase a major beef processing company or perhaps a major beef, pork, and poultry processing company in the U.S. It fits a strategy of food security through self-sufficiency."
If that does come to pass, and it makes perfect sense, we see only two likely candidates. Of the Big Three cattle processors that currently control more than 80% of the trade in U.S. beef, Cargill is in the process of selling their cattle feedlots which would seem to eliminate them. We doubt that China would be satisfied with a bunch of plants without a guaranteed source of captive cattle. Tyson could be a huge target and in a previous front page story we wrote about Tyson's CEO indicating that animals will become less important as a protein source in Tyson's future. He also announced that Tyson bought a chunk of Beyond Beef, which produces an artificial meat substitute. Certainly Tyson's CEO didn't sound like much of a true believer in the future of beef. We could easily see a Chinese company that is partially state owned gobbling up Tyson. If they tried would Trump try to stop them?
Then there is what we feel is the most likely candidate. China could bypass Trump all together by purchasing a non-American meat packer like JBS. The Brazilian company is the world's largest meatpacker and second-largest global food company, processing 29,000 cattle every day in the U.S. and 4,200 in Canada. The company owns 11 American feedlots with a capacity of 900,000 head. JBS also bought Pilgrim's Pride which processes 6.6 million birds a day in 25 U.S. processing plants. JBS also processes 90,000 hogs a day in the U.S. and also operates five feed mills. Last year JBS had $33.9 billion in sales of U.S. and Canadian beef, pork and poultry, accounting for more than half of the company's revenue. A Chinese acquisition of JBS would go a long way in fulfilling China's future protein needs.
Turning A Blind Eye
From afar it would appear that the Batista family who controls JBS would not want to sell the family's jewel, but they might not have the final say in the matter. Lately JBS has been in the news more than Madonna and Justin Bieber combined. And it hasn't been good news. Joesley Batista, chairman of JBS S.A., is caught up in a slew of scandals and Dow Jones reported that Brazil's Supreme Court released Batista's testimony indicating that he and other top JBS executives gave over $2.2 million in bribes to current Brazilian President Michel Temer. In making a plea deal Batista also admitted that he gave millions more in bribes to Brazil's last two presidents through off-shore accounts.
That news about JBS came a week after dozens of search warrants had been issued in a criminal investigation called "Operation Bullish". A few years ago on the front page of this newspaper we complained about the cozy relationship that existed between JBS and the Brazilian government who was acting as the meatpacker's banker. Now Batista has admitted that billions of dollars of loans were made by Brazil's National Economic and Social Development Bank to JBS going back years, which just happened to coincide with the wild growth of JBS. Now JBS has agreed to a plea deal, admitting that seven of its executives and its controlling entity, J&F Investimentos may have gotten those loans through graft and corruption. The company also agreed to pay $67.93 million in fines.
But wait, there's more. Recently you read in the Digest about Brazilian meatpackers, including JBS, who were caught selling tainted meat to foreign customers and paying bribes to meat inspectors to turn a blind eye. It got so bad that JBS shut down Brazilian operations temporarily.
We wouldn't be surprised at some point that the pyramid the Batista family has built would start to topple and at that point they, and the Brazilian government, might want to cash out to the Chinese. But instead of two companies hassling over terms, it would be more like two countries.
When You're Handed Lemons
If you've read his books you know that above all else Donald Trump is a trader. He likes to do big deals, like the one he made recently with Argentinian President Mauricio Macri. After meeting the Argentine President, Trump announced that Argentine lemons would soon be sold in the U.S. American citrus growers, many who'd contributed to the Trump campaign, were not pleased. They said Trump's trade neglected to take the growers' concerns into account and could allow lemons from pest-infested areas of Argentina into the United States. Joel Nelsen, President of California Citrus Mutual, said in filing a lawsuit to stop the trade, "Trump viewed allowing importation of Argentine lemons as a bargaining chip to achieve unrelated foreign policy objectives." (It was speculated those other objectives involved North Korea.)
We can only hope that Trump The Trader doesn't soon forget who helped get him elected and someday uses beef as a bargaining chip in a similar manner.
We'd suggest a good way for Trump to show he really does put America first would be to come out in strong support for country of origin labeling so consumers could once again choose home-grown American beef. We suspect a lack of support for such a push suggests the Trump Bump could be fleeting and cattle markets could turn into a Trump Dump and/or Slump.
– Reprinted with permission (at the request of a reader) from Livestock Market Digest