Historic Moment for US Beef Threatened by Trade Uncertainty

27 June 2018

Amidst the barrage of headlines reporting on red meat’s carcinogenic properties, slowing meat demand in China, growing veganism in developed countries, and increasing preference for organics, one might have missed the United States (US) beef industry’s recent comeback.

Market fundamentals for US beef are better than they’ve been in decades. In 2018, US’ domestic consumption per capita of beef is set to reach its highest point in seven years, while both production and exports are projected to reach historical peaks. With strong domestic and international demand, as well as expected bumper crops for major feed grains this season, a banner year for US beef may appear likely.

The recent growth of the US beef industry has undoubtedly been fueled by its aggressive expansion into foreign markets; between 1990 and 2018, US beef exports have risen by 200 percent. Given the Trump Administration’s combative stance on trade, however, many of the free trade deals that allowed for the expansion of US beef are now in jeopardy. The other two members of the imperiled North American Free Trade Agreement (NAFTA)—Canada and Mexico—together imported over 25 percent of US beef exports in 2017. Recently, hostility has been brewing between the US and policy makers in both Japan and China, further threatening US beef’s access to the majority of its overseas markets by total volume.

Therefore, despite the fundamentally rosy outlook for US beef producers, a combination of diverse datasets can show how strong US beef’s current position really is in the face of any potential trade headwinds.

US beef battles back

Increased exports dominate the story of US beef’s big comeback. As they became aware of the tempered domestic trends, US beef producers shifted to pursue markets abroad in previous decades and have continued since. Total US domestic consumption of beef and veal peaked in 1976 at 13 million tonnes. Meanwhile, US production quantity has surpassed its former 1976 peak several times, largely driven by surging exports. Despite a major setback in 2004, due to the first known occurrence of bovine spongiform encephalopathy (BSE) in the country, US beef producers have successfully been able to reposition themselves to feed Asia’s rapidly growing middle class and its simultaneous rising demand for protein. And although the major driver of change is beef demand abroad, the US is also set to consume more beef domestically thanks to a reinvigorated economy.

Production costs for cattle farms are also likely to be low, which will increase producer margins and profits. US corn and soybean yields were at their highest and second-highest levels last year, respectively, and their combined stocks were at their highest level ever in March of this year at 283 million tonnes. Moreover, both the USDA and Gro Intelligence are predicting 2018 US corn yields to be at their third-highest level ever. The effect of high corn and soybean yields on domestic feed grain prices may be compounded by the ongoing US-China trade war. Although the US does not normally export a large volume of soybeans during this time of year, China’s newly-imposed tariffs on US feed grains will only continue to worsen the ongoing glut. The trade war may still be averted in time, but recent Commitments of Traders (COT) reports indicate that many managed money traders are already betting against a rise in major feed grain prices.

Chart Note: Gro's Yield Model began in 2016. For more information on our models, look here.

Lastly, rents and asset values for pastureland in key cattle-farming states have fallen in the past couple years, further ensuring that production costs will remain low throughout the US beef supply chain.

That is not to say that production costs will be equally low for all US cattle farmers. Texas, the country’s largest cattle-producing state, is currently in the midst of a significant drought. Texas pastureland rated as being good-to-excellent was only 19 percent on June 24th, well below the 54 percent five year average. Of course, for cattle farms in other parts of the country, any complications for Texas will only further increase their producer prices and margins.

Regardless, the daily wholesale prices that beef packers are receiving for primal cuts are high, indicating that beef demand remains strong. Notably, the price paid for loin cuts—traditionally the priciest cut of meat sold by packers—is nearing its highest recorded price. Both grades of beef chuck—which is traditionally used in less-expensive hamburger meat—are closer to their averages but remain strong, too. High prices for loins may be more reflective of the strong domestic economy, however recent weekly export data also indicates strong demand from overseas.

In response, cattle and beef producers have moved production into overdrive. Both beef cow herds and calf crops reached near-decade highs at the end of 2017, and by May of 2018, placement of cattle on feed (for growth in feedlots prior to slaughter) was at its highest point in over ten years. Moreover, it doesn’t appear that US beef producers are overreacting; the USDA projects both US and global domestic consumption will rise sharply throughout 2018.

Trade storms on the horizon

Although growth is accelerating and the US beef industry has good reason to celebrate, there is significant cause for concern. The onset of a trade war can quickly halt the momentum of any export-fueled industry. The renegotiation of United States-Republic of Korea Free Trade Agreement (KORUS FTA) left agriculture untouched, fortunately for US beef producers, however they may not be so lucky during negotiations with less amenable partners. As tensions over trade continue to escalate between the US and Japan—the largest destination for US beef exports—American producers should be concerned. Although US President Donald Trump’s protectionist statements have so far been directed toward foreign manufacturers rather than farmers, there is still a strong likelihood that trade partners will counter with tariffs on US agricultural exports. The same can be said for renegotiation of NAFTA, a market area which alone accounts for over 25 percent of US beef exports. Ultimately, US beef producers need to look no further than China’s recent retaliatory tariffs for evidence.

In light of recent trade events, the fact that beef consumption in China has quickly been picking up steam in recent years is daunting for the US industry. In fact, China is already the second-largest consumer of beef in the world, behind only the US. Unlike Chinese demand for pork, which has started to level off, demand for beef continues to grow at a significant pace. The USDA projects that Chinese beef imports will make a year-over-year jump of 23 percent. With enormous potential for import growth, China has become a critical market for major beef-exporting countries. Other large beef exporters, such as Brazil and Australia, will be eager, and likely able, to fill any gap in Chinese demand left by the US.

Conclusion

Thanks to its large domestic consumer base, the US’ beef industry is resilient. As health concerns grew among the developed world, however, there was a clear downward trend for domestic beef consumption. Even a recent jump in US per capita consumption of beef, potentially due to the strengthened economy, leaves values well below historical peaks.

Exports to rapidly-developing countries around the world has so far been the key to growth for US beef producers. Although the Trans-Pacific Partnership (TPP) is now in the rearview mirror, US beef exports to countries such as Singapore and Chile have continued to increase. In the past few years, nearly every measure for US beef production has risen.

Yet time is clearly running out for US beef producers. The recently-signed, US-less Comprehensive and Progressive Agreement for Trans-Pacific Partnership (CPTPP) will unite other major beef exporters, such as Australia and New Zealand, with many of the US’ most promising import markets. With US beef producers continuing to ramp up production, moreover, there is the distinct possibility that supply will soon again outstrip demand. US beef producers could quickly find themselves with too much product on their hands.