Price Positive Benefits Result from Agreements

Japanese agreement and duties on Canadian live hogs will bring higher prices for cattle producers, but is offset by cattle on-feed numbers. Jacqui Fatka

Published on: Oct 26, 2004

Dynamics are promising for cattle producers after two recent announcements--Japan's agreement to move forward on opening trade and the duty placed on Canadian live hogs being shipped to the United States.

However Chris Hurt, Purdue University Extension marketing specialist, notes that these "price positive" benefits will be offset somewhat by higher numbers of cattle on-feed.

For the U.S.-Japanese agreement to re-open beef shipments, the details still have to be worked out. "In terms of market prices, 'the devil is in the details,'" he notes. "U.S. sources have been optimistic that beef could begin to flow in 'a few weeks.' Japanese sources, however, are suggesting 'maybe in the spring of 2005.' Regardless, Japan is a huge market. In 2003, Japan purchased 920 million pounds of beef, representing 36% of all U.S. beef exports.

National Cattlemen's Beef Association Chief Economist Gregg Doud reminds that after Japan found it's first case of bovine spongiform encephalopathy (BSE), the U.S. lost 40% of it's market share in Japan due. It took nearly 24 months to get back to 90% of Japan's pre-BSE level.

"In addition, when Japan and the United States reach a final agreement, South Korea will most likely join in as well. In 2003, South Korea was the third largest buyer of U.S. beef, representing an additional 23% of beef exports."

The unknown situation of Canada

In regards to the decision involving Canadian live hog imports, Hurt says the duty approaches 15% of the value of the hogs and will have the impact of keeping more hogs in Canada for finishing and processing.

"This will tend to lower hog and cattle prices in Canada, but raise prices in the United States," says Hurt. "The longer-run impacts are less clear. If the duty stays in place, it may cause a shifting of finishing and processing of hogs to Canada."

Adding to the mix of uncertainties for cattle prices is the question of when the border might be opened to Canadian live cattle and the specific terms and timing of such an agreement. There has been a general feeling in the marketplace that a restricted opening of the Canadian border would occur prior to the opening of exports to Japan. For now, the timing and details of each remain uncertain.

Cattle on Feed report shows herd expansion

Hurt says that a final piece of new information in the cattle market is the latest USDA quarterly Cattle on Feed report, which showed on-feed numbers to be higher than expected, up 3%. The number of steer calves on-feed was up 4%, but heifers on-feed were up only 1%. The number of cows and bulls on-feed were down 7%.

"The smaller number of females on-feed reflects a growing interest in herd expansion as more cows are being retained in the breeding herd and more heifers are being held for potential breeding," says Hurt.

Placements were down only 4% and the number marketed in September was smaller than expected, down 11%. Placements of cattle weighing less than 800 pounds were down a surprising 11%, reflecting the limited number of young cattle available for feedlots.

Prices could reach $90 level by year's end

"What does this mixed set of events and numbers mean for beef supplies in the coming months?" Hurt asks. "While the announcement that the United States and Japan will open trade is initially positive, it is not likely to happen for several months as details are worked out. This leaves the immediate issue of higher-than-expected on-feed numbers. Added to larger numbers will be much heavier market weights due to low feed prices and abundant forage supplies."

In October, cattle weights have been up over 4% and these heavy weights will continue into the winter, Hurt adds. As a result, beef supplies will be higher by 2 to 4% in the last quarter of 2004 and the first quarter of 2005.

"Finished cattle prices should move seasonally higher, however, and may approach the $90 level by the end of the year," he says. "Prices are expected to average in the higher $80s in the first quarter of 2005, but to peak in the late-March to early-April period in the low $90s. Prices are then expected to move seasonally lower into the summer, with averages in the low-to-mid $80s."

But, he emphasizes, uncertainties continue to surround the trade issues. "The issue is not just when trade between the United States, Canada and Asia can be restored, but the terms of these potential agreements," he says. "Opening beef exports to Asia could enhance finished cattle prices by $5 per live hundredweight or more, while opening imports of live cattle from Canada, in the absence of opening exports to Asia, could depress prices by $2 or more," he says.

"Odds now seem to favor that mad cow disease issues will be resolved in the next six months. This would allow the establishment of a framework under which limited beef trading between the United States, Canada, and Asia can begin once again."