Beef Cattle Market Outlook

1. Beef Cattle Market Outlook Blake Bennett Extension Economist/Management Texas Cooperative Extension

2. Japan Ready To Open Its Boarders • The U.S. and Japan reached an agreement to open Japan’s boarders to U.S. beef again. • They had banned U.S. beef after the BSE outbreak. • This agreement could add about $1.2 billion to U.S. beef exports as sales are resumed. • It appears unlikely that exports will resume before the Christmas Holidays, but it's always possible.

3. When will actual shipments likely begin? • It is not possible to say exactly. • Before U.S. shipments begin, the Japanese authorities must complete their regulatory process for revising their domestic regulations (i.e., dropping 100% BSE testing to instead requiring testing only for animals 21 months and older). • Regulations to permit importation of beef from animals 20 months and younger also must be promulgated. • The special study of the correlation between chronological and physiological age, defined in the Agreement, must be completed within 45 days. This study will be conducted by USDA/AMS in close collaboration with Japanese experts to determine the details of the grading criteria to be used. • Thus, all things taken together suggest that several weeks will be required for the resumption of sales.

4. What proportion of previous sales will this Agreement permit? • Previous annual sales (2003) of beef and beef products to Japan amounted to $1.7 billion. • This Agreement permits sales of beef and products from animals 20 months old or younger. • The U.S. beef production system is geared to producing younger animals. • Estimates suggest that about 70% of the 35 million cattle slaughtered each year are steers and heifers 20 months or younger. • Thus, the Agreement will permit a significant portion of previous sales to be recovered in the interim period.

5. How will cattle age be determined? What methods will be used in such a determination? • Two methods will be used to determine that animals are 20 months of age or younger and thus meet the requirements for the Japanese market. • Production records that indicate birth dates will be used. • These include records for individual animals; records from insemination; group age verification plans; and records from already existing USDA-certified special programs. • The USDA physiological grading system also will be used. • A special study is being conducted to examine the correlation between chronological age and physiological characteristics. This information then will be used to define the parameters of the USDA grading criteria that will be used in determining animal eligibility for export.

6. How long will this Agreement be in place? What is the longer-term outlook for U.S.-Japan beef trade? • Our export sales to Japan were abruptly terminated 10 months ago. • This agreement marks a start in the resumption of that trade - a very significant restart, to be sure. • The operation of this approach - a special marketing program with specific requirements - will be reviewed jointly by the two Governments in July of 2005. • A group of international experts, including from the World Organization for Animal Health (OIE) and the World Health Organization (WHO), will be asked to review the BSE situation in both countries and to make recommendations as to how the program might be modified and consumers still be assured of safe beef supplies. • Thus, this Agreement marks a start in the resumption of trade. • July 2005 marks an important review. • And, the longer-term view would be a return to normalcy in our trading relationship.

7. The Agreement includes resumption of Japan's beef sales to the United States market. What does this entail? • Japan produces a very expensive, high quality specialty beef that it formerly exported to the United States. • The export sales of Wagyu or Kobe beef were very limited, about a quarter million dollars in 2001. • Japan has requested to resume its sales to our market. • If you have not followed this closely, the Japanese have now had 13 cases of BSE, three in the last few months, so allowing in Kobe beef could spur some criticism. • But, I think this may have been a necessary component of the agreement to get trade resumed, and the rules still need to be developed.

8. What Does This Mean for U.S. Beef? • The U.S. exports about 10% of its beef each year. • Japan, Mexico, S. Korea, and Canada = 83% of volume. • About 33% of our total beef exports went to Japan in 2002. • 2003 – We exported 1.28 million metric tons of beef worth $3.86 billion

10. What Does This Mean for U.S. Beef? • The U.S. will be getting a major export player back. • In terms of price, we should see a significant increase in export demand for our beef. This should relate into a support of our prices.

11. USDA says Taiwan has also agreed to resume US beef imports • USDA also announced that Taiwan has agreed in principle to resume imports of US beef and beef products. • Taiwan officials say the required assessments and evaluations for trade to resume are nearing completion. • On-site inspection of the major features and implementation of the US BSE measures are the last step of the process.

12. USDA says Taiwan has also agreed to resume US beef imports • A delegation of Taiwan experts will travel to the US for the site visits beginning November 10. • Exports of US beef to Taiwan totaled about $325 million in 2003, prior to the finding of bovine spongiform encephalopathy in a dairy cow in Washington state.

13. So Why Hasn’t Our Market Responded? • The market just didn’t respond to the news much because there is still uncertainty as to when the market will be re-opened. • The large packers have been facing negative margins periodically for weeks

14. So Why Hasn’t Our Market Responded? • In a consolidated industry, the large packers are not price takers and we are seeing that fact demonstrated again. • Facing negative margins periodically for weeks, packers started reducing levels of operation and the result was lower cattle prices late last week.

15. So Why Hasn’t Our Market Responded? • Demand is not the problem. • Demand up some 9.4 percent • Comparing the year to year increase in demand for the first three quarters of this year to last, we have seen one of the largest since demand finally stopped declining in 1998.

16. So Why Hasn’t Our Market Responded? • In spite of the strong performance on the demand side, the cattle market is likely to drift lower in the short term in the presence of packer efforts to restore positive margins and the continued uncertainty about the opening of the Japanese market to U. S. beef.

17. So What Should We Do? • The high $80’s fed market is hard to hold with Japan still closed. • Hold or obtain short positions in the live cattle and feeder cattle futures until we see things starting to improve after the sharp losses that came late last week. • Barring any fundamental changes in supply and demand, help is around the corner. But it’s just that, around the corner and right now we don’t know how far the corner is away.

18. Questions?

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