By John Harrington
DTN Livestock Analyst
One month into Livestock Market Year 2017 and what's not to like.
I'll pause for the janitorial staff to mop the floor of phlegm, spittle and vomit, convulsive reactions such an assessment might force from the months of demonstrators, Federal judges, journalists, green card holders, Elizabeth Warren, Stephen Colbert, and millions of conflict-haters who just want to "get along". Come to think of it, let's take another second or two to accommodate masters of the Heimlich maneuver, CPR and first responders in general.
Nevertheless, once the emergency room clears, I won't hesitate to raise another cautious (see below) cheer over the profitable way red meat producers have stepped into the new year. To be sure, it's a small corner of the national stage, perhaps unworthy to draw meaningful implications for constitutional law and the future of the free world. Still, it's the fishing hole this game warden monitors, and certainly not one irrelevant to the overall welfare of U.S agriculture.
Only the biggest sourpuss in cattle feeding country would argue about crowd size in January's inauguration of profits. With the five-area fed steer averaging right at $120 (the highest since last June), beef producers finally scored a significant healing of lost equity.
According to the DTN feeding model (based on 8-weight steers finished over 120 days), feedlot black ink averaged $261 per head last month.
Although early year fireworks in the pork industry were less spectacular, trips to the bank more than paid for the gas. After slugging through record slaughter numbers and tonnage through the fourth quarter of 2016, finishing floor managers seized upon both tightening supplies and strong demand in January like Steve Bannon measuring his new West Wing office for drapes. The average National dressed sales last month totaled approximately $62, more than $20 greater than the November low (when producers were flushing away nearly $35 per head) and good enough to net the feeding company close to $5.
Furthermore, January markets ended with enough bullish momentum to encourage beef and pork producers regarding the possibility of sustained profitability. Not only do most analysts believe fed steer and heifer numbers will remain tight at least through the end of March, DTN projects that feedlot break-evens are now essentially fixed to remain between $97 and $105 from now through Memorial Day (i.e., well-under the current trading range of April live futures, $112.75 to $116.65).
As far as short-term optimism in the hog market is concerned, the premium structure of lean futures (e.g., summer contracts are now $4 to $5 over spot February) seems quite promising. Of course, all pork producers are nursing an even bigger market hope tied to the completion of new processing plants and the significant expansion of chain speed in the second half of 2017.
And yet ...
A bird in the hand today does not even guarantee the possibility of two in the bush tomorrow. More pointedly, it's not how you start, it's how you finish. Virtually everyone in the house knows that the absolute key to winning market stamina through the end of the year is the preservation and/or successful reformation of trading agreements between the U.S. and major foreign buyers.
When President Donald Trump first engaged in saber rattling over the Trans-Pacific Partnership (TPP) and the North American Free Trade Agreement (NAFTA), most commodity groups grumbled but struggled to say philosophic, publicly reasoning that all deals could be made better if accomplished in a timely manner.
Needless to say, that last clause was absolutely crucial. By all means, hold trading feet closer to the fire, just as long as there's no serious lull in export demand.
The Trump Administration's ability to successfully sweet talk, cajole, negotiate, or arm-twist in this regard remains to be seen. In fairness, it's way too early to make a judgment. Still, it's tough to ignore certain brash phone conservations our new Commander-in-Deals has reportedly had with his counterparts in Mexico and Australia.
Characteristically, he sounds like less than a charm school graduate.
We're set to see another test of Trump's style and potential effectiveness later than week when Japanese Prime Minister Shinzo Abe pays a state visit. Abe will be in Washington Friday to meet with Trump on a number of matters, including security challenges and bilateral trade. The importance of schmoozing Abe and cementing the trading friendship of Japan for the meat industry can hardly be overstated.
For U.S. beef and pork exports, Japan is the highest value international market. In fiscal 2016, Japanese consumers purchased $1.4 billion of U.S. beef products and $1.5 billion of U.S. pork products. Demand is very strong despite Japanese tariffs and other import measures that limit market access for both products.
Under terms of the TPP, Japan's 38.5% tariff on fresh and frozen beef would have been cut to 9% over the agreement's phase-in period and would have given the U.S. beef industry parity with Australia in the Japanese market. Japan's tariffs on pork, which are determined through a so-called gate price system, would have been substantially reduced as part of the TPP agreement.
An analysis by the International Trade Commission found that beef exports to TPP countries would grow by $876 million a year by the end of the phase-in period and that most of the growth would be in trade to Japan. Likewise, it found that pork exports to TPP countries would grow by $387 million, with most of the exports going to Japan. Nearly 9,000 U.S. jobs would be generated by increased exports of livestock products, according to the USDA's export multiplier.
In other words, the bar for securing a critical portion of U.S. beef and pork demand couldn't be set higher. Of course, no one expects the president to sign, seal, and delivery any kind of history-making deal on Friday. But he definitely needs to start laying the essential tracks in that regard, cautiously avoiding any self-inflicted wounds and respecting unique Japanese sensibilities.
If he can't get the job done and still insists on undoing the vital export network now in place, January's bullish start could fade faster than yesterday's Tweet.
John Harrington can be reached at harringtonsfotm@gmail.com
Follow John Harrington on Twitter @feelofthemarket
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