CME: Proposed Higher Chinese Tariffs on US Beef to Have Minimal Impact

Tue, 10 Apr 2018

US - The proposed higher Chinese tariffs on US beef will have a minimal immediate impact since we export very little beef into mainland China, reports Steiner Consulting Group, DLR Division, Inc.

There was a lot of hope about expanding those exports in the coming years and the higher tariffs could make that more difficult, especially considering strong competition on value from South American markets.

Additionally, at this point it does not appear that China will impose a higher tariff on US cattle hides, at least following our reading of the second list. However, should the trade "skirmish" with China expand, it is possible that hides will be included in future lists. Please click here for list (in Manadarin).

China is the largest global buyer of US cattle hides and those purchases also represent a significant portion of US hide production. USDA reports hide exports both in terms of units sold (i.e. whole hides) and the value of those sales.

The latest data available is for February and it shows total hide sales for the month were 809,895 pieces, 5 per cent less than a year ago. The value of those hide sales was reported at $45.2 million, which puts the average price per piece at around $56/hide, pretty close to USDA quoted prices.

Total US bovine hide exports in February were 1,245,398 pieces, 7.9 per cent less than a year ago. In the first two months of this year China has accounted for about 63 per cent of all the bovine hides that have gone into export markets. Please keep in mind this is for whole hides that meet weight specs.

There are some additional hide exports but the volume is relatively small. US bovine hide exports to China in 2017 were near 10.6 million pieces, 61.7 per cent of all US exports. But accounting for a large share of exports may not mean much if those exports are a small share of domestic production.

Leather markets are global and the US is a key supplier due to its quality and consistency. As the global economy continues to expand, demand for leather goods, be this for consumer products or automobiles, has continued to expand. The red line in the following chart shows the ratio of US hide exports to China vs. federally inspected slaughter.

In other words, how many whole hides went to exports relative to the number of feedlot cattle that were slaughtered during that month. In the last five years the ratio has been around 33 per cent while overall hide exports have accounted a little over half of FI cattle slaughtered.

The hide represented the single most valuable by-product that packers derive from animals they slaughter. USDA reports cattle by-product values (also called drop credit) every week. The chart below illustrates the breakdown of the various product relative to the contribution of each item to the overall credit.

According to USDA, for the week ending 6 April the drop credit was $9.80/cwt live. On a 1400 pound steer this implies a total drop credit of $137. The value of whole butt branded hides was quoted at $58/piece, making up 44 per cent of the entire by-product value.

At this point it is speculative as to the impact of a future Chinese tariff on hides. But consider that based on current values, a 25 per cent drop in the value of hides would lower the derived value from the hide by about $14.5/head or about $1/cwt live basis. Current fed cattle price is about $115/cwt live basis.