Washington Insider-- Friday

Bloomberg: Cattle Ranchers Own Worst Enemy

Here's a quick monitor of Washington farm and trade policy issues from DTN's well-placed observer.

China Not Meeting WTO Obligations: US Industry Groups

China has not done enough to expand market access to foreign companies, protect intellectual property rights and address other barriers to trade, representatives of U.S. agriculture, information technology and other industries told an interagency government panel October 5.

The nation must beef up penalties for intellectual property violations, curb financial support for investment, merger and acquisition activity and end trade-restrictive and discriminatory requirements imposed for alleged security reasons, they said.

China presents a complex overall picture, but as the growth of the country's economy slows, there appears to be mounting reluctance in China to continue its economic reform efforts, Jeff Moon, assistant US trade representative for China affairs, said in his opening statement.

Wheat markets being distorted. Alan Tracy, president of the U.S. Wheat Associates, said China's policies "create some of the most significant distortions in global wheat markets." For example, he said, China fails to properly allocate its tariff rate quota (TRQ) to private sector importers.

Under its terms of accession to the WTO, China agreed to allow an annual 9.64 million metric tons of wheat imports subject to just 1 percent duties; but Tracy said that China's failure to properly allocate the TRQ, so that in most years, only about one-third of the quota amount, "resulting in lost market opportunities for world wheat exporters." China's domestic subsidies for fuel and fertilizer, and its value-added tax of 13% on wheat imports, also make it harder for foreign producers to compete against Chinese wheat growers, Tracy said.

The U.S. recently filed a WTO complaint against China's domestic supports and subsidies for wheat, corn and rice.

EPA Proposed Rule Draws Criticism from Ethanol Backers

A new proposed rule that makes changes to the Renewable Fuel Standard (RFS) is being criticized by backers of corn-based ethanol because it does not lift a provision that restricts sales of 15 percent ethanol blends (E15).

The Proposed Renewables Enhancement and Growth Support (REGS) Rule makes changes to the RFS and other fuel regulations that are intended to support growth of ethanol and other renewable fuels, the Environmental Protection Agency (EPA) said in a statement when it announced the rule October 3.

One part of the proposed rule would allow fuel blends of 16% to 83% ethanol to not be fully subject to gasoline quality standards, EPA said. Instead it would put in place other standards for the quality and environmental performance of the higher ethanol blends. "EPA believes this will clear the way for the expanded production and use of high ethanol fuel blends at a lower cost, and thereby the opportunity for increasing demand," the agency said in a statement.

However, the proposed rule does not provide regulatory relief for E15. E15 sales are prohibited in some markets from June 1 to September 15 to reduce evaporative emissions from gasoline that contribute to ground-level ozone. Ethanol producers want to expand use of ethanol using E15 blends -- which EPA has cleared for use in model year 2001 or newer automobiles.

The rule would leave E15 as the only ethanol-blended fuel that does not have relief from the volatility measurement, or Reid Vapor Pressure (RVP), according to Growth Energy CEO Emily Skor. "It is imperative that E15 be given the same volatility treatment as regular E10 gasoline," she said. "The current RVP waiver for E10 was granted in 1990, and it is time we update our fuel regulations to match the market realities of the 21st century. E15 burns cleaner, has reduced tailpipe emissions and particulate matter and reduces smog and other harmful emissions."

Expanding the RVP waiver to cover E15 is "the biggest thing we're looking for," Growth Energy spokesman Michael Frohlich told Bloomberg BNA, adding "that's the last big roadblock we see in terms of E15 expansion."

Washington Insider: Bloomberg: Cattle Ranchers Own Worst Enemy

Beef output has been up recently, and prices weaker, Bloomberg is reporting this week. But, there's a big difference between at least some of the press reports that have come out this week and those that typically cover ag markets. Bloomberg seems to be saying that the market situation is largely the industry's own fault."

That's a pretty tough call for the industry but Bloomberg reports evidence from the industry itself, including from cattlemen themselves. For example, "the current industry-wide buildup has been the fastest seen in at least 30 years, Shelby Horn, a fourth-generation cattleman with a family ranch in Nebraska told Bloomberg.

The result, Bloomberg says, is an "explosion of beef on the market and a 30% drop in wholesale prices from a record set in May 2015, when supplies were tight after the drought. And with many of the calves still a year or two from slaughter, the industry finds itself with no quick or easy way to adjust.

Even worse, it could mean beef prices will keep falling through 2019, John Nalivka, the president of Sterling Marketing Inc., an industry consulting firm, told Bloomberg.

In fact, the impacts of the industry output surge are widespread. "Most cow-calf guys, they'll be in shock by the time they get their fall calves sold" because of the steep plunge in prices, Shawn Walter, owner of Professional Cattle Consultants in Weatherford, Oklahoma, told Bloomberg. "That's going to chill most people's expansion plans."

Beef production will rise 5.2% this year and climb a further 3.4% in 2017 to a five-year high, Bloomberg says, citing USDA data. Output is increasing as the cattle, hog and chicken industries expand simultaneously, leaving the nation set for a year of record meat production and declining prices. Consecutive years of bumper grain harvests have also sparked expansion and cut feed costs.

In addition, the industry tends to adjustment only fairly slowly. "The cattle business is a years-long cycle," Jeff George, manager and owner at Finney County Feedyard near Garden City, Kansas, told Bloomberg. Still, he notes that the impact of the latest expansion "snuck up on a lot of us," he said.

Beef supplies could keep climbing even as ranchers start to pull back their herds, cattlemen say. That's because while farmers sell some of their heifers for beef, and that eventually means fewer calves and a smaller herd, but "it just creates more meat in the meantime."

To illustrate, Bloomberg follows a case from Rancher Horn. As pasture conditions improved in 2014, he ran more animals on his Nebraska ranch — as many as 700 from as lows as 550 in 2009. When the drought ended, calves were still selling for as much as $1,600 a head, Horn says, but now they are bringing as little $600, adding that his family is considering cutting cattle numbers to 600.

Larger numbers of slaughter numbers are a benefit to processors who not only pay less for livestock but spread the costs of running their plants across more animals. Larger beef production also is good for restaurants and grocery stores, where prices are beginning to fall, Bloomberg says. Retail ground-beef has dropped in eight of the past nine months and is down 14% from a record reached in February 2015.

The process of herd adjustments take time because cattle can be almost two years old when they are slaughtered. The supply chain that starts with ranchers and farmers, then "stocker operators" who then add a couple hundred more pounds and the feedlots that bulk them up to 1,400 pounds for slaughter.

Still, the steps being planned now to cut back herds will slowly work their way through the system and eventually reduce the current supply flood. The U.S. herd is expected to expand by only about 0.5% in 2017, said Derrell Peel, a professor of agribusiness at Oklahoma State University in Stillwater, down from his previous forecast for a 1.5% increase.

Across the industry, the current volatility in cattle futures is making producers increasingly wary of keeping their herds as large as they are, said Horn, the cattleman. He thinks the earlier expansion has been killed, he said. "The volatility and lower prices were a nail in the coffin."

There's another aspect to the "cattle cycle" and that's the industry's aversion to suggestions that the government should intervene much beyond a few additional purchases for feeding programs even when changes are dramatic. Observers are not usually as blunt as Bloomberg was in its "own worst enemy" characterization, but the industry has long registered a preference for "going it alone" and seems to understand clearly the need to pull back when weak prices signal the need to do so —and, to have difficulty understanding the increases in plantings by crop producers this year in the face of weak markets.

Well, nobody ever said ag markets and production planning are simple, but the thoughtful and well informed seem to make them work. It's a proud industry with a proud history, and may have done better in times when the government presence is smaller than otherwise. Also, it is interesting when the press focuses closely on what's actually going on and why rather than its occasional visions, in terms of either diets or management from the food elites, Washington Insider believes.

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