The Market's Fine Print

When Colonel Theodore Roosevelt led his much-celebrated charge up San Juan Hill in 1898, many Rough Riders were more worried about their growling stomachs than flying bullets from Cuban revolutionaries. Somehow the quartermaster had managed to stock the army mess with nearly 350 tons of tainted beef. By the time the last latrine was dug and tragically filled, an estimated 2,500 soldiers had died of food poisoning -- at least six times the number of actual combat dead lost by the U.S. during that sorry little war.

More than a century later, world consumers were shocked by another dramatic episode involving tainted U.S. beef of a different sort. On Dec. 23, 2003, a lone Holstein cow (one of 42 million in the national herd) from Washington State tested positive for BSE. Even though the cow was quickly discovered to have been from Canada, as many as 53 countries immediately banned imports of U.S. beef and beef products.

Panic and reason skip along together about as gracefully as Steve Bannon and Rachel Maddow.

I thought of these two regretful moments of history last Friday when Brazil announced its latest contribution to the global beef trade's "Hall of Shame." After an extensive undercover operation, Brazilian federal police accused dozens of companies, including corporate juggernauts like JBS SA and BRF SA, of bribing sanitary officials for health certificates. More specifically, investigators charged that health inspectors were bribed to overlook the sale of expired meats (both beef and chicken). Police also alleged that the appearance and smell of expired meats was improved by using chemicals and cheaper products like water and manioc flour.

Virtually no one attuned to the sensibilities of the world meat trade was surprised by how quickly foreign buyers reeled in the face of the scandal. Despite emphatic denials by suspected packers and governmental attempts to frame the potential problems as extremely isolated (e.g., President Michel Temer initially dismissed the headlines as a "fuss," noting that only three of the more than 4,000 meatpacking plants in Brazil have been forced to close), major customers wasted no time in pulling the plug.

So far, countries imposing partial or full import bans on Brazilian meat include China, the European Union, Canada, Chile, Hong Kong, Japan, Mexico, Switzerland, Egypt, South Africa, and South Korea (though the latter may be reconsidering).

Of course, if these negative reactions were quite predictable, the same goes for the aggressive counter-punching from the home team. The Brazilian economy has a tremendous amount at stake here. The Brazilian beef industry simply represents a huge player on the global stage.

Brazil can lay claim to the title of world's biggest beef exporter, sending 1.85 million metric tons overseas in 2016. Furthermore, it corrals approximately 226 million head, the second-largest cattle herd in the world behind India and nearly 2.5 times larger than the U.S. In truth, we're lucky that the country's lower meat quality and poor market access make it chronically inefficient. For example, despite its herd size advantage, total commercial beef production falls a good 15% short of the U.S. output.

The scandal could have a massive effect on employment and the economy because the meat production sector's exports represent 15% of total exports (i.e., Brazil exported $12.6 billion of meat last year).

Six million Brazilians work in the meat production industry, according to the Brazilian Association of Meat Exporters. Many fear that a deepening and prolonged trade disruption could derail Brazil's nascent economic recovery and even send it back into the throes of a depression.

We feel your pain, Brazil. Once world perceptions get skewed enough to seriously question your integrity as a top-drawer supplier, returning to reform school for a respectable degree can take many long years. Been there, done that.

Yet, like the farmer who mumbles a prayer at the back of the church for drought and hail to take out crops in the surrounding three counties, I can't get too weepy about the risk of reduced supplies and higher prices facing hungry world consumer of beef. In all honesty, I smile at the possibility that Brazilian problems just might force China to finally drop its phony, BSE-based ban on U.S. beef (talk about fake news).

China, which USDA calls the world's fastest-growing market for beef, accounted for nearly one-third of the Brazilian meat packing industry's $13.9 billion in exports last year. Roughly 30% of China's beef imports came from Brazil in 2016. Australia had about 19% of China's import market, while Argentina held about 8%. With Australia in herd-rebuilding mode, China could struggle to fill Brazil's market share if the South American giant remains stuck in the penalty box. Maybe enough to post a few friendly tweets to Mr. Trump.

I'm just saying.

If we've learned anything from our own trading missteps on the world trade stage, it's that Brazil's new scandal could be resolved either next week or the next decade. Maybe it's exactly that uncertainty and ambivalence, pulling with sympathy on one end and opportunism on the other, that has kept the U.S. still trading with Brazil, at least for the moment. Instead of immediately burning the unloading dock, USDA has only cautiously increased the number of inspections required of Brazilian product.

Clearly, this situation needs to be monitored as we move forward.

Right or wrong, I sense that both this week's cash and futures markets have already dialed in some bullish implications and possibility.

Such conjecture strikes me not so much wrong as premature.

John Harrington can be reached at harringtonsfotm@gmail.com

Follow John Harrington on Twitter @feelofthemarket

(AG/)

Copyright 2017 DTN/The Progressive Farmer. All rights reserved.