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Thursday, June 18, 2015

Should we be concerned about the US beef import quota?

By Augusto Semmelroth  |  Source: USDA, US Trade Commission, DAFF

Key points

  • US now the largest export market for Aussie beef, taking 35-40% of total shipments since mid-2014.
  • Record pace of exports to the US has raised concerns about triggering 85% of the US beef import quota by 1 October.
  • Any major negative impact on cattle prices seems unlikely, as exporters will have time to reshuffle exports to other markets before exceeding the quota to avoid the 21% tariff.
  • It’s still a bit too early to be alarmed about exceeding this year’s quota, but export levels need to be monitored more closely so that risks are quickly assessed.   

2015-06-16 US Beef Import Quota FIG 1

2015-06-16 US Beef Import Quota FIG 2

2015-06-16 US Beef Import Quota FIG 3

Beef exports to the US have surged since early 2014, well and truly surpassing Japan as the largest export market for Australian beef. Given the stubbornly strong pace of shipments seen this year, concerns over the US import quota are surfacing. So how does the US beef quota system work? And if triggered, what could it mean for the cattle market going forward?

The US has always been a major trading partner of Australia and, by any historic measure, the second largest export market for Aussie beef. Yet, last year the US quickly surpassed Japan to cement itself on the top of the ladder. To put things into perspective, figure 1 shows the monthly beef exports to the two countries, as well as the rolling 12-month average. In market share terms, the US has accounted for 35-40% of Aussie exports over the last 10 months.

As beef exports continue to flow at a remarkable pace, the question of the US beef import quota has arisen. More specifically, what happens if it’s triggered?

Fortunately, Australia has the largest quota allocation (tariff-free) of 418,214 tonnes, followed by New Zealand with 213,402 tonnes and Argentina and Uruguay with 20,000 tonnes each (figure 2). Mexico and Canada have unlimited tariff-free access under the North American Free Trade Agreement (NAFTA), but limited exportable supplies.

But how much of the Australian annual quota has been used? Taking the export stats from DAFF until May, and an estimate for June, total exports for the first half of the year will likely sit somewhere around 225,000-230,000 tonnes swt, or roughly 55% of the allocation for 2015.  

So far, the main focus of the discussion has been around the 85% quota trigger by 1 October rather than the annual quota itself. This is of particular importance for export businesses. This is because the 85% trigger shifts the way quotas are allocated from a “first-come-first-serve” basis to an “exporter-specific” quota based on their shipments to September. In other words, the more beef an exporter ships up until September, the larger its Q4 quota allocation for the remainder 15% will be.   

For the 85% threshold (355,482 tonnes) to be triggered, average monthly shipments will have to surpass 42,000 tonnes between July and September. This is a relatively ambitious target. However, monthly exports would have to contract to 31,675 tonnes swt, on average, in the second half of the year to avoid tariff-bound exports above the quota (figure 3). This could prove tricky to achieve if near-record cattle turnoff levels are sustained.

Next week: Stay tuned for next week when we will take a look at the US production and import situation, and then examine the pricing of prices to the US and, by extension cattle prices in Australia.

What does this mean?

While the most of the talk about the US beef import quotas continues to revolve around the 85% quota trigger, we believe this is more of a concern to exporters rather than to cattle producers at this stage. As mentioned previously, the allocation of the remaining 15% of the quota (should the 85% threshold be triggered) will impact individual export businesses differently in the last quarter of the year.

That said, concerns about the US quota have a good reason to come to surface. The insatiable US demand for lean/manufacturing beef has been pivotal in supporting domestic cattle prices since last year, particularly for cows. As such, exceeding the tariff-free quota would place strong pressure on exporters who now strongly rely on US customers. Paying the 21% tariff to US customs for exports over the quota could negatively impact cattle prices as exporters will try to offset the higher costs of doing business by lowering OTH cattle prices.

Yet, we still believe it’s too early to be alarmed about exceeding the quota. If seasonal conditions deteriorate further and slaughter rates remain at record highs, exporters will have time adjust before the end of the year to make sure they only sell restricted volumes above the quota, if needed. With that in mind, the real impact on domestic cattle prices will be alleviated, even under a worst case supply scenario. 

Mecardo information is provided to assist in your marketing decisions. It contains a range of data and views on the current market. It is not intended to constitute advice for a specific purpose. Before taking any action in relation to information contained within this report, you should seek advice from a qualified professional. The information is obtained from a variety of sources and neither Mecardo nor Ag Concepts Advisory will be held liable for any loss or damage whatsoever that may arise from the use of information or for any error or mis-statement contained in this report. 


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