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  • Can Chinese Demand for U.S. Hides and Skins Recover?

    Can Chinese Demand for U.S. Hides and Skins Recover?

    Hides in the leather business typically refer to the skin of large animals while skins typically refer to smaller livestock. Raw cattle hides are generally grouped with offal items when discussing total animal value, but hides and skins are an important contributor to the total value of most cattle as the leather is commonly used for belts, shoes, wallets, jackets, car seats and interior, etc. Hide selections are grouped in several ways but are typically based on being branded or native (i.e., not branded), steers and heifers versus cows, dairy cows versus beef breeds, hides from mature bulls, and light versus heavy hides. The value of the hides is further based on the quantity of defects they contain as it relates to holes, cuts, lesions, or grain defects, often caused by injuries, horns, flies, ticks, grubs, and poor skinning and fleshing practices.

    Supplying its massive leather production industry, China has been the largest importer of hides and skins for both the U.S. and the world. However, imports over the past few years have been declining. In 2013, raw cattle hides and skins were a major agricultural export for the U.S., reaching $2.3 billion, with China accounting for 63%. However, as of 2022, U.S. exports were only $876 million, and it appears that exports in 2023 will be even lower (USDA, 2023). At first glance, it would not be unreasonable to think that raw hides and skins were affected by the U.S. trade war with China. Clearly, the tariffs the Chinese government imposed on U.S. hides and skins, on top of the tariffs that the U.S. government imposed on finished leather products resulted in direct and indirect negative impacts on U.S. exports of hides and skins to China. However, taking a longer view of the data, U.S. exports to China have been declining for nearly a decade.

    Figure 1 show Chinese imports of raw cattle hides and skins from the U.S., Australia, Canada, and all remaining countries combined (rest of world) since 2015. Note that Chinese imports exceeded $2.5 billion in 2015 but decreased to around $1.8 billion in 2016 and 2017. While imports fell even more in 2018 and 2019 during the trade war, this appears to be a part of an overall declining trend. For instance, imports from the U.S. fell by 66% during this period, but imports from Australia and the Rest of World also fell by 71% and 68%, respectively. According to USDA (2018), a combination of both internal and external factors has contributed to this reduced demand and has increased the cost of producing leather domestically. These factors include growing competition from synthetic materials, rising labor costs, and stricter environmental regulations. Although modest, import increases in 2021 and 2022 relative to 2020 may be a sign of a possible recovery.

    Figure 1. Chinese imports of raw cattle hides and skins: 2015-2022

    Note: Raw cattle hides and skins are defined according to the Harmonized System Classification (HS) HS 4101 raw hides and skins of bovine and equine animals (not tanned, parchment-dressed or further prepared). 
    Source: Trade Data Monitor® (2023)

    References

    U.S. Department of Agriculture (USDA). 2018. Chinese Demand for Imported Hides Beginning to Weaken. Foreign Agricultural Service GAIN Report: CH186027.

    U.S. Department of Agriculture (USDA). 2023. Global Agricultural Trade System. Foreign Agricultural Service. https://apps.fas.usda.gov/gats/default.aspx

    Muhammad, Andrew, and Andrew Giffith. “Can Chinese Demand for U.S. Hides and Skins Recover?” Southern Ag Today 3(42.4). October 19, 2023. Permalink

    Photo by Pixabay: https://www.pexels.com/photo/colors-belt-skin-belts-65280/

  • Sectoral and Regional Concentration of H-2A Patronage

    Sectoral and Regional Concentration of H-2A Patronage

    Based on H-2A utilization trends over the past two decades, the increase in its patronage has been more significant in farms that are more labor-intensive and with high demand for seasonal labor. Specifically, these sectors include fruit, tree nut, vegetable, melon, nursery, tobacco, and greenhouse farms. According to USDA’s Economic Research Service (ERS), H-2A employment statistics across farm enterprises indicate that crop farms accounted for 80 to 90 percent of H-2A workers hired since 2010, while livestock farms accounted for only 4 to 8 percent (Castillo et al., 2021).  Table 1 presents figures from more recent years that validate the ERS estimates.  Focusing solely on more explicit farm job titles declared in H-2A applications, workers in crop farms, nurseries, and greenhouses accounted for 84.7 to 88.2 percent of certified H-2A workers from 2020 to the 3rd quarter of 2023.  The share of workers in livestock farms, ranches, and aquaculture/animal-based businesses ranges from 4.0 to 4.8 percent.

    The geographic distribution and growth of employment of H-2A workers in the country has been quite uneven since its inception. Recently, the Southeast posted larger swings in H-2A patronage than other regions.  In 2007, about a third (34%) of H-2A workers were hired mainly in 5 states–California, Florida, Georgia, North Carolina, and Washington.  These states now account for more than half (52%) of all H-2A jobs.  

    In Table 1, Southern states that rank among the Top Ten in H-2A employment account for 26.4 to 30.8 percent of all certified H-2A workers.  These states (especially Florida and Georgia) have large fruit, vegetable, nursery, and greenhouse sectors that account for the bulk of the demand for H-2A workers.  The composition of the usual Top Five H-2A state employers list and the regional trends (Table 1) only validate the program’s apparent crop sector bias.

    The low H-2A employment in livestock farms can be attributed to these farms’ production cycle and unique labor needs.  Compared to specialty crop farms, livestock operations are generally less labor intensive. Furthermore, livestock operations that do have more intense labor requirements typically have year-round labor needs that cannot be filled by seasonal, temporary H-2A work contracts.  The current H-2A model clearly emphasizes its role as a mechanism for hiring seasonal and temporary workers to fill a need only during short time segments of the production or growing cycle. Existing H-2A regulations allow for initial employment or extension of employment for a maximum duration of one year.  Therefore, farmers face the challenge of recruiting and training (often at a significant cost) new workers every year instead of retaining their workforce from year to year. Among livestock farms, this lack of farm labor continuity causes uncertainty and inefficiencies in farm management, which affects the viability of employing H-2A workers in those operations.  

    Table 1. Annual Industry and Regional Breakdown of H-2A Certified Workers, 2020 (3rd Quarter)

    Notes:  Source:  H-2A Disclosure Datasets, Department of Labor3.
     
    1 These workers’ shares were obtained from explicit job titles used in the H-2A applications. For crop workers, the job titles considered here are “Farm workers and laborers, crop, nursery, and greenhouse” and “First line supervisors of agricultural crop and horticultural workers.”  For livestock workers, the job title is “Farm workers, farm, ranch and aqua animal.”  Although it is possible that other job classifications used in the applications may also include crop and livestock workers (categories like Others, Agricultural Equipment Operators, Graders and Sorters, Helpers – Production Workers, and Packers and Packagers, Hand), our summary only considers the earlier worker categories that explicitly identify farm operations-specific job positions.
     
    2 The Southern States are Arkansas, Florida, Georgia, Louisiana, Mississippi, Alabama, Tennessee, South Carolina, Kentucky. 

    Escalante, Cesar L. “Sectoral and Regional Concentration of H-2A Patronage.” Southern Ag Today 3(42.3). October 18, 2023. Permalink

  • Balance of Trade Has Shifted as Beef Production has Decreased

    Balance of Trade Has Shifted as Beef Production has Decreased

    While the vast majority of beef produced in the U.S. is consumed domestically, international markets are a significant piece of the U.S. beef system. For perspective, the U.S. exported the equivalent of about 12.5% of its beef production during 2022, while importing roughly 12%. This was a fairly typical balance of trade, especially for a year with high beef production levels like last year. However, as beef production is on track to see a significant drop in 2023, trade patterns are also being impacted.

    Through August, exports of U.S. beef are down by 14% from the first eight months of 2022. A drop of that magnitude certainly warrants some question but is largely a case of year-over-year comparison being a little misleading. For the first two quarters of 2023, beef production was about 4% lower than 2022. With lower production levels, a larger share of U.S. production will be consumed domestically. Additionally, high price levels are also making imports of U.S. beef less attractive in many countries. For example, exports to our three largest destinations (South Korea, Japan, and China) are all down sharply so far this year.

    The same factors that have led to lower export levels have also led to an increase in U.S. beef imports. Through the first eight months of the year, U.S. beef imports are up by a little over 5%. The largest percentage increases are in beef imports from Australia, New Zealand, and Uruguay, which are primarily sources of lean trim to go into ground beef. Unlike 2022 when the U.S. was a slight net exporter of beef, we are very much on track to be a significant net importer in 2023. Through August, U.S. beef imports have exceeded exports by more than 20%.

    This trend towards increased imports and decreased exports is likely to continue for the next few years. Given that this calf crop is smaller than last year’s calf crop, beef production is likely to decrease in 2024. And given expectations for lower beef cow inventory next year, I would expect beef production to be lower again in 2025. The same supply fundamentals supporting strong cattle prices are resulting in a significant shift in the balance of trade for beef. And as beef supplies get increasingly tighter over the next couple of years, we are likely to see an ever greater divergence between imports and exports.

    Burdine, Kenny. “Balance of Trade Has Shifted as Beef Production has Decreased.” Southern Ag Today 3(42.2). October 17, 2023. Permalink

  • Russian Wheat Production and World Wheat Market Fundamentals

    Russian Wheat Production and World Wheat Market Fundamentals

    World wheat production exceeded world wheat consumption for 7 out of 8 marketing years from the 2013/14 marketing year to 2019/20. The stocks-to-use ratio as measured by days of use on hand at the end of the marketing year increased from a 104-day supply to 146 days on hand over the same period.  Since 2020/21, we have seen four consecutive years of total use greater than production. Days on hand have subsequently fallen back to a 119-day supply.  During this period, Russia invaded Ukraine in February 2022, raising concerns over exportable wheat supplies from the critical Black Sea wheat producing region. 

    As world wheat supplies tightened, cash wheat prices doubled from the summer of 2020 to the fall of 2021, from just under $4 per bushel to $8, then to over $12 in the months after the invasion. Prices have since fallen back to levels last seen in the summer of 2021 (the early stages of the 2021/22 marketing year). This price retracement has occurred even though world days of use on hand at the end of the marketing year are lower, and the conflict in Ukraine continues. 

    Figure 1. Texas Cash Wheat Prices, weekly

    A key factor behind prices moving lower despite tightening world wheat fundamentals is the continued movement of wheat from the Black Sea region. In the marketing year prior to the invasion, Russia and Ukraine exported 56 mmt of wheat, 28% of world wheat exports. Current estimates for the 2023/24 marketing year are for combined exports of 60 mmt, 29% of the world total. 

    This export total is a result of record wheat exports from Russia and a 50% reduction in exports from Ukraine. Russia has gone from virtually no wheat exports in the 2000/2001 marketing year to a projected 49 mmt in the 2023/2024 marketing year. (Figure 2)  Export capability comes from a 50% increase in production over the last 10 years. Further, Russia has increased production by 10 million harvested acres since 2013, and increased yields from 33 to 47 bushels per acre. 

    Figure 2. Russia Wheat Production, Exports, Consumption, and Ending Stocks

    Russian wheat supplies are of increased importance to the world wheat market. Russia’s wheat exports have increased against a backdrop of tightening world wheat fundamentals. Wheat prices have fallen as wheat exports continue from the Black Sea region, even though the supply and demand situation for world wheat is tighter than before the Russian invasion of Ukraine. In the current world wheat supply and demand environment, any substantial limitation or reduction in exportable wheat supplies from Russia (e.g., due to reduced wheat production, export policy, or geopolitical forces) would likely result in a significantly amplified price response. 

    References

    USDA, Foreign Agricultural Service, Production, Supply, Distribution Database. Accessed October 5, 2023, https://apps.fas.usda.gov/psdonline/app/index.html#/app/home.

    USDA, Office of the Chief Economist, World Agricultural Supply and Demand Estimates, September 12, 2023. 

    Welch, J. Mark. “Russian Wheat Production and World Wheat Market Fundamentals.” Southern Ag Today 3(42.1). October 16, 2023. Permalink

  • Demystifying Patronage Refunds

    Demystifying Patronage Refunds

    Cooperative firms return profits to their member-owners in proportion to their use of the firm.  Those profit distributions are referred to as “patronage refunds”. In contrast,  most other corporations distribute profits in proportion to investment. Cooperative members may be somewhat familiar with patronage refunds but often do not understand all of the structures and issues.  Producers who are not a member of a cooperative may wonder what they are missing.  Patronage refunds are the most unique and, perhaps, the most interesting feature of cooperatives.

    In cooperative terminology, a patron is a cooperative customer who qualifies to receive patronage refunds.  That typically means that they are a member of the cooperative.  Patronage refunds are profits that are distributed in proportion to use. Usage can be measured in multiple ways.  Patronage can be based on the dollar amount of purchases or commodity payments or on physical units such as bushels or tons.  A cooperative can track member use as a single patronage pool, or as multiple pools reflecting separate commodities, products or departments.   Each cooperative selects the patronage base that most fairly represents member use.

    Cooperatives can pay patronage as a combination of cash and equity. Equity patronage is eventually redeemed into cash and, for that reason, is often called “revolving equity”.  Equity patronage has two functions.  First, it allows members to build ownership without an out-of-pocket investment.  Second, it capitalizes the cooperative, funding the property, plant and equipment.

    Patronage refunds have tax implications.  Cooperatives are taxed as corporations but are allowed to deduct patronage distributions.  Those patronage refunds become taxable income for the patrons. Cash patronage is immediately taxable to the patron but equity patronage can be structured to be taxable when issued or taxed at the later date when it is redeemed into cash.

    Many local cooperatives are in turn members of regional cooperatives.  Those regional cooperatives issue patronage refunds to the local cooperatives, which becomes part of the local cooperative’s net income.  Therefore, the patronage refunds that producers receive from their local cooperative reflects both the local cooperative’s profits and the pass through share of the regional cooperative’s profits. 

    Many younger producers wonder why a cooperative cannot simply offer more favorable prices (more than what competition might dictate) in lieu of paying patronage refunds.  There are some very good reasons.  Equity patronage capitalizes the cooperative.  One way to think of equity patronage is that the members are receiving their share of the total profits and then temporarily reinvesting a portion of those profits in the cooperative. The second rationale for not substituting favorable prices for patronage is the danger of misestimating costs and creating a loss.  Finally, favorable prices would result in zero profits and zero return on assets and equity.  Basically, profits have been given away in the form of prices. Many members will not perceive the price benefit and conclude that the cooperative is poorly managed.  By setting prices at market level, generating profits and then returning those profits as patronage refunds, members can observe the cooperative’s performance and appreciate its benefit, and the cooperative will be capitalized and able to respond to member needs.

    Most producers wish they could purchase their inputs a little cheaper and sell their commodities at a slightly higher price.  Most producers would also like to invest for the future.  Producers can achieve all of the goals with no out-of-pocket investment by joining and patronizing their local cooperative.  When you are a cooperative patron, the check really is in the mail!

    Kenkel, Phil. “Demystifying Patronage Refunds.” Southern Ag Today 3(41.5). October 13, 2023. Permalink