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  • Understanding the New Safeguard Policy for U.S. Beef in Japan

    Understanding the New Safeguard Policy for U.S. Beef in Japan

    In 2021, beef and beef products were the third highest exports for the U.S. ($10.6 bill.), behind soybeans ($27.4 bill.) and corn ($18.7 bill.) (USDA, 2022a). A key trading partner for the U.S. beef sector is Japan ($2.4 bill. in 2021), which was the leading foreign market for U.S. beef by volume. Through existing trade agreements (e.g., U.S.-Japan Trade Agreement [USJTA], Comprehensive and Progressive Agreement for Trans-Pacific Partnership [CPTPP]), the U.S. and major competitors like Australia face lower beef tariffs in Japan relative to the Most Favored Nation (MFN) rate of 38.5%. The tariff rate for the U.S. and Australian beef in Japan (excluding offal and processed products) is currently 24.1% and is continually declining to 9% by 2033. However, both USJTA and CPTPP allow the Japanese government to increase tariffs on beef products when imports from the U.S. or CPTPP countries exceed a certain volume during a specified period. This specified volume is often referred to as a safeguard. In general, safeguard measures are used to limit excessive import growth by allowing governments to increase tariffs on a product when imports exceed a certain level during a specified period.

    U.S. beef faced a particularly restrictive safeguard in Japan of 242,000 metric tons (MT) when USJTA was enforced in 2020 and in 2021 (Japanese fiscal years: April-March). Japan’s beef safeguard for CPTPP countries was 625,400 MT during this period. The CPTPP safeguard was predominantly applied to Australian beef given Japan’s limited beef imports from other CPTPP countries, and unlike the U.S. safeguard, significantly higher than actual imports from all non-U.S. countries, let alone Australia (See Figure 1). This safeguard difference put U.S. beef at a significant disadvantage relative to Australian beef in the Japanese market because U.S. exports to Japan averaged more than 245,000 MT per year between 2017–2021. Thus, it was no surprise that the safeguard was triggered after the first year of USJTA’s enforcement, leading Japan to raise tariffs on U.S. beef to 38.5% for one month. Consequently, the U.S. government was able to negotiate a new three-trigger safeguard mechanism for U.S. beef in Japan this year. Moving forward, the Japanese government can increase tariffs on U.S. beef only if all the following occur: 1) Imports of U.S. beef exceed the USJTA beef safeguard; 2) The total volume of beef from the U.S. and original CPTPP countries exceed the CPTPP beef safeguard; and 3) imports of U.S. beef exceed imports from the previous year (USDA 2022b). The most important aspect of this change is that the U.S. and Australia are now essentially sharing the CPTPP safeguard. That is, even if Japan’s imports of U.S. beef increase and exceed the USJTA 2022 safeguard (246,900 MT), the Japanese government can raise tariffs on U.S. beef only if total beef imports from the U.S. and CPTPP countries exceed 637,200 MT (CPTPP safeguard for 2022), which is not likely to occur.

    Figure 1. Japan’s Beef Imports (2017 –2021) and Respective CPTPP and USJTA Safeguard Triggers for 2022

    Note: Data include fresh, chilled, and frozen beef (HS 0201 and HS 0202) since imports of offal and processed products do not count against the safeguard level. Years are Japanese fiscal years (April-March). Japan agreed to incrementally increase the safeguards each year. Hence, the slightly higher 2022 safeguards.
    Source: Imports: Trade Data Monitor® (2022); Safeguard information: Muhammad et al. (2021)

    References

    Muhammad, A., Griffith, A., Martinez, C., and Thompson, J. (2021). Safeguard Measures and US Beef Exports to Japan. UT Extension Publication W1023. https://ageconsearch.umn.edu/record/313523

    Trade Data Monitor® (2022). https://www.tradedatamonitor.com/

    U.S. Department of Agriculture (USDA), Foreign Agricultural Service (2022a). Global Agricultural Trade System. https://apps.fas.usda.gov/gats/default.aspx

    U.S. Department of Agriculture (USDA), Foreign Agricultural Service (2022b). U.S., Japan Reach Deal on Beef Tariff Safeguard. FAS Press Release. https://www.fas.usda.gov/newsroom/us-japan-reach-deal-beef-tariff-safeguard

    Muhammad, Andrew, and Charley Martinez. “Understanding the New Safeguard Policy for U.S. Beef in Japan.” Southern Ag Today 2(27.4). June 30, 2022. Permalink

  • Can Solar Panels Improve Contract Farm Profitability?

    Can Solar Panels Improve Contract Farm Profitability?

    The cost of solar systems has been decreasing rapidly over the past 10 years, making it an attractive option for poultry growers across the U.S. seeking to counteract rising electricity costs. However, it is imperative that growers understand how a typical contract pays them back for their solar investment. The key points are how much electricity a system produces and the value of that electricity to the farm.

    Barring other restrictions, the maximum sized solar generation system utility companies typically allow a customer to install and connect to their grid is one with solar production capacity equal to the customer’s normal annual usage. Many solar installers will use this basic design logic to sell a customer a  large system  claiming they are going to offset 100% of the power bill. That claim will likely not be true for a poultry grower because the variable usage pattern of poultry production. The chart illustrates an example electric usage pattern of a poultry farm vs. the solar production potential of varying sized systems (100%, 50%, and 30% of annual usage). The highly variable usage pattern results in a lot of excess solar energy produced that is not being used by equipment on the farm but is put back on the grid. The realized value of the excess solar energy is highly variable across utility companies and for many growers in southeastern states, they will be compensated for it at rates much lower than retail. 

    To further examine how this scenario works out for contract poultry growers, a recent study was published in the Journal of American Society of Farm Managers and Rural Appraisers that examines how the variable power usage of broiler farms interacts with solar production and the resulting effect on the profitability of various solar system scenarios such as system size, location, and electricity rates. The study showed that under a simple net billing arrangement, where excess solar is valued at close to wholesale rates by the utility company, maximizing system size to match annual usage was not the most profitable, and in fact could be a losing proposition. The study also showed the impact of cost-share and tax credit incentives on profitability. The full study can be found here: https://higherlogicdownload.s3.amazonaws.com/ASFMRA/aeb240ec-5d8f-447f-80ff-3c90f13db621/UploadedImages/Journal/2022/SolarSystemProfitability_2022Journal.pdf

    The variable electricity usage pattern of poultry farms greatly affects the amount of lower valued excess solar energy a system produces (energy above the red line) compared to solar that directly offsets retail purchases (energy below the red line.) 

    Brothers, Dennis. “Can Solar Panels Improve Contract Poultry Farm Profitability?“. Southern Ag Today 2(27.3). June 29, 2022. Permalink

  • Hedging Opportunities for Managing Price Risk for Cattle

    Hedging Opportunities for Managing Price Risk for Cattle

    Uncertainty and volatility are dominating most commodity markets given the current environment, which includes increasing inflation and interest rates. Despite the cash price of many goods escalating rapidly, cash cattle prices have done no such thing as can be confirmed by the CME feeder cattle index and the 5-area weighted average price for live cattle. However, the futures market, options market, and Livestock Risk Protection insurance (LRP) have been offering several opportunities to hedge cattle prices at much higher prices than have been physically experienced for several months. For instance, the August feeder cattle contract has traded between $163.93 and $186.65 per hundredweight over the life of the contract. During that time, the August futures price has held a $10.53 to $27.29 per hundredweight premium to the CME Feeder cattle index. These premiums appear to encourage hedging cattle, but convergence has been an issue with cash prices and the futures market. This is where LRP has an advantage in that it is indemnified based on the CME feeder cattle index and the 5-area weighted average price for live cattle. Figure 1 illustrates the number of days the daily settlement price for each feeder cattle contract exceeded the final settlement price from 2015 through 2020. The point of this figure is that the futures market often offers opportunities to benefit from hedging.

    Figure 1. Number of days the daily settlement price of feeder cattle futures contracts exceeded the final contract close price during the life of the contract (2015-2020). (LMIC, 2021; Griffith and Boyer, 2022)

    Griffith, A.P., C.N. Boyer, I. Kane. 2022. Producer Focus Groups: Price Risk Management Contributions to Economic Sustainability in the Cattle Industry. University of Tennessee Extension publication. In Press.

    Livestock Marketing Information Center (LMIC). 2021. Historic CME Feeder Cattle Futures Prices.

    Griffith, Andrew P. . “Hedging Opportunities for Managing Price Risk for Cattle“. Southern Ag Today 2(27.2). June 28, 2022. Permalink

  • Some Quirky Aspects of Cotton Marketing

    Some Quirky Aspects of Cotton Marketing

    This article highlights some differences between U.S. cotton and other ag commodity markets. The subject really involves the nexus of politics and economics.  There is a long history of government regulation of commodity markets. A textbook example is the Onion Futures Act of 1958 which banned trading of onion futures (and which was the basis for subsequent studies of efficient markets by Working[i] and Gray[ii]).  

    Our cotton example begins in 1929 when the U.S. Congress singled out cotton in a notable policy restriction.  It seems that two years earlier, one of USDA’s routine monthly forecasts had projected lower cotton prices.  When this forecast proved accurate, some in the cotton industry assumed that the forecast caused the price decline. This led to a political reaction where the USDA was banned from forecasting (only) cotton prices, a policy that remained in place until the 2008 Farm Bill.  

    Cotton was unique in dropping out of Title 1 commodity programs in the 2014 Farm Bill, only to come back in 2018 with “seed cotton” as a new, covered commodity in the Bipartisan Budget Act of 2018.  Space does not allow an adequate discussion of the underlying events of that story.

    A unique reporting requirement of U.S. cotton since the 1950s is the CFTC Cotton On-Call report (https://www.cftc.gov/MarketReports/CottonOnCall/index.htm ).  This is a weekly report of merchant on-call (i.e., basis contract) transactions reflecting purchases from farmers and sales to textile mills that are unfixed with ICE futures, presented by delivery month.  These data are potentially informative in identifying large, hedged positions in ICE cotton futures (see the peaks of the red line in Figure 1).  This market transparency could benefit suppliers and smaller merchandisers and market analysts, but in some cases it could lead to speculative trading on anticipated short covering prior to futures contract expiration (https://southernagtoday.org/2021/12/current-squeeze-dynamics-in-ice-cotton-futures/ ).  

    Why have these different policies existed for cotton? One reason is the historical dominance of southern politicians during the 20th century.  Thus, if the cotton grower segment was angry at USDA, even mistakenly, they had the political power to have something done about it for a southern crop like cotton.  The global aspect of cotton is another feature that brought about the trade talk attention, the Doha Round, and the WTO case, which precipitated cotton leaving and returning to federal farm programs. Finally, some cotton-specific regulations may have to do with the concentration of the cotton merchandising sector, relative to grains.  Compared to grains, the U.S. cotton market is dominated by a handful of global merchandising firms.  The cotton on-call reporting requirement originated as a way for the cotton merchant sector to report their futures transactions as legitimate hedges, which they are. Curiously, it is the cotton merchant sector that now opposes the collection and publication of the cotton on-call data, which they consider proprietary (https://acsa-cotton.org/wp-content/uploads/2020/05/ACSA-Position-Limits-Comment-Letter.pdf).  The merchant sector also has had an ongoing concern since 2008 with excess speculation in ICE cotton futures.  This may explain their opposition to publication of cotton on-call data.  

    [i] Working, Holbrook (1960-02). “Price Effects of Futures Trading.” Reprinted from Food Research Institute Studies, Vol. 1, No. 1, February 1960, in Selected Writings of Holbrook Working, Anne E. Peck, ed., Chicago Board of Trade, 1977. pp. 45–71.

    [ii] Gray, Roger.  1963. “Onion Revisited.” Journal of Farm Economics,. Vol. 45, No. 2, May 1963.

    Robinson, John. “Some Quirky Aspects of Cotton Marketing“. Southern Ag Today 2(27.1). June 27, 2022. Permalink

  • Local Food Sales & Practices

    Local Food Sales & Practices

    USDA released the results of the recently completed 2020 Local Food Practices Survey in April 2022.  The survey results revealed continued growth in local food sales across the country.  Over one-hundred and forty-seven thousand farmers and ranchers across the U.S. sold $9 billion of local edible food commodities directly to consumers, retailers, institutions, and intermediaries.  The reported level of sales reveals a three percent increase from 2015.  While reported sales increased, the number of operations selling directly decreased by twelve percent (12%). Direct farm sales across different buyer types are shown in Table 1 for the U.S. and Southern region only. In 2020, direct sales to retailers represent 46% of U.S. total direct farm sales, yet account for only 27% of Southern Region direct farm sales. To explore all of the data from the results of this survey, visit https://www.nass.usda.gov/Surveys/Guide_to_NASS_Surveys/Local_Food/

    Table 1.  Total U.S. and Southern Region Direct Farm Sales, by Buyer Type, 2015 and 2020

                            SOURCE:  2020 AND 2015 Local Food Marketing Practices Survey, USDA NASS.

    While direct farm sales market continues to grow, farm operations using this marketing strategy have declined overall. A close examination of the data shows slight changes between producer locations and the targeted marketing channels.  For example, the Southern region reported an increase in the number of farms selling direct and a decrease in sales volume over the same period. Nationally, 77% of farms with direct sales (consumers, intermediaries, and retailers) sold through direct to consumer channels (Fig. 1). 

    Figure 1.  U.S. and Southern Region Direct-to-Consumer Sales by Marketing Practice 2020 ($ million).

    A majority (57%) of farms selling food directly were located in metropolitan counties, and these farms accounted for sixty-two percent (62%) of all direct food sales. Lastly, 78% of farms selling food directly marketed their products within a 100-mile radius of their farm operation.

    Rainey, Ron, and Celise Weems. “Local Food Sales & Practices.” Southern Ag Today 2(26.5). June 24, 2022. Permalink