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China dangles carrots at U.S. beef industry

Prime Cuts with Steve Kay from the December 2017 issue of Canadian Cattlemen

China is getting increasingly adept at dangling carrots to keep the U.S. at bay. Its latest carrot was to announce on November 9 that it had signed US$253 billion of business deals with U.S. companies. News reports quickly questioned whether the deals will turn into actual business. Buried in the massive total was news that JD.com, China’s second largest retailer and e-commerce company, had signed agreements to purchase US$200 million of Montana beef over the next three years. Skepticism also greeted this news, for reasons that have bedeviled the re-entry of Canadian and U.S. beef into China.

China reopened its market to U.S. beef last June. But only a trickle (800 metric tonnes by the end of October) has been shipped. That’s because few U.S. cattle satisfy China’s requirements that the beef comes from cattle that have not been implanted or fed ractopamine (the feed supplement Optaflexx). The same requirements will make it difficult for Montana to supply the amount of beef JD wants. JD also says it intends to invest up to US$100 million to build a new processing facility in Montana to support Montana beef production, another deal that industry analysts greeted with skepticism.

JD says it will purchase beef from the Montana Stock Growers Association (MSGA), Cross Four Ranch and other MSGA members. The agreement contains commitments to import an increasing amount of beef over the three-year term. This will increase Montana beef export sales by as much as 40 per cent in 2018, says MSGA. The agreement calls for JD to purchase the equivalent of US$50 million of cattle in 2018, US$70 million in 2019 and US$80 million in 2020.

My calculations suggest this would involve 28,000 steers or 31,500 heifers in 2018, just over 39,000 steers or 44,000 heifers in 2019, and nearly 45,000 steers or 50,300 heifers in 2020. Yet there are not enough cattle in Montana currently that satisfy China’s “natural” requirements to fill the amount of beef that JD says it will buy in 2018. Even if more Montana producers and cattle feeders were persuaded to change their production practices, it would take two or three years to build up numbers of eligible cattle.

Producers would also have to enter into special feeding arrangements with feedlots. Montana is a sizeable cow-calf state but has little feeding capacity. Its cattle total on January 1 this year was 2.650 million head. Beef cows totaled 1.486 million head and its 2016 calf crop totaled 1.470 million head. Nearly all calves and feeder cattle go out of state to be finished. Montana had only 45,000 head on feed on January 1 this year.

Producers and feedlots will only produce beef that qualifies for China if they are guaranteed premiums to cover the additional cost of production due to slower growth rates in cattle on feed. JD says it will buy the beef at fair market value. But what does that mean? The agreement also makes no mention of what percentage of the carcass JD will buy. Buying only a certain number of items won’t work economically for producers.

The likelihood of a new processing plant appears to be even more remote. It might take two or three years for a plant to be approved let alone built, say analysts. Various attempts have been made in the past 25 years to build a plant in Montana but to no avail. If one was eventually built, the only way it could survive is for Montana to increase its feeding capacity. JD’s agreement will remain a carrot until Montana starts producing meaningful amounts of beef for China.

About the author

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A North American view of the meat industry. Steve Kay is publisher and editor of Cattle Buyers Weekly.

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