Like it or not, the U.S. economy doesn’t exist in a vacuum. The global economy has a growing role in what happens here at home on the ranch.
“There is no shortage of factors weighing on the global economy heading into 2020,” summarized the December Quarterly U.S. Rural Economic Review report from CoBank.
“Weaknesses in trade, manufacturing, and business investment are all acting as a drag on global growth. The world GDP growth rate is forecast to fall for the second consecutive year in 2020 to a range of 2.5-3.0 percent.”
CoBank added that the central banks of the world, much like the Federal Reserve, have been working to stave off recession by lowering interest rates.
“In GDP-weighted terms, the share of advanced economies that cut rates in 2019 is the highest since the financial crisis. The size of these rate declines was modest in comparison at 40 basis points, but the action will support an ailing global economy in early 2020,” reported CoBank.
“Research tells us that interest rate reductions deliver less stimulative punch when they start from a low level. Nevertheless, the rate cuts will serve as a stabilizing force and should help to put a floor beneath global growth in Q1.”
Eyes on China
Much of the global economic attention has gone to the trade war and ongoing tension between the U.S. and China, the world’s two largest economies, according to CoBank and several other academic-, industry-, and government-sourced economic outlooks.
“The trade policy story that has garnered the most news attention in 2019, and should continue to do so in 2020, is the ongoing negotiation with China.”
“The trade policy story that has garnered the most news attention in 2019, and should continue to do so in 2020, is the ongoing negotiation with China,” wrote Dr. Russell Hillberry, associate professor of ag economics at Purdue University, in the Purdue Ag Econ Report (PAER).
Hillberry observed that, despite the recent news that the signing of the “Phase One” deal with China being imminent, President Donald Trump doesn’t have much leverage.
“He will be up for reelection,” Hillberry pointed out, adding that the Chinese leadership is not facing that uncertainty. In early 2018, China’s parliament changed its constitution to allow President Xi Jinping to rule for life. The move has been widely criticized internationally with numerous international outlets noting that such power consolidation has not been seen since the rise of China’s Chairman Mao Zedong.
“Moreover, it does not appear that the prices of China’s exports to the U.S. have fallen in response to the tariffs; the implication being that Chinese firms have not been forced to respond to U.S. tariffs by reducing their prices,” continued Hillberry.
“The United States is only one market in a global economy. The emerging evidence makes it seem likely that China’s exports that would have been sold in the U.S. were instead diverted to other markets. Substitution across markets also seems to have been an important part of Chinese buyers’ responses to China’s tariffs on U.S. agricultural exports.”
Nonetheless, a U.S.-China trade deal would bring some element of certainty to the international marketplace. And marketplaces like certainty.
“The preliminary Phase One trade deal in process would leave many of the tariffs and counter-tariffs in place between the two economic powers,” read the CoBank report.
“Chinese beef demand is expected to be extremely strong in 2020.”
“But it would add some level of certainty to businesses that are looking to invest. Details of the deal are still scant at the time of writing, but we expect the grain, animal protein, and dairy sectors to be the biggest winners from the limited agreement.”
Other events in China—most notably the ongoing African swine fever (ASF) crisis—have also been having an outsized impact on global trade, particularly for animal protein and beef in particular.
“Chinese beef demand is expected to be extremely strong in 2020,” reported RaboBank in its Beef Quarterly Q4 2019 report. “ASF has caused pork prices to triple in the space of 12 months (October 2018 to October 2019). Not only has the shortage of pork pushed consumers to other proteins—including beef—but the price increase now means beef is relatively more affordable.”
RaboBank gave the example of average Chinese retail beef prices in October 2019 being only 60 percent higher than pork, compared to 280 percent higher the year before.
Beef demand from China to fill the protein gap left by ASF is driving export growth in several U.S. beef-competitive countries, including Australia, Brazil, and New Zealand. RaboBank also noted that Canada regained access to the Chinese market in November 2019, “which should be a strong boost to Canadian beef and pork exports to China. We expect this will result in a very quick decline in Canadian cattle and beef exports to the U.S.”
U.S. imports, exports, prices
Expectations for the beef trade balance are in the U.S.’ favor in terms of volume, according to the USDA’s December World Agricultural Supply and Demand Estimates (WASDE) report. Imports of beef into the U.S. in 2020 are estimated at 2.88 billion pounds, down from the 2019 cumulative estimate of 3.05 billion pounds. Similarly, export expectations for 2020 are 3.31 billion pounds compared to 3.07 billion pounds in 2019.
A large portion of the import decline is expected to be as a result of tighter global lean manufacturing beef supplies.
“As a larger share of beef from Australian and New Zealand go to China, it is forcing a reduction in the quantity of manufacturing beef coming into the U.S.,” summarized RaboBank, observing that beef trimmings from Oceania were at a premium to domestic trimmings. This will bolster demand for domestic manufacturing beef.
“This situation is not expected to be quickly resolved and will be an interesting market development to watch during the coming year,” RaboBank added.
This was one of two potential international drivers of domestic cattle prices in 2020, according to RaboBank. The other is the potential for the U.S.-China deal to allow increased export of U.S. pork to China, which would increase all protein prices, according to RaboBank. Without those two international wildcards, the group projects fed cattle prices to remain relatively unchanged in 2020.
The USDA had a similar projection in the recent WASDE report with the expected annual price average for 5-Area, direct, all-grade steers being $117/cwt, same as for this year. — Kerry Halladay, WLJ editor
