China agreeing to open its domestic market to U.S. beef has been in the news, but producers need to remember it is only the first step in an ongoing and lengthy process.
“The first step of opening any international market is the political process of negotiating access and agreeing on the conditions and stipulations of that access; think of it as establishing the rules of the game,” said Derrell Peel, Oklahoma State University Cooperative Extension livestock marketing specialist.
Step two follows with the economic process of markets determining the value, size and timing of trade. The restrictions and requirements for American beef to enter China mean that initially only a small portion of U.S. beef production will qualify for export to that Far East nation.
“Increasing the qualified supply will necessarily involve additional costs for the industry,” Peel said. “The pace of export growth will depend on the value of U.S. beef in China and that, in turn, will depend on which products – in terms of cuts and quality – are demanded.”
Furthermore, it is just good business sense for U.S. beef exporters to move rather cautiously until the market values and export procedures become more certain.
“The additional costs to qualify for export are typically incurred for entire animals even though only certain products are exported, meaning the export value must be sufficient to cover the additional costs for non-exported portions of the carcass,” Peel said.
In general, not much is known about the composition of Chinese demand for U.S. beef. Questions abound, such as what mix of middle versus end meats, Choice versus Select and offals will make up Chinese demand for U.S. beef?
However, given that unofficial flows of U.S. beef have been entering China in recent years, some beef packers may have insight, at least initially, into beef product demand in China. But that too could promote a particular set of challenges, such as uncertainty about the timing and volume of beef exports for the first few weeks or months.
“It is possible unofficial flows will convert quickly into official exports, in which case apparent initial volumes of exports to China may simply displace export volume currently being transshipped through other countries,” Peel said.
Of course, it is also possible the unofficial flows will continue and be augmented by new official exports, meaning industry analysts and producers will need to look comprehensively at export volumes across countries to understand the net effect.
“It is even possible that China will move quickly and aggressively to stop unofficial flows, which could happen before official flows have developed and could actually result in a temporary reduction in net beef exports,” Peel said. “The next few months will no doubt be very dynamic.”
Put it all together and it seems unlikely that beef exports to China will have a large noticeable effect on cattle and beef prices and beef production in the U.S. initially. Over time, with growing market share, prices for particular products might be affected depending on the quantity, quality and specific products demanded in China.
“More general price effects on beef and perhaps cattle will depend on the dynamics of demand relative to supply for U.S. beef products in the Chinese market,” Peel said. “The U.S. beef industry will benefit over time from some combination of higher prices and increased export volumes as the Chinese market grows.”
So the bottom line is beef exports to China may be a very big deal in the future but the effect will likely start fairly slowly.