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COOL Retaliation Decision Lends Uncertainty to Markets

09 December 2015

US - As expected the WTO sided with Canada and Mexico in their dispute with the US over Country of Origin Labelling (COOL) but the tariff amount awarded was smaller than what these two countries were requesting, write Steve Meyer and Len Steiner.

Futures for cattle and hogs were lower but we think this was not simply because of the WTO decision, after all this was not a big surprise. Rather the decision added to a slew of other negative news that have pressured red meat prices.

Still, the outlook for US trade in the next three to six months is critical and there is plenty of uncertainty as to how the potential for tariffs will distort trade flows with two of our largest trading partners.

There is some expectation that the US Senate will vote in the next two weeks to either repeal COOL or modify it enough so it satisfies Canadian and Mexican objections.

In the meantime, market participants may opt to sit on the sidelines given all the uncertainty surrounding this issue.

US export data for October was released a couple of days ago and it continued to show significant year/year declines in beef and chicken exports and also, in our view, somewhat disappointing pork exports.

October exports of fresh/frozen and cooked pork were 141,919 MT, 8.4 per cent larger than a year ago. The overall volume was in line with what the weekly export numbers were projecting, so no big surprises there.

But even as pork volume was higher in October, keep in mind that we are comparing to year ago levels when prices were extremely high, especially for hams.

The chart shows how October exports compare to 2012, a year when weekly hog slaughter in Q4 was similar to this year (although production this year is higher due to larger carcasses).

In October 2012 US pork exports were 168,913 MT and this year we are running about 16 per cent under that level.

The expectation in late summer was that surging China demand would help clean up hog supplies that most analysts were expecting to be quite large. But Chinese pork purchases, while large compared to a year ago, have not been large enough to have the projected impact.

Total US pork exports to China in October were just 8,802 MT compared to almost 13,000 MT in July. Average pork exports to China in 2012 were a little over 17,000 MT.

For all the talk, China demand simply has not been the factor many expected and it is part of the reason why hog prices are stuck in the mid 50s at this point.

Needless to say, exports remain a critical factor for pork demand in Q1 of 2016 and all the uncertainty surrounding trade with Canada and Mexico has been quite negative for futures prices.

Beef and veal exports in October were higher than the previous month as is usually the case but at 65,659 MT were 14.1 per cent lower than year ago.

Exports to Japan were down 41 per cent, an especially stunning number given this was the top market for US beef in 2014.

Chicken exports in October were 230,078 MT, down 19 per cent from a year ago. Chicken exports are slowly improving but they have quite a ways to go.

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