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HUNTIN' DAYLIGHT -- JAPANESE TRADE RESUMES - MARKET YAWNS

by: Wes Ishmael

It was big news.

After almost two years U.S. beef was allowed in Japan last month, marking at least a stepping-stone toward the conclusion of a geo-political impasse pitting science against consumer emotion.

“We are very happy this long process has finally come to a conclusion, and U.S. beef can once again be exported to Japan. This has been a trying time for us, but also especially challenging to the many Japanese companies and individuals who have both relied on and enjoyed our products for nearly three decades,” said U.S. Meat Export Federation (USMEF) President & CEO Philip Seng, following the December 12 announcement that the Japanese ban on U.S. beef had been lifted.

As expected, at least at press time, it also appeared South Korea—another key U.S. beef export market—was close to following suit.

To the surprise of some, though, all of this was ancient news as far as the market was concerned.

Sure, contract highs were set for live cattle futures (deferred months) the week after the announcement, but they'd lost some ground by the end of that week. Market fundamentals, more than anything, drove packers to pay $3-$4 more that week than the previous one. The sustained spike in price some had hoped for never materialized.

For one thing, the trade victory is far from complete, just as the market had anticipated. Only beef from cattle 20 months old or younger is eligible for export. To meet export requirements into Japan, cattle must come through a Quality System Assessment (QSA—more later), which is part of the USDA Beef Export Verification (BEV) program. Producers can apply for approval of their own USDA QSA Program for age verification or enroll their cattle in one of the approved age verification programs, listed online at www.ams.usda.gov/lsg/arc/qsap.htm or http://processverified.usda.gov.

Aside from the added steps and cost associated with this process, only a small portion of cattle can qualify for export today. Though there is no way to calculate a failsafe number, most industry estimates say approximately 10 percent of cattle in stocker operations or feedlots today have the necessary age credentials for the export program.

Ultimately, according to the National Cattlemen's Beef Association (NCBA), the folks at USDA estimate about 35 percent of the U.S. herd could qualify under the age limit.

All of this pales in comparison to how long it may take to woo Japanese consumers back to U.S. beef. A variety of polls reported in that nation's national media in recent months indicate the mass majority of consumers there are still wary.

“Even if the surveys overstate the real concern of Japanese consumers about U.S. beef (which seems likely), it still suggests that it will take some time before Japanese demand for U.S. beef approaches 2003's level,” explained James Mintert, a noted cattle economist at Kansas State University in December. He believes it will probably be 2007 or 2008 before U.S. beef exports to Japan equal 2003's.

Understand, accomplishing this isn't just a matter of convincing Japanese consumers that U.S. beef is safe. As daunting will be wresting market share away from the nations that filled the gap when the U.S. was locked out.

NCBA estimates the economic loss for the U.S. cattle industry due to Japan's recently ended trade embargo has been $3.14 billion a year. Spun differently, it will take some time to recover the additional $10/cwt. or so (basis fed cattle) that NCBA and others say is yet to be recovered when exports reach the level they were at before export disruptions. It will be a while before prices reflect the added export demand.

Fortunately, the lingering effects of trade disruption come at a time of continued historically high cattle prices.

Tight feeder cattle supplies caused by the expansion phase of the cattle cycle helped bolster prices in 2005 and will continue to keep beef supplies tight in 2006, says Jim Gill, market director for the Texas Cattle Feeders Association (TCFA).

According to Gill, fed cattle prices averaged almost $87.50/cwt. in 2005, the highest yearly average ever recorded in the Southern Plains. With continued strong domestic beef demand and the reopening of Pacific Rim markets Gill expects fed cattle prices to remain strong in 2006.

Speaking at TCFA's annual year-end news conference last month, Gill predicted that fed cattle prices will range from $85 to $95 per cwt. in the first quarter of 2006; $84 to $92 in the second; $80 to $88 in the third; and $86 to $93 in the fourth.

“Cheaper corn prices combined with tighter feeder supplies will likely support high feeder prices for the next couple of years,” said Gill. “Corn prices, which averaged nearly $4.45/cwt. in 2005, FOB the elevator (Southern Plains), will likely remain on the defensive in 2006.” Although demand for corn will increase for ethanol production and the export market, Gill says corn supplies will be more than adequate in 2006, given the 11.8 billion-bushel harvest this year.

That will put a strong underpinning on feeder cattle prices. Gill said a 750-weight feeder steer averaged about $111/cwt. in 2005—more than $7 higher than 2004 and $25 higher than 2003.

The ABCs of QSAs

If you haven't heard the term “QSA” yet, or if you reckon it's something best vaccinated for, just wait. You'll likely be finding out a lot about Quality System Assessment (QSA) in the coming months because this is how the industry will make cattle age-eligible for Japanese export through the USDA Beef Export Verification (BEV) program.

In a small, imperfect nutshell, a QSA is a USDA program, which ensures that specified product requirements are supported by a documented quality management system. More specifically, it is a documented trail of verification that supports a product claim. QSAs can be unique to each company that goes through the process of receiving approval for one, but all conform to standards set forth by the International Standards Organization (ISO).

So, in the case of Japanese beef exports, a QSA—BEV in this case—is how those who want to export to Japan will verify beef is from cattle 20 months or younger (the current requirement), using live animal production records. QSAs can also be used to document other product claims and attributes such as source verification and animal handling.

Between the Japanese request for age verification and the premium being paid domestically for some source verified cattle, currently the burgeoning number of QSA programs being developed by feedlots focus on age and source.

Crist Feedyard and K.C. Feeders at Scott City, KS, for instance, were the first feedlots to receive QSA approval from USDA for source and age verification. That was last spring. At the time, Ty Rumford, general manager of the Crist yard explained, “We realized there was a need to supply as many source and age verified cattle as possible, and in a manner that is expected by our export markets. Our QSA program standardizes the way we conduct business and ensures our customers that we have truly verified both source and age. We think it will be invaluable to both our producer and packer customers.”

“This approval gives packers added confidence in their source and age verification programs and significantly reduces their risk when buying source and age verified cattle,” explains Leann Saunders, IMI Global vice president. “The USDA's approval of Crist Feedyard and K.C. Feeders QSA program eliminates additional requirements of the packer that must be fulfilled if a feed yard is not QSA-approved.” Along with offering a variety of traceability technology and verification programs, IMI Global helps folks like Rumford put together QSA programs.

Basically, a company's QSA describes how it will verify the product requirement, and how it will maintain the identity of the product throughout production. This includes how it trains employees to follow QSA protocols. So, for example, a feedlot QSA might describe what records it uses and maintains to validate age (BEV-accepted records can be found at www.ams.usda.gov/lsg/arc/bev.htm), and how it conducts internal audits to verify conformance to its unique QSA protocol. Incidentally, QSA programs are also required to maintain a list of approved suppliers (more later).

There are a slug of other specifics (www.ams.usda.gov/lsg/arc/qsap.htm), and getting and maintaining these QSA programs involves a fair bit of paperwork. In cowboy terms, though, using age verification as the case in point, it boils down to packers having a QSA program approved by USDA that verifies they know and can prove cattle entering the BEV program fit the age requirement. A packer's QSA defines the standards suppliers' cattle must meet to be eligible for its QSA program. A feedlot QSA defines eligibility standards for cattle from its suppliers.

As garbled as this sounds, the point is if you have your own QSA program you control your own marketing destiny in a way. With age and source, for example, the way you procure and manage cattle, it could be that they wouldn't be eligible for a particular feedlot's QSA, whereas an approved program of your own could make them eligible. For some operations, the decision to craft their own programs could also be a matter of convenience. For one thing, if you want to sell cattle to multiple QSA programs, as an approved supplier you must maintain a separate set of records for each. For another, without your own QSA approval it could be there are more hoops to jump through if you want to make cattle eligible for a feedlot's QSA, as Saunders alluded to earlier for packers and feedlots.

The bottom line at this stage of the game is that you should at least be aware of QSA's and the fact that some of your customers are gearing up to use them.

You can find more detailed information in a fact sheet at www.beefstockerusa.org

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