CME: Effect of Growing Risks in Europe and Asia

US - Livestock and grain commodity markets were sharply lower on Tuesday as large traders sought to trim their long positions in light of growing risks in Europe and Asia, write Steve Meyer and Len Steiner.
calendar icon 18 November 2010
clock icon 4 minute read

Last spring, fears of a Greek debt default sowed panic in markets, not so much because of the size of the potential Greek default but rather the implications that it would have for the Euro Zone as a whole. The situation in Greece is far from resolved and it remains to be seen whether Euro members are willing to bankroll an ever expanding tab of Greek profligacy.

More recently, debt markets have been rattled by reports that the budget hole in Ireland, another country suffering from the post-bubble hangover, appears to be much deeper than previously thought. This has begun to tinge the credibility of other EU countries thought to have heavy debt burdens. Adding to the renewed panic about debt defaults in Europe, market participants responded to reports that China, a significant buyer of global raw materials, would impose price controls on a number of food staples and production materials. Based on overnight trading, it appears that the markets may open higher on Wednesday but volatility will remain high for the foreseeable future.

The panic selling of commodities on Tuesday overshadowed news that the US would lift the ban on imports of beef and pork products from the Brazilian state of Santa Catarina. The so called final rule was published in the Federal Register on November 16 and it comes into effect on 1 December. As we have discussed in the past, the rule is much more important with regard to the precedent that it sets rather than the actual impact on the supply of imported beef and pork in the US market.

We do not expect any beef imports of any appreciable quantity to come into the US anytime soon and Brazilian officials indicated that they expect only about 10,000 MT of pork to come into the US next year, less than 0.05 per cent of the 8.5 million MT of pork that will be consumed in the US in 2011. The precedent, however, is important as it does open the door to more beef and pork coming into the US from markets that are currently closed to US importers. APHIS, (USDA’s Animal and Plant Health Inspection Service) has worked in recent years to develop policies based on the concept of regionalization.

The basic premise is that political boundaries do not properly reflect disease risk and APHIS “will consider the importation of a commodity from a specific region of a country even though other parts of that country may be affected by an animal disease.” This is especially important for large countries, such as Brazil, with areas (e.g. the Amazon) where certain animal diseases will likely never be eradicated. Based on the concept of regionalization, we could see more Brazilian beef and pork coming into the US in the coming years, however, the process will likely be quite lengthy and deeply political. Finally, keep in mind that while most larger protein producing countries do want access to the US market, most of the growth in global protein consumption is not taking place in the US but rather Asia and developing economies. And the focus of US industry should be on expanding access for US exports, rather than erecting barriers to imports.

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