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REMARKS AS PREPARED FOR DELIVERY By USDA Chief Economist Keith Collins The Economic Consequences of BSE For the North American Cattle and Beef Industries The USDA BSE Roundtable The University of Minnesota St. Paul, Minnesota
June 9, 2005
Good morning. Thank you, Mr. Secretary, for organizing this forum. The Secretary invited me to begin the discussion of the market and structural implications of BSE by presenting economic data about what has and is happening. That should help position us to discuss what changes may be in store for the U.S cattle and beef industry.
Cattle Market Trends Prior to BSE
To begin, return to 2002, the last full year of data prior to the finding of BSE. In 2002, the U.S. and Canada generally traded freely with one another in cattle, beef and beef products. At that time, cattle numbers had been trending up slowly in Canada (figure 1, red line), while cattle numbers here had been trending down (blue line).
Both countries had seen beef exports grow sharply, with Canada much more dependent on exports than the United States. In 2002, beef exports equaled 47 percent of Canadian production but 9 percent of ours. Canada's cattle production exceeded its slaughter capacity; consequently, Canada exported an average of 1.2 million head to the U.S. during 1998-2002.
The Canadian Finding of BSE
In May 2003, Canada discovered BSE, and immediately Canada lost its export markets for ruminants and ruminant products. With exports accounting for such a large portion of beef production, Canadian cattle prices plunged (figure 2, red line). During May 2003, fed steers in Alberta sold for $77 per cwt (in U.S. dollars), but by July, they averaged only $27, down 65 percent. As prices dropped, slaughter declined, producers held animals back, and with the U.S. border closed, cattle inventories on farms started rising. The Canadian government initiated multiple financial assistance programs to try to limit the industry's losses.
During the summer of 2003, the U.S. imported no ruminant or ruminant products from Canada. Figure 3 shows U.S. imports of Canadian cattle before and following the finding of BSE. In the fall of 2003, the U.S. opened its market to Canadian boneless beef products from animals under 30 months old. Figure 4 shows the value of U.S. beef imports from Canada, which are now back to pre-BSE levels. The resumption of beef exports to the United States and strong consumer demand helped Canadian slaughter and cattle and beef prices begin to recover. The price recovery continues today, but remains limited by the closure of the U.S. market to imports of live cattle and beef from cattle over 30 months of age.
The U.S. Finding of BSE Then, it was the U.S. turn for market disruption. After the U.S. discovery of BSE in Washington State in December 2003, more than 50 countries suspended imports of U.S. ruminant and ruminant products. Despite the export loss, three factors made the U.S. market reaction very different from that in Canada: (1) beef exports accounted for a much smaller share of U.S. production, (2) supplies of U.S. cattle were tight, and (3) the Canadian border was closed to imported cattle. As in Canada, our consumer demand for beef was unfazed by finding BSE in a single cow. U.S. cattle prices fell, but the decline was brief (figure 2, repeated, blue line). Prices of fed cattle dropped from about $85 per cwt before Christmas to a low of about $73 in early January, but then rebounded and went on to set a record high for 2004, and continue to be strong. No government financial assistance programs have been authorized for cattle producers.
The U.S. and Canadian Beef Processing Situation
Let's now focus on the beef processing sectors in the U.S. and Canada. With open trade between the U.S. and Canada in beef from younger animals, U.S. and Canadian meat packers compete with one another for the retail market. Consequently, beef prices in the U.S. and Canada are competitive and similar. But, because there is no live cattle trade between the two countries, and Canada has a surplus of live cattle, Canadian meat packers are paying less for cattle than U.S. meat packers, and Canadian slaughter is expanding (Figure 5, red line).
In the U.S., meat packers must compete against one another for the reduced pool of available slaughter cattle, bidding up prices. Our packers also must compete against imported Canadian beef. Consequently, U.S. meat packing margins have been lower than in Canada, and U.S. slaughter is cyclically low (blue line), which increases packers' operating costs due to low capacity utilization.
U.S. meat packers that slaughter mostly older age animals, such as cows, do not face competition from Canadian lean processing beef, which cannot be imported into the U.S. However, they face sharply reduced cow supplies. In 2004, U.S. cow slaughter was down about 15 percent from 2003. Competition for the limited supply of cows has boosted cow prices and reduced packer returns.
We can compare meat packers' returns in Canada and the United States by looking at the ratio of boxed beef prices to fed steer prices in each country (red and blue lines in Figure 6). The ratio rises as the price a packer gets for beef increases relative to the price the packer must pay for cattle. These ratios are not absolute measures of profits because other costs are incurred in slaughter, but they indicate the relative margins. The figure shows that before BSE the margins were the same in both countries, but since 2003, packer margins have been substantially higher in Canada than in the United States. Implications for the Structure of the North American Cattle and Beef Industry Economic principles suggest some key adjustments are likely in the U.S. and Canadian cattle industries over time, if current conditions persist (Figure 7).
A first adjustment is that the longer the border remains closed, the more likely Canada will continue to expand cattle slaughter and beef exports to the United States, and ultimately to the rest of the world. Meat packers in Canada can be expected to expand capacity first by adding production hours, then by expanding existing plants and finally by building new plants. With expanded capacity, Canada will eventually work through the cattle whose marketing has been delayed due to low cattle prices and the closed border. As cattle supplies decline below capacity, Canadian cattle prices will rise, and meat packer margins decline. Higher cattle prices will be an incentive for Canadian cattle producers to further expand cattle production, although there is a several year lag between producers holding back heifers for breeding and an increase in slaughter-ready cattle.
Data to date suggest these adjustments are underway. The Canadian federal and provincial governments have a strategy to increase slaughter capacity. Canadian cattle slaughter rose about 25 percent in 2004, from its depressed 2003 level, mostly using existing capacity. Federally inspected slaughter is up another 6 percent year-to-date, and several plant expansions are coming on line in 2005.
A second adjustment is that the record-high U.S. cattle prices in 2004 and relatively high prices thus far in 2005, combined with an open border for beef with Canada, will likely cause an expansion in U.S. cattle production at the same time U.S. meat packers may be reducing slaughter capacity. U.S. cattle producer returns have been strong, and with the return of good forage, the stage is set for expanded cattle production. Retaining heifers to increase herds will reduce the already low level of available slaughter cattle. Without access to Canadian cattle, U.S. slaughter will remain below capacity, forcing some meat packers to curtail slaughter operations.
The data to date suggest these adjustments are underway. Several U.S. plants have periodically reduced operations and laid off workers. If the current economic conditions are sustained, permanent closures in the U.S., combined with permanent expansions in Canada, would result in Canada increasing its market share of North American beef production and exports. Another possible consequence is that as U.S. cattle producers increase marketings over the next few years, there could be fewer U.S. packing plants bidding for more cattle, suggesting a "buyers' market" and lower cattle prices.
If U.S. packing plants close, some U.S. cattle producers would face higher transportation costs to more distant plants. Plant closures would not necessarily occur only in the northern states. Figure 8 shows the top 7 states that import Canadian cattle and the percentage of each state's slaughter accounted for by Canadian cattle. Without Canadian cattle, U.S. plants will bid cattle away from one another. The most vulnerable plants will be the less efficient ones that cannot pay to keep cattle coming in their door.
In conclusion, BSE in North America has resulted in two distinct markets for live cattle but one market for beef. In the short term, U.S. cattle producers are benefiting with higher cattle prices than otherwise. But over the longer term, these market imbalances must and will be worked out. The continued restriction of Canadian cattle imports provides an incentive to increase beef production in, and exports from, Canada. This has and will put financial pressure on U.S. meat packers and could affect where and at what price U.S. producers will be able to market their cattle. Reopening the Asian markets to U.S. beef would reduce the adverse impacts on U.S. cattle producers but may still leave Canada a more formidable competitor in foreign markets.