The Canadian Beef Situation
By Dr. Gary Brester and Dr. John Marsh, Professors in the MSU Department of Agricultural Economics and Economics
May 2004 — I submitted five questions to Drs. Brester
and Marsh and asked their opinions about beef trade
with Canada. The following are my questions and their
answers.
— John Paterson, Editor
Q: The U.S. has allowed certain beef imports from Canada during the past few months. Would allowing Canada to export cattle to the U.S. have a major in influence on U.S. cattle prices?
Brester: We first have to recognize that all beef importing countries barred imports from Canada following the single case of BSE that occurred in Canada last spring. In effect, this significantly reduced the world’s supply of grain–fed beef at a time of relatively low supplies and rising demand. This multilateral action contributed to approximately 20% of the increase in U.S. beef prices during 2003. A unilateral decision by the U.S. to import Canadian beef increases the supply of beef to U.S. consumers, and will lower beef and cattle prices. Of course, the markets have already adjusted given that the U.S. is importing some beef from Canada. Thus, it makes little difference whether the U.S. imports Canadian beef or Canadian cattle. A decision to import Canadian cattle could certainly cause a short term reduction in cattle prices especially if imports are allowed at a time when U.S. packing plants are operating at capacity. Conversely, if Canadian cattle imports resume during a time of relatively short fed cattle supplies, then one would expect only a small, short term price impact. Recall that Canadian cattle imports represent only 4% of U.S. cattle slaughter. In fact, if Canadian cattle imports help U.S. packing plants operate at more efficient levels, this is a positive outcome for the U.S. cattle industry. In addition, futures markets appear to have already anticipated the resumption of normal trade activity between the U.S., Canada, and importing countries. Nonetheless, if a producer has cattle on show lists at the time of a "short term" negative price effect, losses can be devastating. Thus, it is important that producers manage price risk in anticipation of such events. Fortunately, the near and long term futures and options markets are providing solid price risk management opportunities. Tom Urban, former CEO of Pioneer Hybrid, once explained risk management to me in the following way. He said you can choose to manage risk through negotiation, insurance, and futures markets. However, if you decide to forego the use of such tools to manage then you must be willing to live with both the and negative consequences of the gamble that you have willingly taken. In either case, the worst thing you can do is ignore risk.
Q: Some have argued that U.S. imports of Canadian beef and cattle should be banned for seven years so that Canada can demonstrate that their system is BSE–free. What would the ramifications of such an action be?
Marsh: After the BSE outbreak in the United Kingdom, Canada and the U.S. instituted similar programs to minimize the risks of BSE transmission. To a great extent, it is much more important to consider the world’s reaction to U.S. and Canadian efforts to minimize this risk. Although Canada is much more dependent on beef exports than is the U.S., both countries need healthy export markets. For example, Canada has historically been the third or fourth largest export market for U.S. beef. The continuation of a ban by the U.S. on imports of Canadian beef and cattle would not have much of an effect on U.S. prices if the rest of the world would decide to import Canadian beef.
Q: If the U.S. refuses to open our borders to imports of Canadian beef and cattle, could this have implications with respect to the World Trade Organization?
Brester: Participating countries have developed the WTO to establish and enforce trade rules so that member countries do not unfairly invoke trade restrictions. However, all WTO member countries retain the right to ensure that imports are safe. This, of course, is the heart of the beef trade disagreement between the U.S. and the E.U. regarding the use of growth hormones. Scientific evidence is used in trade disputes to determine whether or not consumers are at risk. If the rest of the world decides that the Canadian industry has a safe beef system, then the U.S. would have to prove that Canadian beef is unsafe if we were to continue a unilateral trade ban.
Q: Some have argued that the ban on U.S. imports of Canadian cattle and beef that occurred in 2003 was the major reason for record cattle prices last year. Was this the major reason?
Marsh: Without a doubt, the world’s trade embargo was a catalyst for record prices in 2003. Nonetheless, U.S. fed and feeder cattle prices were already 20% higher in May 2003 than in October 2002 because of supply and demand fundamentals. My research has shown that about 20% of 2003 price increases was the result of the U.S. ban on Canadian cattle and beef imports. The majority of the price increase (70%) was the result of strong consumer demand, reduced domestic supplies, lower slaughter weights, and increased by–product values. Another 10% of the price increase was caused by lower worldwide beef supplies. More importantly, if only the U.S. had banned Canadian beef imports, the impact on U.S. cattle prices would have been even smaller than the 20% increase suggested by my research.
Q: Why is there so much animosity and divisiveness in the cattle business? What started it and can it be moderated?
Brester: First, part of the answer to the question centers on trade. For over 200 years, economists have recognized that trade is beneficial for societies. However, we also recognize that trade is not likely beneficial for every group within a society. Second, it is often convenient for some to think about "U.S. imports" or "Canadian exports," but in reality, neither "country" directly imports or exports beef. It is companies within those countries that choose to import or export so that they can operate pro table enterprises. Third, in many respects, the beef industry is much like other industries in which many segments exist between the raw input and retail levels. For example, high feeder cattle prices are good for feeder cattle producers, but gnaw away at feedlot profits much like high steel and labor prices reduce the profitability of tractor manufacturers. Fourth, some individuals and groups will often use the "trade" issue as a means to further personal, political, and group agendas. Often, the stated goals of these agendas are thinly veiled and inconsistent with proposed actions. Fifth, economists agree that competition within and across economic sectors increases the availability of goods and services and reduces prices to consumers. So, much like a basketball game in which spectators enjoy viewing competition and appreciating its outcome, that enjoyment would be greatly reduced if spectators were forced to participate in that competition that is, which of us would like to be on the receiving end of a Shaquille O’Neal elbow?