Summer 2005, Vol. 11 No. 3
In this issue...
A New World Market for U.S. Beef
Domestic and international responses to bovine spongiform encephalopathy (BSE) in North America have permanently altered international market opportunities for U.S. beef. As expected, most international markets immediately banned imports of U.S. beef when the first U.S. case was reported in December 2003. Beef and beef variety meat exports in 2004 fell 75 percent by volume and 79 percent by value compared with 2003 levels. By April 2005, strong demand from Mexico and the reopening of a few markets helped overcome some of the overall trade loss, but most major markets remained closed to U.S. beef (see Table 1).
The second U.S. case of BSE, officially confirmed in June 2005, set back much of the progress made in re-opening international markets. Taiwan, Indonesia, and several other countries that had re-opened their borders to U.S. beef reinstated bans, and South Korea immediately expressed strong reluctance to move forward with negotiations to resume trade. However, the rush by Taiwanese consumers to purchase discounted U.S. beef already on store shelves indicates that, at least for some consumers, low price outweighed any concern over the safety of U.S. beef, if such concern existed. Early reports from Taiwan indicated that reinstating the ban may have been an automatic reaction that will be reversed, but it is difficult to say how long a reversal will take.
On the other hand, the Japanese government's calm reaction to the news of a second BSE case in the United States reflected the stated expectation that more than one BSE-positive animal would be found in the United States. It may also reflect the fact that Japan has yet to set a timeline for opening its borders to U.S. and Canadian beef, and conflicting test results in the second case appear to be causing additional delays by Japan.
Consumer Opinion and the Beef Safeguard in Japan
Although the Japanese government remains committed to negotiations to reopen its market, U.S. exporters will face new marketing challenges when access is allowed. With 20 confirmed cases of BSE and 100 percent testing of cattle, reports of new cases in Japan's cattle herd have little impact on overall consumer behavior. However, surveys continue to show strong consumer opinion against resuming imports of U.S. beef under the terms of the Beef Export Verification Program drafted by Japan and the United States. Although consumer opinion often does not reflect actual purchasing decisions and not all Japanese consumers will shun U.S. beef, the Australian industry's classification as free of BSE and its unchallenged hold on the Japanese market will make it difficult for U.S. beef to re-capture market share.
Another obstacle for U.S. beef is Japan's safeguard system. The safeguard is triggered when imports increase by more than 17 percent from volumes imported during the previous Japanese Fiscal Year (JFY) on a cumulative quarterly basis. Once triggered, the beef tariff increases from 38.5 percent to 50 percent and the safeguard remains in place for the remainder of the current fiscal year. Import volumes of chilled beef and frozen beef are measured separately, so the safeguard can be triggered for one or both categories of beef in a given quarter. The sudden losses of Canada and then the United States from the market reduced import volumes, thereby reducing safeguard trigger levels. As the end of the first quarter of JFY 2005 (April-June) approached, concern arose that the safeguard would be triggered by increased imports from Australia.
Despite requests from major trading partners, Japan has never failed to implement higher safeguard tariffs on either beef or pork, regardless of the market conditions that created the ebbs and surges in import volume. Table 2 shows Japanese imports in 2003 before the first BSE case was found in the United States, and in 2004 with both the United States and Canada banned from the market. The lower import levels in JFY 2004 make it more likely that beef safeguards will be triggered after the United States and Canada re-enter the market.
Increased Processing Capacity in Canada
U.S. beef will also face pressure from the increase in Canadian slaughter capacity necessitated by the extended closing of the U.S. border to live Canadian cattle. In June 2004, Canada was slaughtering around 77,000 head of cattle per week, already a high slaughter rate for the Canadian industry. In June 2005, the Canadian Meat Council estimated that Canadian slaughter capacity could reach 107,000 head per week by November. The additional 30,000 head per week would equal 1.5 million more head per year--this at a time when the United States is facing underutilized beef slaughter capacity.
In 2002, the last full year of live exports to the United States, Canada slaughtered about 3.5 million cattle in inspected facilities and exported just over 1.0 million live cattle to the United States for slaughter (see Table 3). By 2004, Canadian slaughter increased to more than 3.9 million head with no live exports. At the same time, the size of the domestic herd increased from 13.8 million head in 2003 to 16.8 million head in 2004 (January 1 herd inventories). Part of this expansion is the result of herd aging, as producers carried 8.6 percent more beef cattle in 2004. To counter this problem, Canada has funded a Herd Management for Older Animals Program to help cull older animals from the national herd. As a result, many older animals will not be slaughtered for beef.
Even with the increase in herd size, the slaughter capacity estimated to be on-line by November would more than accommodate all of Canada's slaughter needs without exporting live cattle. This is not to say that Canada will not export live cattle to the United States now that an appeals court has ruled that the border can be reopened, and some of Canada's increased capacity can be ramped back down relatively quickly. But Canadian cattlemen will have more options. The capacity to kill all of the approximately 800,000 head of steers and heifers formerly sent to the United States gives Canada the potential to harvest an additional 294,000 metric tons (carcass weight basis) of young, exportable beef.
Given that Canada and the United States likely will enter many markets at about the same time, both offer essentially the same quality and types of beef on a commodity basis, and both are shipping beef similar distances to many foreign markets, a higher volume of exportable beef in Canada will slow the speed at which the United States recovers market share in other countries. Canada's separate export promotion programs and national cattle identification program will make Canadian beef highly competitive against U.S. beef.
Market Outlook Post-BSE
Based on events since BSE-positive animals were found in the United States, the United States will find itself in a different position in world beef markets. Mexico has become and will remain the largest market for U.S. beef and beef variety meats for some time. To balance demand for the types and cuts of beef the U.S. industry produces, the United States will face an uphill battle in recapturing market share in other countries, especially in high-value markets that have been highly resistant to accepting U.S. beef. Once Japan reopens to U.S. beef, that country's beef safeguard mechanism is likely to hamper these efforts because of lower quarterly trigger levels. And, closing the border to Canadian live cattle has exacerbated these challenges because the United States will face Canada's increased ability to place high-quality beef into world markets. ♦