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Effects of a disruption of trade in boxed beef on the Canada-US

By Joseph Washington,2014-06-30 22:27
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Effects of a disruption of trade in boxed beef on the Canada-US

    Economic Impact on the Canadian Cattle and Beef Industry of a

    Disruption of Exports of Boxed Beef to the United States

    Daniel A. Sumner and José Bervejillo*

    August 16, 2005

Introduction and context

    Discovery of Bovine Spongiform Encephalopathy (BSE) in North America has prompted governments in both the United States and Canada to undertake a number of regulatory measures in response to animal health and food safety concerns. These measures have disrupted normal market relationships, notably the historical integration of the North American beef and cattle markets and, in particular, the regular flow of beef and cattle from Canada to the United States.

    In this context, this report evaluates the potential damage to the Canadian cattle and beef

    1industry if legal challenges were to halt exports of boxed beef from Canada to the United

    States in the near future. We consider this issue by drawing on evidence from the events of 2003 when BSE was first discovered in a cow in Canada and the U.S. border was closed to cattle and beef exports from Canada. We use standard econometric and economic modeling to elucidate the economic logic behind the likely impacts on market prices and other economic variables.

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    * Sumner is the Frank H. Buck, Jr. Chair Professor in the Department of Agricultural and Resource Economics at the University of California, Davis and Director of the University of California Agricultural Issues Center. Bervejillo is a research specialist at the Center.

     1 As used in this report “boxed beef” means boneless beef from cattle slaughtered at less than 30 months of age.

    This report paper was prepared to examine impacts given that the United States was considering further trade restrictions on boxed beef.

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    1- The beef and cattle markets in Canada were integrated and exports from Canada to the United States played a crucial role

    Before May 20, 2003, there was a single integrated North American market for cattle and beef. Canada produced 4.4 million cattle for slaughter annually, of which about 20 percent was slaughtered in the United States. Canada exported about 516 thousand tons of beef annually, of which 72 percent went to the US market. (See tables 1 and 2.)

    Table 1 provides basic information on the status of the beef and cattle markets in the United States and Canada in the years just before May 2003. The table includes annual averages of quantities produced, consumed and traded in terms of number of head and metric tons of product for the years 2000-2002. Notice that, in most dimensions, the Canadian industry was (and is) about one-tenth the size of the U.S. industry. Furthermore, while the United States exported almost twice as much beef as Canada, Canadian exports of beef to the United States were larger than U.S. exports to Canada. This same pattern of more exports South than North also held for live cattle. In general, Canadian shipments to the United States comprised a small share of the total available supply in the United States, but a significant share of Canadian production.

    Table 2 looks more closely at trade in Canada during this pre-2003 period. Three percentage shares included in the table are particularly noteworthy. First a little more than 18 percent of all fed cattle in Canada were exported to the United States for slaughter during this period. Thus, a significant share of the slaughter cattle in Canada moved South as live cattle. Furthermore, more than 32 percent of all beef produced from slaughter within Canada, was exported to the United States. Thus about a third of the cattle that stayed in Canada for slaughter were shipped South in the form of beef. Moreover, even when beef imported into Canada is included, more than 27 percent of total Canadian beef supply during this period was exported to the United States. Clearly, disruptions in these exports had the potential to be, and did become, a major concern in the economics of the Canadian cattle and beef industry.

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    Table 3 broadens the time horizon to show beef and live cattle exports from Canada in value terms for each year from 2000 to 2004 and for the period May 2004 to April 2005. These annual trade data further document the importance to the Canadian industry of beef and cattle exports and, in particular, show the importance of the U.S. market. Comparing the years from 2000 to 2004 shows just how much the disruption of the beef trade in May 2003 affected normal trade flows. Even though the import ban on boxed beef lasted for only about one quarter in 2003, the data indicate the clear and substantial decline in annual exports for the year. The table also shows how the partial lifting of the restrictions on boxed beef in 2003 allowed the beef trade to resume in 2004 and 2005. Exports of beef to the United States in 2004 were 8 percent higher than 2002, and beef exports to all destinations were 10 percent higher than in 2002. However, with no exports of live cattle, total exports of beef and cattle decreased 43 percent in dollar terms from 2002 to 2004.

    2- Economic impacts of the trade disruptions from the discovery of BSE in May 2003 and the ban on Canadian exports of boxed beef to the United States, with lessons for understanding the likely economic impacts if a ban on boxed beef were reinstituted

    In order to assess the economic impact of a future disruption in exports of boxed beef from Canada to the United States it is useful to consider the impacts of the 2003 events. Some effects of the May 20, 2003 BSE discovery on cattle and beef prices may be seen by examining data for the weeks and months surrounding this event. Several charts illustrate graphically an industry in severe economic crisis immediately following the disruption of trade. Furthermore, the timing of the price and revenue movements shows that the large immediate economic loses were due in large measure to blocking boxed beef exports from Canada to the United States. Exploring the economic impacts during this period will help us understand what would happen if boxed beef shipments were banned again.

    Before May 20, 2003, prices for cattle in Canada were very closely aligned with US prices because of the integrated market between the two countries. Small systematic differences in

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    prices were the result of local differences in conditions of supply, demand, quality and transportation costs. After May 20, 2003, Canadian prices collapsed and U.S. prices rose.

    Chart 1 shows weekly prices of fed steers in Canada for the periods before, during and after the ban on boxed beef imports into the United States from Canada. Fed steer prices reflect the value of cattle as they leave feedlots for slaughter. Chart 1 shows in dramatic fashion how rapidly prices collapsed and how far they fell. Moreover, the chart shows that when the United States announced in mid-August 2003 that the trade in boxed beef would soon be allowed to recommence (a category that includes beef from fed steers), prices began to rise. However, prices remained below the pre-ban level and did not share the rise in cattle prices experienced in the United States, in part because live cattle shipments remained restricted.

    Chart 2 shows that the price of cull cows fell even more than the price of fed steers and that these prices remained low in subsequent periods. This follows from the fact that the export of beef from cull cows was not renewed in September 2003 as it was for beef from fed steers.

    Chart 3 shows that the price of 550 pound steers also collapsed after the U.S. market was closed and recovered somewhat when the market for beef was opened in August 2003. The price for these steers depends on expectations about the market for fed cattle and beef several months into the future. When the market was initially closed many observers expected it to be opened again soon, so feeder cattle prices fluctuated for a few weeks before collapsing when it became evident that the U.S. market would remain closed for a considerable period.

    These charts show that the prices continued to fall in the weeks immediately after May 17, 2003. The observed price responded quickly but not immediately, in part because some cattle sales are made through forward arrangements that had already specified the price before the BSE event took place. This means that for a few weeks the average prices reported included some higher prices that had been set before the BSE event and some lower prices that were set after the BSE event. In fact, during the days following the ban, there were very few transactions in Canada, and as a consequence, for confidentiality reasons, the Can-Fax

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    cwt) as one measure of the effect of the ban on boxed beef shipments that was in place during the May 24 through August 30 period.

    Table 5 shows a similar pair of regressions for beef cut-out values (the average price per pound for beef from the slaughtered carcasses). The data for Canadian cut-out values was not collected or reported prior to May 2003 because the Canadian cut-ut values were virtually identical with the U.S. values and data providers found no interest in collecting a separate series of Canadian values. Therefore, in Table 6 we only compare the period from May 24, 2003 to August 30, 2003 with the period after August 30. The key result is that the cut-out value was $0.12 cents per pound lower during the period when boxed beef shipments to the U.S. were restricted.

    The regression analysis reinforces and supplements the illustrations from the price charts discussed above. Canadian cattle and beef producers suffered severe price declines that can be attributed directly to the ban on shipping boxed beef to the United States.

    An alternative approach to measuring the losses from the boxed beef ban is shown in Table 6. Table 6 shows average prices for the four weeks prior to May 30, 2003 compared to the period of the boxed beef ban, from May 24 to August 30, and then to the four weeks after August 30, 2003. The facts that are highlighted in this table again reinforce the point that prices for fed steers, fed heifers, cull cows and for the cut-out values were lower in the period when the boxed beef ban was in place. The period of the boxed beef ban had an average price about $35 per cwt lower for fed steers and heifers than the period immediately preceding the ban. The price during the boxed beef ban was more than $19 per cwt lower for steers and heifers than the period after the boxed beef ban was removed (and the cattle ban was continued). We also see in this table that the price of cull cows did not come back because, as we have seen, the ban on shipments of beef from these older animals to the United States remained in place. Finally, the message for the cut-out values is similar. The fall in price was $0.23 per pound, with $0.20 cents per pound recovered when the boxed beef ban was lifted. Hence, the cost of the boxed beef ban was $0.20 cents per pound.

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    Let us turn to considering direct information on losses of revenues by beef packers and cattle feedlot operators. Revenue for Canadian beef packers over the period January 2000 to December 2004 is shown in Chart 4. For these data, total revenue was calculated as the number of head slaughtered, multiplied by the average carcass weight, multiplied by the cut-out value. Only steers and heifers, which are the groups of cattle affected directly by the ban on boxed beef shipments, are included. Chart 4 shows a huge drop in revenues per week immediately following the ban on shipments was instituted. From that immediate loss, packers slowly built back revenues as more cattle had to be slaughtered, and at higher average weights, as those animals had gained weight (above their most economically optimal weight but for the shipment bans) while they were being held off the market (See Chart 5). Packer revenues regained their previous levels when the ban on boxed beef shipments was removed in August 2003, despite low prices, as the losses were forced down the supply chain. Numbers of head slaughtered rose in the later period as more Canadian cattle were slaughtered in Canada given that the ban on live cattle shipments remained.

    Chart 6 shows that the revenue losses for Canadian feedlots were even more severe than for beef packers. For feedlots, revenue is calculated as number of fed steers and heifers slaughtered times an estimated live weight ( assuming a standard carcass yield equal to 62

    2percent) times the price per pound. The drop in revenue after May 20, 2003 was immediate and easily the largest one week fall in revenue in the data. Revenues remained depressed until the U.S. market for boxed beef was opened again.

    Chart 7 shows the equivalent figure for cull cow operations. Revenues are estimated for the number of cull cows slaughtered multiplied by an estimated live-weight (based on 55 percent

    3carcass yield) and the price per pound. After May 17, 2003, revenues decreased to about one fourth to one fifth of the revenues in previous periods. There was some recovery after September 2003, but revenues remained significantly below pre-BSE levels.

     2 The 62 percent carcass yield cited here is the expected quantity of meat of grade “Choice” for every 100 lb of live weight. Carcass yields on steers and heifers vary from 60 to 64 percent. 3 A 55 percent carcass yield for cull cows may represent the upper limit. Carcass yield may vary from 48 to 55 percent (Blakely).

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    It is more difficult to estimate revenues for other activities such as the sale of calves and stockers. Data on marketings are given on a monthly basis, while prices are weekly (Chart 3). Feedlot placements are strongly dependent on the season. Sales and placements of calves are typically small in the late spring and summer months because most calves are born in the spring and are not ready for sale until the fall. The May 2003 ban did not have a large effect on placements during that fall because the calves had already been born in the spring of 2003. Imposing a ban in the fall would have a more devastating impact on cow-calf and stocker markets, since there would be a large number of animals offered for placement and the price decline and lack of market would affect the market when the bulk of the yearly crop was ready for sale.

    Examination of these historical data makes clear that the Canadian cattle and beef industry is highly vulnerable to a loss of the boxed beef market in the United States. Furthermore, the cattle industry is likely to be more vulnerable currently, in the summer of 2005, than it was in May 2003. The reason is that the industry has remained depressed economically because, as shown in Charts 1, 2, and 3, and in Table 4, Table 5 and Table 6 cattle prices remain depressed.

    With this background, let us turn to considering analytically the logic and magnitude of losses that can be anticipated if the U.S. market for boxed beef was closed to Canadian beef.

     3. Economic simulations of the likely short run economic impacts of a ban on U.S. imports of Canadian boxed beef from animals younger than 30 months

    The economic issue at hand relates to assessing the immediate losses that would be incurred if a U.S. import ban on boxed beef were instituted. To see the economic logic behind how such a ban would affect the Canadian industry it is useful to briefly review some characteristics of cattle supply and demand.

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    The demand for cattle and the demand for beef are closely linked. Consumer demand for beef is relatively unresponsive to market price. Econometric estimates of the short run elasticity of demand for beef are smaller than -1.0 in absolute value, meaning that total revenue falls when price falls because quantity sold does not rise proportionately. Econometric demand estimates for North America are provided by Eales (1996); Brester, Marsh and Smith (2002); among others. For beef consumption in Canada, Eales estimated an elasticity of demand of -0.76, meaning that a 10 percent increase in quantity available would cause a 13 percent fall in price (-0.76 = - (10/13).

    The quantity of beef supplied is a function of the price of beef and factors that affect the cost of production of beef, mainly the price of slaughter cattle. The quantity of slaughter cattle supplied, in turn, depends on the price of cattle, feed prices and other costs of production for the cattle industry. The supply of beef to the market has a complex relationship to a decline in price. In the short run, if price declines are expected to be temporary, beef and cattle producers can hold animals off the market or hold beef in cold storage anticipating the return to higher prices. In the intermediate run or if price declines are expected to persist, the quantity of beef supplied responds little to a fall in market price because it is costly to hold cattle that are ready for slaughter off the market. Cattle producers and beef processors have very limited ability to adjust their output when they are faced with an immediate and unexpected drop in market access or other demand shock that they expect to continue. Cattle in feedlots must be marketed in a timely fashion because excess weight or delays are extremely costly. Slaughter plants must continue to operate near capacity or face severe losses. In the face of severe price declines that may be temporary, marketing and slaughter delays may reduce losses compared with selling at depressed prices, but such a strategy does not prevent losses and does not solve the problem if price declines continue because the backlog of cattle and beef must be marketed in short order or face steep losses from holding and/or storage costs.

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    In 2003, many in the industry expected the U.S. import bans on beef and cattle to end quickly. As such, cattle and beef were held off the market and only released a few weeks later when it became evident that the trade ban would last longer than anticipated.

    Three factors characterize how beef processors react in response to sudden changes in market conditions. These are the cost of storage and the amount of cold storage capacity available, the expected duration of the market disruption, and the ability to forecast future changes in market conditions. For the case of a ban on boxed beef imports to the United States from Canada, increased beef storage would not be a cost effective option, just as it was of little help during the crisis in 2003. Furthermore, since the duration of such a ban would be uncertain, the beef and cattle industries would find it difficult to plan effectively. Uncertainty adds to losses because it dampens adjustments and allows prices to fall further.

    Econometric evidence of beef and slaughter cattle supply in North America supports this economic logic. Brester, Marsh and Smith (2002) for example find a short run supply elasticity of 0.12 and other estimates are even smaller. Dynamic considerations related to the cattle breeding herd sometimes suggest very inelastic supply, especially if ranchers believe conditions may change soon and that prices are likely to rise in the near future (Jarvis, 1974; Rosen, 1987; Sarmiento and Allen, 2000).

    Let us consider the dynamics in the market following a severe shock to beef demand. A ban on U.S. imports of Canadian boxed beef would have large immediate short run effects. The loss of a large share of market demand would cause the market price to fall. Beef packers would face a sharp decline in price and would suffer immediate losses. In response, Canadian packers would cut the number of cattle they purchase for slaughter, while trying to sell the excess supply of beef in the domestic market or in export markets. More beef in Canada would drive out imports, but they are a small share of the Canadian market already, especially after May 2003. Feedlots would suffer losses with lower prices for fed cattle as demand from packers collapsed. Feedlots would respond by buying fewer replacements from stockers or

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