Group Title: Working paper - International Agricultural Trade and Policy Center. University of Florida ; WPTC 05-09
Title: Economic assessment of bovine spongiform encephalopathy (BSE) and the U.S. cattle and beef industry
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Title: Economic assessment of bovine spongiform encephalopathy (BSE) and the U.S. cattle and beef industry
Series Title: Working paper - International Agricultural Trade and Policy Center. University of Florida ; WPTC 05-09
Physical Description: Book
Language: English
Creator: VanSickle, John J.
Hodges, Alan W.
Publisher: International Agricultural Trade and Policy Center. University of Florida
Place of Publication: Gainesville, Fla.
Publication Date: July 2005
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Bibliographic ID: UF00089805
Volume ID: VID00001
Source Institution: University of Florida
Holding Location: University of Florida
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WPTC 05-09


I '-ional Agricultural Trade and Policy Center



AN ECONOMIC ASSESSMENT OF BOVINE SPONGIFORM
ENCEPHALOPATHY (BSE) AND THE U.S. CATTLE AND BEEF
INDUSTRY
By
John J. VanSickle & Alan W. Hodges
WPTC 05-09 July 2005


WORKING PAPER SERIES


'V


i~fr


UNIVERSITY OF
FLORIDA


Institute of Food and Agricultural Sciences









INTERNATIONAL AGRICULTURAL TRADE AND POLICY CENTER


THE INTERNATIONAL AGRICULTURAL TRADE AND POLICY CENTER
(IATPC)

The International Agricultural Trade and Policy Center (IATPC) was established in 1990
in the Institute of Food and Agriculture Sciences (IFAS) at the University of Florida
(UF). The mission of the Center is to conduct a multi-disciplinary research, education and
outreach program with a major focus on issues that influence competitiveness of specialty
crop agriculture in support of consumers, industry, resource owners and policy makers.
The Center facilitates collaborative research, education and outreach programs across
colleges of the university, with other universities and with state, national and
international organizations. The Center's objectives are to:

* Serve as the University-wide focal point for research on international trade,
domestic and foreign legal and policy issues influencing specialty crop agriculture.
* Support initiatives that enable a better understanding of state, U.S. and international
policy issues impacting the competitiveness of specialty crops locally, nationally,
and internationally.
* Serve as a nation-wide resource for research on public policy issues concerning
specialty crops.
* Disseminate research results to, and interact with, policymakers; research, business,
industry, and resource groups; and state, federal, and international agencies to
facilitate the policy debate on specialty crop issues.









An Economic Assessment of Bovine Spongiform Encephalopathy
(BSE) and the United States Cattle and Beef Industries

John J. VanSickle & Alan W. Hodges 1

Prior to 1990, imports of Canadian live cattle were limited to quantitative restrictions
under the U.S. Meat Import Act (MIA) of 1979. Following the implementation of the
Canadian-U.S. Trade Agreement (CUSTA) in 1989, Canadian beef became exempt from
the formula-based quantity restrictions of the MIA. Imports of Canadian cattle grew and
reached a peak in 2002 when the imports reached 1.68 million head (figure 1). In May
2003, as a result of bovine spongiform encephalopathy (BSE) being discovered in a
native-born Canadian animal, the United States Department of Agriculture (USDA)
placed a ban on all imports of live cattle and beef from Canada. This occurred at a time
when the slaughter of native U.S. animals in the United States was declining because of
depressed cattle prices and severe droughts that had killed grass in many of the key cow
calf producing areas and made it more expensive to maintain cattle herds. As a result,
U.S. cattle herd size declined from 103.5 million head in 1996 to 95.8 million head in
2005. Cattle slaughter in the U.S. also declined from a peak of 35.6 million head in 2000
to 34.9 million head in 2003 and 32.1 million head in 2004 (figure 2).

It is incorrect to attribute higher beef prices in the U.S. exclusively to the fact that in
May 2003 USDA prohibited imports of live Canadian cattle and placed some limits on
importing Canadian beef. Canada exported 1.68 million head of cattle in 2002 (figure 1)
(mostly to the U.S.) which is far less than the 2.8 million head decline in U.S. cattle
slaughter from 2003 to 2004. It is also notable that imports of Canadian beef and veal
increased to a record value of $1.18 billion in 2004 (figure 3). June 2004 retail beef prices
averaged $4.25 per pound, slightly less than the $4.32 in November 2003, six months
after Canadian cattle and all but boneless Canadian boxed beef were first removed from
the market.2 These domestic higher prices are being realized in a period when import
volumes of Canadian boxed beef remain at or above pre-Canada BSE levels and U.S.
exports to most of the U.S. key export markets have been stopped because of the
discovery of BSE in a Canadian animal in Washington state. Exports of U.S. beef
declined from 2.5 billion pounds in 2003 to 488 million pounds in 2004, costing the U.S.
beef industry $3.18 to $4.88 billion.3 The U.S. beef industry is seeing higher prices even
in the face of the loss of key export markets such as Japan and South Korea because of
the combined effect of lower U.S. production and the ban on imports of Canadian cattle
and some beef in the U.S. market.


1 John VanSickle is a Professor of Food & Resource Economics at the University of Florida and is the
Director of the International Agricultural Trade & Policy Center, IFAS/University of Florida. Alan Hodges
is co-director of the Economic Impact Analysis Program in the Food and Resource Economics Department
of IFAS/University of Florida.
2 Ironically, the USDA Inspector General issued a report in February 2005 that documented in detail that
USDA had secretly allowed additional Canadian beef products such as bone-in and ground meat to be
imported.
3 Coffey et al. "The Economic Impact of BSE on the U.S. Beef Industry: Product Value Losses, Regulatory
Costs, and Consumer Reactions." Kansas State University. April 2005. A 29-30.









USDA Secretary Johanns suggested in a recent press conference that continued
closure of the border with Canada is causing the Canadian industry to build processing
capacity and move the industry north of the border4. His claims are that U.S. producers
are losing business and that workers are losing jobs because processors do not have
access to Canadian cattle.

The first questionable assumption in his argument is how much real growth in
processing capacity is occurring in Canada as a result of the border closure. Following
the removal of quantitative Canadian beef export restrictions to the United States under
the CUSTA, U.S. multinationals made large investments in Alberta, Canada, to expand
existing slaughter facilities. Alberta feedlot operators began expanding their herds in
anticipation of the increased demand for finished cattle. Moreover, Canadian cattlemen in
the western provinces, particularly Alberta, began expanding their herds during 1994-95,
in part due to anticipation of expanding slaughter facilities in Alberta, scheduled to begin
operations in 1996-97. Insufficient Canadian slaughter capacity due to delays in the
expanded slaughter plants led to Canadian ranchers selling large numbers of livestock to
U.S. processors and packers in 1996 and 1997 (figure 1). In large part, slaughter capacity
began to expand with the implementation of CUSTA.

A January 2005 article published by the Cattlemen Journal outlined what it called
"Canada's New Packing House Map." The article detailed the packing house sector of
Canada and documented the changes that are taking place. An analysis of the specific
packing plants noted in the article indicates that Canada currently has a daily kill capacity
of 15,390 animals with expansion under construction adding capacity by another 6,440
animals (figure 4). The article noted that another 3,560 head of kill capacity was being
discussed in areas across Canada, bringing their total potential kill capacity to 25,390
cattle if all current construction and construction being discussed occurs. While this
represents a 67% increase in daily kill capacity, it should be noted that most of this
capacity has been built for cows and bulls over the age of 30 months that will not be
allowed in under the new rule as published. It is questionable whether the new rule would
have altered these expansion plans.

It should also be noted that this represents a small part of what the Secretary notes is a
'North American Cattle Industry.' The top 5 beef processing companies in the U.S. have
a daily kill capacity of 103,500 animals. The top 30 beef processing companies in the
U.S. had a daily kill capacity of 128,745 in 1999 (figure 5). It would appear that while
the kill capacity of the Canadian beef processing industry is increasing, most of that
added capacity was started prior to the 2003 border closure and is being built to handle
older cows and bulls that will not be allowed in under the proposed rule. The added
capacity that is currently under construction represents roughly 40% of the current
Canadian processing capacity. However, the added processing capacity in Canada is less
than 5% of the current capacity of Canada combined with the capacity of the top 30 U.S.


4 Tele-News Conference with Agriculture Secretary Mike Johanns Regarding the closed Canadian border
and the impact on the beef industry Hyrum, Utah May 17, 2005. Transcript available at
hup \ \ \ .usda.gov/wps/portal









processors in 1999. The growth in capacity in Canada is small relative to the larger
industry already in place in Canada and the U.S.

In the short run, Secretary Johanns may be right in that some U.S. processors who
relied on Canadian cattle imports may be having trouble keeping their plants running at
an efficient capacity. The Secretary ignores, however, the larger impacts on the economy.
We can first take note of the fact that competition in the beef processing industry is at a
peak at this point in time because of the lower production of animals for slaughter by
U.S. cattle producers. As previously noted, U.S. cattle slaughter declined 2.8 million head
in 2004 when compared to 2003. This decrease included the loss of 1.68 million head of
imports from Canada and has caused the U.S. beef processing industry to operate at less
than full capacity, which has created increased competition for cattle from U.S. feedlots.

The loss of imports from Canada has two opposing impacts on the U.S. economy.
First, the reduction in the number of cattle handled by U.S. processors will lead to a loss
in economic output by this sector and result in losses of jobs for the U.S. packers that
process Canadian cattle. On the other hand, U.S. cattle producers will have more income
and likely will increase herd size. An increase in the U.S. cattle herd will lead to more
domestic cattle being processed by U.S. processors and added jobs for those processors.

An economic impact analysis was completed to account for the opposing forces that
are impacting the cattle and beef industries. Results of the impact analysis of resuming
imports of Canadian cattle into the U.S. are contained in table 1. This analysis was done
using data contained in the USDA economic analysis of the proposed rule. Our analysis,
using USDA data, shows a decrease in value of U.S. cattle due to competition from lower
value Canadian cattle. Our analysis shows a corresponding increase in total value of U.S.
packers' output primarily due to increased cattle supply from Canada. We extend our
analysis beyond what USDA has done by calculating the net effect of resuming imports
from Canada, which is simply the sum of the impacts of the USDA action on the U.S.
cattle producers and the U.S. meat packers. The impact estimates were calculated using a
U.S. Input-Output (I-O) model5 constructed with Social Accounting Matrix (SAM)
multipliers, with all social accounts included, such that transfer payments are captured.
The analysis of increased packer output due to increased supply coming from Canada
was done by setting the regional purchase coefficient (RPC) for cattle to zero, forcing the
model to import cattle for slaughter. The changes in values for 2005, 2006 and 2007 were
entered into the model separately, and were first deflated to 2002 dollars to be consistent
with the model year information, and then impact results were restated in 2005 dollars.

Overall results of our analysis of resuming imports of Canadian cattle into the U.S.
(presented in table 1) indicate a net decline of $7.56 billion in U.S. economic output, a
decline of 68,442 jobs, and a decline of $3.57 billion in value added, including $2.26
billion in labor income and $294 million in indirect business taxes.

The impacts are separated in our analysis to show the impact due to increased
cattle imports from Canada and the impact from decreased production by U.S. cattle

5 Implan Pro, MIG, Inc., Stillwater, MN, 2005.









producers. The impact of reduced output from U.S. cattle producers due to resumed
Canadian imports was estimated as a loss of $12.83 billion in economic output, while the
impact of increased slaughter output due to increased supply of Canadian cattle was an
increase of $5.26 billion in economic output. Results are provided for direct, indirect and
induced effects, and are available for major industry groups. The direct effects represent
the change in output of the U.S meat packers and cattle producers, indirect effects
represent changes in other supplier industries, and induced effects represent changes in
income and spending by industry employees. The results indicate that there will be some
elements of the economy that depend on imported Canadian cattle slaughtered in U.S.
packing facilities that will decline if the border remains closed, but that loss to the U.S.
economy is more than offset by the gains that are expected from increased production of
domestic cattle, and from those U.S cattle being processed into beef, to total a net gain of
$7.56 billion in output value over the 2005 to 2007 period.

The other impact that BSE has caused to the beef and cattle industries is the
resulting loss of export markets following the discovery of a BSE-infected cow of
Canadian origin in Washington state in December, 2003. As noted above, U.S. beef
exports have declined, from 2.8 billion pounds in 2003 to 488 million pounds in 2004.
Kansas State University recently published an analysis of the impact that the loss of
export markets has had on the U.S. beef industry. The Kansas State report indicates that
the decline in exports of carcass beef (or more commonly meat) has cost the U.S. beef
industry between $2.86 billion and $4.22 billion in losses. Dramatic declines in exports of
offal have cost the industry an additional $319 million to $448 million, bringing the total
cost to U.S. producers from lost exports to between $3.18 and $4.66 billion. Clearly, the
economic impact of the discovery of the BSE-infected Canadian cow in the U.S. is
costing U.S. cattle producers. The new rule proposed by USDA will increase those
negative impacts by encouraging the economic displacement of U.S. cattle producers by
Canadian cattle producers, whose cattle are less expensive because of international
import bans because of BSE in Canada.

To summarize, lost exports have already cost the U.S. cattle and beef industries
$3.18 to $4.66 billion. Beef and cattle prices remain high despite a steadily growing
supply of imported beef and the continuing loss of export markets for U.S. beef. The
impact of lost exports would be even more significant to U.S. cattle producers if market
prices were not higher because of the current reduced size of the U.S. cattle herd and the
current ban on imports of live Canadian cattle. Allowing imports to come in as specified
in the USDA's final BSE minimal risk region rule would magnify the impacts of lost beef
export markets on the U.S. economy by another $7.56 billion over the period 2005 to
2007. The current ban on importing Canadian cattle is hurting some U.S. beef processors,
but their impacts are more than offset by the gains to producers and processors of U.S.
cattle and beef. It must also be noted that these impacts do not account for the increased
risk of potential BSE-infected cattle as a result of importing live cattle and beef from
Canada.














Figure 1. Canadian Cattle and Calves, Imports, Value and
Average Import Value, 1989 to 2004


1,800,000

1,600,000

1,400,000

1,200,000

1,000,000

800,000

600,000

400,000
200,000
0


$900.00

$800.00

$700.00

$600.00

$500.00

$400.00

$300.00

$200.00

$100.00

$0.00


S Volume
- Value
Ave. Val


Source: USDA Foreign Agricultural Trade Database. http://www.fas.usda.gov/ustrade/USTImFatus.asp?OI=


oCOCOCOCO cn 3 0 O l0 0000 0
CO0-C3C,3O OOOCCCO0-03C
(0 (0 (0 0 0 0 0 o
(00 Q 0 M W(00 N









Figure 2. Annual US Cattle Slaughter, 1980 2004: 1,000


7%


19
c9


1
V0


1


V


0


36000

35000

34000

33000

32000

31000

30000

29000


1












Figure 3. Beef and Veal Imports, Total Value and Average
Value, 1989 to 2004


1,400,000

1,200,000

1,000,000

800,000

600,000

400,000

200,000

0

N\b N^b N^b N^b N^b \^p^ N^b CP^


$3,500.00

$3,000.00

$2,500.00

$2,000.00

$1,500.00

$1,000.00

$500.00

$0.00


Volume
- Value
Ave. Val


Source: USDA Foreign Agricultural Trade Database. http://www.fas.usda.gov/ustrade/USTImFatus.asp?QI










Figure 4. Canada's Current Daily Kill Capacity, Expansion Under Construction and Expansion
Being Discussed.

16000

14000-

12000-

10000-

8000

6000

4000

2000

0
Currnt-nde CosrcinTaknJtg


Cu rrent


Under Construction


Talking Stage










Figure 5. Daily Kill Capacity in Canada and the U.S.


120000



100000-



80000



60000



40000



20000


*I


+


+


+


0 --


O Talking Stage
* Under Construction
* Current


Canada


US
















Table 1. Economic Impacts on the US Cattle Slaughter Market from Canadian Imports (2005-07)

Impact of Reduced US Cattle
Slaughtered Impact of Increased Supply


Impact Direct Indirect Induced Total Direct Indirect Induced


Output*


Employment (Jobs)


Value Added*


Labor Income*


Indirect Business Taxes*


-1,967


-5,203


-238


-198


-18


-4,037


-42,182


-1,519


-849


-158


-6,829


-61,890


-4,065


-2,701


-290


-12,833


-109,275


-5,822


-3,748


-466


1,478


3,909


179


149


13


1,166


13,149


508


301


46


2,625


23,774


1,568


1,040


112


Total


5,269


40,832


2,254


1,490


172


Net Impact on US Slaughter Market


Direct Indirect Induced Total


-489


-1,293


-59


-49


-4


-2,871


-29,033


-1,012


-548


-112


-4,204


-38,116


-2,496


-1,661


-178


-7,564


-68,442


-3,568


-2,259


-294


*Millions 2005 Dollars

Impacts estimated for Implan slaughter sector (67) with type SAM multipliers
Source: Implan software and U.S. data for 2002 (MIG, Inc, 2005)












Figure 6. Canada Monthly Direct Sales Steer Prices, 2002-2004


1 2 3 4 5 6 7
Month


8 9 10 11 12


140


120


100


80


60


40


20


0


--2002
-*-2003
2004


I









Figure 7. Beef Cattle on Canadian Farms, 1995 to
16,000.0 2004, 1,000 head
14,000.0
12,000.0
10,000.0
8,000.0
6,000.0
4,000.0
2,000.0
0.0

(-'r>-) (-- Q '> '> 9 )
a a% a a a% a a a> a a




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