The proverbial bird in hand may be worth two in the bush, but what if you factor in the density of birds within scope-distance, the accuracy of the hunter and the supply of ammunition? This is the dilemma producers and policy makers face in sorting out the economic impact of resuming live cattle trade with Canada.
For the time being, although the assumption grows less rational each passing day and with each new BSE discovery in Canada, assume U.S. packers and feedlots can begin importing cattle from Canada March 7, as USDA proposed last month.
Any abacus you use says adding more cattle and beef tonnage to the U.S. supply, relative to constant consumer demand, means prices for cattle and beef will decline.
In fact, according to USDA's economic analysis of its rule for resuming Canadian cattle trade, if the rule takes effect as is, fed cattle prices are expected to decline 3.2% and feeder prices 1.3% in 2005. By 2009, compared to a market without those cattle, fed prices are expected to be 1.3% lower and feeder prices 0.6% less.
If that's the case, USDA's analysis claims the net welfare benefit — the difference between consumers' willingness to pay for commodities beyond their actual price and changes in producers' revenue beyond their variable costs — will be a positive $66.3-$74.6 million in 2005. In other words, consumers save more on beef purchases than what producers sacrifice.
“We actually believe there will be a slight decline in imports from Canada. That's a result of the fact there's substantial incentive for meat packers (Canadian) to shift in slaughter to more cows,” says Keith Collins, USDA's chief economist.
Under USDA's proposed rule, cattle more than 30 months of age are ineligible for U.S. import, but beef from animals older than 30 months is eligible. The guess is Canadian packers will harvest more cows and send the beef to the U.S., keeping more fed beef at home, and resulting in a decline in beef tonnage exported across the border.
For comparison, Gregg Doud, chief economist for the National Cattlemen's Beef Association, points out, prior to BSE in North America, net U.S.-Canadian trade also shaved the price of live cattle. He explains, “The total U.S. beef imports from Canada (live-in-carcass equivalent plus beef) cost U.S. producers an average of $5.74-$6.89/cwt. (fed cattle). This cost is slightly offset by the estimated $0.92-$1.10/cwt. U.S. producers received by exporting to Canada. So, the estimated net effect of a completely open border with Canada results in a loss to U.S. producers of $4.82-$5.79/cwt. on U.S. fed cattle prices.”
Doud also points out the U.S. resumed importing boneless boxed beef from cattle 30 months old and younger in September 2003. That's amounted to about 14 million lbs./week. “Economic modeling suggests this increase in U.S. beef supplies negatively affects U.S. fed cattle prices by $2.80-$3.36/cwt.,” he says.
At least this essence of the price impact is the bird in hand, or a reasonable facsimile of resuming imports of live cattle and rescinding the age restriction on boxed beef as USDA proposes.
This is also the same bird, albeit sitting on the opposite branch, if public policy or the vagaries of BSE conspire to keep the border closed for an indefinite period. Without imports, in absolute terms, it's the money that won't be shaved from fed and feeder cattle prices.
Continuing to bar the door
Keeping the border closed might find packers — like three of the nation's top four have already — cutting shifts or closing entire plants for weeks at a time because of tight supplies, high prices and relatively weak retail demand.
So, with or without Canadian cattle, one could argue strongly that fed cattle prices will decline, simply because market fundamentals demand an adjustment to restore equilibrium.
At least part of the current market imbalance stems from the fact domestic cattle supplies are historically narrow relative to demand and will tighten more as the national herd retains more heifers for expansion. Again, with or without Canadian cattle, basic economics say the market will find ways to compensate and adjust the price downward.
Arguably, this is even true if you assume global export markets open to the U.S., while the U.S. remains closed to Canadian cattle. Prior to the loss of U.S. beef export markets, economists consistently pegged the value of total beef and beef variety meat exports at $15/cwt. for a fed steer. As of June, Doud says the U.S. had recaptured 31% of its lost export market, the equivalent of about $5/cwt. on a live-weight basis.
With Canadian cattle, many argue you have more opportunity to recoup this remaining $10/cwt. (basis fed steer). Without Canadian imports, because of the supply-based packer squeezing cited earlier, positive price impact should be diluted. Longer term, it would be tough for the U.S. to maintain both domestic and restored international demand with such little supply.
Some argue the rest of the world will continue to ban U.S. beef until trade with Canada is resolved. That's because other nations view this more as a North American beef market rather than a U.S. one.
The longer the border remains closed, the more opportunity Canada has to build its own beef packing capacity. That could make Canada a tougher competitor with the U.S. in the international beef export market.
“In the final analysis, Canadian cattle imports and their subsequent price influences are outweighed many times over by the return of $10/cwt. on two-thirds of our export markets,” Doud says.
Part of what makes the conjecture surrounding resumed Canadian trade just that is no one knows for sure how many cattle will come south with the new rule.
“We estimate that in 2005 we'll import 2 million head of cattle from Canada (with the proposed rule), Collins says. “Compared to zero that sounds like a lot but remember we're moving back toward normalcy in trade with this rule. In the five years prior to 2003 our average imports from Canada were 1.25 million head/year.”
More specifically, using an average of imports for 2001 and 2002, USDA estimates the U.S. would import about 652,400 fed cattle and 311,400 feeder cattle with the proposed rule — the quantity that would have been expected without trade disruption. In addition, USDA expects another 394,500 fed cattle younger than 30 months of age and another 204,000 feeder cattle due to the backlog caused by the trade disruption.
Weak dollar muddies reality
That's in line with estimates made by Cattle-Fax in its long-term outlook issued in December. Cattle-Fax pegs 2005 Canadian feeder cattle and calf imports at 300,000-400,000 and fed cattle at approximately 500,000. However, these estimates are based on the earlier belief that USDA's ultimate rule would not rescind the age rule on boxed beef imports.
In 2002, when drought forced Canadian producers to liquidate, the U.S. imported approximately 464,000 head of feeder cattle. Fed cattle imports were 756,000 head that year (the peak was 828,000 head in 2001).
However, Doud says, “Industry observers are united in their belief that lower costs of gain in Canada will be a significant mitigating factor against any significant quantity of U.S. feeder cattle imports.”
Moreover, even with the duress of BSE, fundamentals are different than during pre-BSE days. After all, the dollar is weaker.
“Today, the U.S. dollar buys fewer Canadian dollars than last year,” Doud says. “The Canadian beef market is discovering this makes it impossible for Canadian beef prices to return to normal levels, regardless of the post-BSE marketing environment.
“Fed cattle that were worth $80/cwt. in February and March of 2003 were worth $1.20/cwt. in Canadian dollars. Because of the weaker dollar, that was equivalent to $1.06/cwt. in Canadian dollars in February and March of 2004,” Doud says.
Plus, even if you felt reasonably sure of the number set to come south, you still don't know exactly when they'll move. USDA estimates the majority of backlogged feeder and fed cattle would move in the first 3-6 months of trade resumption.
Meanwhile, reports of a Canadian trucking industry that all but collapsed with BSE suggest it may be tough to move as many cattle as Canadians may like, as quickly as they hope.
Most important, no one knows what U.S. consumer reaction will be to resumed Canadian trade, which could nullify lots of sophisticated economic modeling.
One thing's for sure, when trade resumes, the market will decide where it needs to go in order to maintain equilibrium, whether or not anyone can predict its methods of doing so.