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Free vs. Fair

For Columbus, MT, rancher Leo McDonnell the traditional explanations for declining cattle prices no longer seem to apply."We've been in this business all of our lives. You can tell something is wrong," says McDonnell, who began keeping a watchful eye on imports about four years ago.McDonnell, who operates the Midland Bull Test and runs his own herd of Angus cows, says this round of lower prices is

For Columbus, MT, rancher Leo McDonnell the traditional explanations for declining cattle prices no longer seem to apply.

"We've been in this business all of our lives. You can tell something is wrong," says McDonnell, who began keeping a watchful eye on imports about four years ago.

McDonnell, who operates the Midland Bull Test and runs his own herd of Angus cows, says this round of lower prices is not part of a normal cattle cycle. Instead, he believes imports are contributing to an oversupply of cattle, resulting in a lack of demand - and price - for beef.

He bases his conclusion on simple math: The U.S. is projected to have record beef imports in 1998 and 1999, yet cow herd inventories - and thus number of calves produced - are near record lows.

Indeed, the U.S. was the largest importing country of beef (in tonnage) in the world last year, according to USDA Foreign Agricultural Service (FAS) reports. And that's not counting the 2.046 million head of live-cattle imports that came into the country last year, to boot.

Add to the mix the fact that USDA reports "all cattle slaughtered in the U.S. including all live imports" as "U.S. beef production," and you may begin to understand why McDonnell's watchful eye turned to a raised eyebrow. For example, last year's 2.046 million head were factored into U.S. production numbers.

McDonnell and other ranchers began to suspect that they weren't entirely to blame for the current cattle supply glut. They've thus begun to rally for fairness in free trade.

They've done that in the form of the Ranchers-Cattlemen Action Legal Foundation (R-CALF), a non-profit corporation formed in May 1998 with the sole purpose of initiating enforcement of U.S. trade regulations regarding imports of beef and cattle.

"We're not looking for trade barriers, just fair trade," says McDonnell, founder and president of R-CALF.

At issue are very low-priced, live-cattle imports from both Canada and Mexico and government support programs to Canadian cattle producers.

Trade policies are on the books to protect our producers from these unfair trade practices, says McDonnell. However, these policies generally aren't enforced unless the industry claiming injury files a petition for "import relief." This requires the Department of Commerce and the International Trade Commission (ITC) to initiate investigations and take action.

"If we want our trade laws enforced, the industry must step to the plate," McDonnell says. It's a process that's been used successfully by red raspberry growers, tomato growers, wheat gluten producers, salmon producers, the U.S. steel industry and others.

Hoping for solutions, R-CALF filed three petitions for import relief on behalf of the cattle industry October 1. The petitions ask for trade remedies regarding beef cattle dumping by Canada and Mexico and trade-affecting subsidies against Canada (see sidebar on page 34).

What To Expect? So what are the cattle industry's chances of seeing trade remedies? What changes can producers expect in prices?

Attorney Terence Stewart of the Washington, D.C., law firm of Stewart and Stewart is a specialist in international law and is representing R-CALF. Stewart says the success rate in anti-dumping and countervailing duty cases is one in two. But he is convinced R-CALF will be successful.

"We think we have a very strong case. Canada's dumping margins are 10 to 30 percent and margins for Mexico are much higher," he says. "If the case is successful, producers should see higher prices for their cattle."

If other industries are any indication, Stewart's prediction should be accurate. Take for example the tomato industry.

In 1996 Stewart represented the U.S. tomato industry when it filed an import relief case alleging Mexico was "dumping" tomato imports into the U.S. Part- way through the investigation, Mexican producers asked for a suspension agreement in which a floor price was established for tomatoes coming into the U.S.

The agreement raised the price for tomatoes on both sides of the border. In the first year, revenue increased $60-80 million for U.S. tomato producers, according to McDonnell.

While establishing a floor price on imports through a suspension agreement is not normally how import relief cases are settled, Stewart says import relief cases can be a win-win for everyone.

"U.S. producers get fair prices; foreign producers get fair prices; consumers get improved supply and fair prices as well," says Stewart.

"This doesn't stop imports, but it means imports have to come in at a fair value. If imports are sold below that value to the U.S., the importer pays the difference," he adds.

So is R-CALF the best option for the cattle industry?

Stewart says the anti-dumping petition, coupled with countervailing duties, are among the best legal tools when there are low-priced imports in the market.

"These are tools that have stood the test of time, and they have made a significant difference in the viability of many industries," says Stewart.

"Selling below cost for an extended period of time is not sustainable and is potentially actionable under U.S. law," he adds. Furthermore, Stewart says R-CALF and its supporters are doing the right thing by taking a strong stand that fair trade conditions must be reestablished.

With the potential for price improvements, McDonnell says he is disappointed with the National Cattlemen's Beef Association (NCBA) and other producer organizations that haven't completely supported R-CALF.

Naysayers The NCBA Executive Committee is supporting the countervailing duty petition against Canada, but has chosen to support its policy to seek bilateral negotiations rather than legal action as a way of controlling live-cattle imports from Mexico and Canada.

"These imports are not a new phenomenon, especially from Mexico," says NCBA's economist Chuck Lambert. "We have seen the livestock industry expand in Canada, so we have seen imports increase. But even at the current level those imports only account for 3.5 percent of total slaughter."

Canadian cattle imports have increased from less than 500,000 in 1988 to 1.38 million head last year. And, Lambert acknowledges that imports are a "contributing factor" to oversupplies. But, he contends that heavier slaughter weights of U.S. cattle are the largest contributor.

He points out that at 99.5 million head, cow inventories are back to the lows of the 1960s, but we're producing as much beef as we were in the 1970s when inventories were at record highs.

Lambert adds that, if anything, the balance of trade has moved in favor of the U.S. "Just in the last two years we've begun to increase our exports toward an equivalent amount of what we import. Prior to that, the U.S. exported very little."

But McDonnell and other R-CALF supporters question why so many imports are necessary?

For example, the poultry industry doesn't appear to suffer from an imbalance between imports and exports. FAS reported that the U.S. exported 2.6 million tons of poultry last year while importing less than 300,000 tons. According to the FAS, this deficit is because the U.S. Food Safety Inspection Service only allows poultry imports from five countries whose meat inspection is equivalent to ours.

Impact On Exports Concern over exports is probably the biggest reason R-CALF may be a double-edged sword. More than 90% of all U.S. cattle exported go to Mexico and Canada. Moreover, Mexico has been a long-term supplier of feeder cattle to U.S. cattlemen and is now our second-largest and fastest growing export market for U.S. beef.

But R-CALF only pertains to live cattle, and Stewart says, "The reality is we (the U.S.) run a massive trade deficit on live cattle with both Mexico and Canada, I don't see how this case would jeopardize that."

Furthermore, says Stewart, U.S. producers are not at risk of losing export markets simply because cases are brought in the U.S. against unfair trade practices. Retaliation by a foreign government against trade actions being brought in the U.S. is not permitted, he adds.

And, other countries can use the same defense. "If U.S. exports are being dumped and causing injury, the country claiming injury has a right to pursue an investigation," says Stewart. In fact, the Mexican cattle and beef industries filed an anti-dumping petition with the Mexican government against the U.S. long before R-CALF cases were prepared and filed, Stewart says.

Is The Threat Enough? At the very least, the import relief petitions are causing concern - and some action - on both sides of the border.

As a result of border blockades and Congressional concerns, negotiations have been taking place between the U.S. and Canada to address the concerns of grain and cattle producers.

NCBA cites implementation of revised Northwest Pilot Project rules on October 1 to allow U.S. cattlemen to ship more feeder cattle into Canadian feedlots as an example. The rules waive specific animal testing requirements in order to make cross-border shipment of live cattle more accessible to U.S. cattle producers.

And the U.S. steel industry has experienced that filing an import relief case - whether you win or lose - can improve prices.

In the past two decades the steel industry has filed about 46% of the nation's unfair trade complaints even though it has lost more than half its cases in the last 10 years.

But, win or lose, steelmakers have learned that once the industry files trade cases, often imports drop because importers fear having to pay duties on the imports. While the case is in the works for about a year, the domestic industry can raise prices. And, even if ITC rejects the case, the market gets time to rebound.

At the same time, there are some early indications of possible price movements in the U.S. "R-CALF filed on October 1 and we have seen an upward move on the market in prices for live cattle," says McDonnell.

Finally, to get an idea of what could happen if nothing is done, McDonnell says to look to the sheep industry.

Sheep numbers have gone from 33 million head in 1960 to 11.8 million in 1988 to 7.6 million head in 1998. Yet, lamb and mutton supplies (including imports) in the U.S. have remained around 160,000 metric tons from 1980 to 1997. With imports increasing from 19% in 1995 to 29% in 1998, it is evident that imports are keeping supplies up.

Recently, the sheep industry filed an import relief case of its own that, if successful, would allow lamb imports but prevent them from flooding the market.

And that is the bottom line: lowering supplies to create demand and allow prices to rebound.

McDonnell concedes cattle imports won't stop, but adds that doing away with subsidies should improve prices on both sides of the border. "They are aware of it (their subsidies) and they know we're coming," says McDonnell.

McDonnell says nine of 10 phone calls he receives from Canadians say they hope the U.S. industry wins the case because they believe it will also increase the price of Canadian cattle.

"I still think what we're doing will benefit producers in all three countries, but they are going to have to play fair," says McDonnell.

"This whole thing is about putting more money in feeders pockets. Until they get more profitable, we won't get more money back to the producer," McDonnell says.

On Oct. 1, 1998 R-CALF filed three petitions for import relief on behalf of the U.S. cattle industry.

The petitions ask for the following trade remedies:

* Anti-dumping margins against Canada and a separate petition against Mexico. (Dumping is considered under international law if prices for export are below the full cost of production in the exporting country.)

The anti-dumping petition asserts actions by Canadian producers may be undercutting cost of production by $50-150 a head. The petition against Mexico asserts that country's beef cattle are coming into the U.S. with dumping margins of more than $200 a head.

* The second petition against Canada, called a countervailing duty petition, charges that up to 39 federal and provincial subsidies give Canadian cattle producers roughly a $100/head edge over U.S. producers when they ship those cattle south. If there are grounds for a countervailing suit, Canadian cattle would be assessed a fee (or trade "duty") that would be equivalent to the amount of subsidy that is being paid to the Canadian producer by the government until the subsidy is dropped.

* R-CALF is also monitoring the U.S. government negotiations with Canada on the issue of feed barley prices in Canada and whether they provide an artificial benefit to Canadian cattlemen.

R-CALF's attorney Terence Stewart says the next hurdle after filing is to get the Department of Commerce and International Trade Commission (ITC) to initiate an investigation.

In order to do that R-CALF needs to obtain "standing" by obtaining support by at least 25% of U.S. production of live cattle. The Department of Commerce is currently looking at cattle inventory as the denominator as such figures account for the roles played by cow-calf operators, backgrounder-yearling operators and feedlots. R-CALF needs at least 21.5 million head of cattle in support, with more support than opposition. The deadline was November 10.

If the case is initiated, R-CALF will have until December 4 to prove "injury" to the cattle industry. "Injury will be the easiest to prove because we're in a supply-sensitive business," says Leo McDonnell, R-CALF founder and president. "A 10-percent change in supply would have a 15- to 20-percent impact on price."

The estimated cost of R-CALF's case is $1.5 million, but funding is not a problem, says McDonnell. Over $700,000 has already been collected from producers, banks and groups like the National Farmers Union.

And a decision should come within a year. This process has a defined timetable and structure, says McDonnell. That means a decision should be made within 8-12 months and costs should be kept in check, he adds.