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BSE DISCOVERY PRESENTS NEW CHALLENGE TO BEEF INDUSTRY

by: Stephen B. Blezinger
Ph.D, PAS

Like so many other members of the beef industry I watched the newscast on the evening of Tuesday, December 23 in disbelief as the newscaster reported another case of Mad Cow Disease (Bovine Sponigiform Encephalopathy, BSE) but this time it was being reported here in the United States! I am certain that many of us, in the back of our minds, knew that it would happen sooner or later but there was that part of me that said: “as the most progressive beef producers on Earth it won't happen here.” Guess I was wrong along with a lot of other folks.

I'm writing this article on Sunday evening, December 28 and by the time you read this who knows what will have transpired concerning this issue. Since the discovery of the affected animal on the 23rd we've seen the futures market bottom out two days in a row (thankfully there was a holiday in there) with more downward movement almost guaranteed. We've found that the affected animal could very likely have come from Canada and that depending on it's age may have contracted the disease from consuming animal ruminant protein products before they were banned by the Canadian Government. As an aside, the Canadian Beef Industry definitely doesn't need another round with BSE either. If, however, the collective governments determine that the animal did originate in Canada, this will allow the U. S. to retain it's BSE-free status. We've also witnessed, virtually overnight, the banning of beef exports to most of the major beef importing countries. This was fundamentally a knee-jerk reaction to a issue that is sensitive world-wide. Obviously the closing of imports of U.S. beef is not based on sound science but frankly, international policy as it has pertained to the world-wide beef industry seldom is. Enter the politicians and bureaucrats. Beef exports account for 10 to 15 percent of total beef sales annually. Subsequently, we are not in a position to take the hit on this that Canada did back when an Angus cow was reported with BSE back in May 2003. The main reason for this is that Canada has historically exported approximately 50 percent of it's beef production annually. Thus when their export market dried up in short order after the report, their market prices dropped severely.

What are the implications of this issue? I'll not bore you facts and news excerpts you already know. Let's take a look at where things could potentially go now that the “Big One” has hit.

Implications of a BSE Affected Beef Market

To begin, ever since the report came out, I have made it a point to eat beef every day. Given my wife and the weight conscious perspective she maintains, this was a bit difficult (No Honey, no baked chicken breast on wild rice tonight, I want a STEAK!). Interestingly, as we went out to eat on a couple of occasions over the holiday I saw no one intentionally avoiding beef. One of these places was a pretty nice steak house in South Central Texas and they had all the business they wanted on Friday, December 26. So the question is: will the immediate depression in beef prices be driven by the consumer? I don't really think so.

Consider the following discussion by Dr. James Mintert, Professor of Agricultural Economics at Kansas State University in an article take from CattleNetwork.com this past Friday, December 26th. Dr. Mintert writes: “. . . In response to a USDA's announcment late on December 23rd that a single dairy cow in the state of Washington tested positive for BSE, live cattle futures prices declined the $1.50/cwt. daily limit on Christmas Eve and, with expanded ($3.00/cwt.) limits in place on December 26th, prices fell an additional $3.00/cwt. The Chicago Mercantile Exchange announced that limits would increase again on Monday, December 29th, this time to $5.00/cwt.

The question on cattle producers mind is, how low will prices go before they stabilize? Answering that question requires that we assess the reasons why prices are headed lower and attempt to quantify the expected impact.

The announcement that BSE was detected in the U.S. herd led, almost immediately, to announcements by nearly all major beef importers that they halt all imports of U.S. beef. During 2002 U.S. beef exports totaled about nine percent of U.S. beef production. Loss of access to export markets effectively boosts the domestic supply of beef, which, in turn, will push domestic prices lower. The exact magnitude of the supply increase is difficult to determine because trade flows will likely shift somewhat in response to loss of export markets. The most extreme assumption is that all of the beef that normally would have been exported will be consumed in the domestic market and that beef imports will remain unchanged. If that's the case, loss of export market access alone (holding everything else constant) could cause domestic cattle prices to decline about 15 percent, based upon an expected price decline of about 1.6 percent for every one percent increase in domestic supplies. However, in the short run, it would not be surprising if loss of export markets caused prices to decline even more than 15 percent.

Loss of export markets will also hurt by-product values. Steer by-product values were averaging over $10 per cwt. (live weight) during December, prior to the BSE announcement. Export markets are very important sources of demand for by-products, so it would not be surprising if by-product values decline by one-third to as much as one-half, if the ban on U.S. exports remains in place. Declines in by-product values will help drag cattle prices lower.

Domestic demand, now that BSE has been discovered in the U.S. herd, is the biggest wild card. Research by Nick Piggott at North Carolina State and Tom Marsh at Kansas State suggests that the impact on domestic beef demand could be limited, if there are no additional BSE cases. Their research on the impact of food safety on meat demand suggests consumers' respond differently to food safety concerns vs. long-run health concerns. In particular, the meat demand model developed by Piggott and Marsh indicates that, in general there are no lagged effects on U.S. meat demand from publication of food safety information. This suggests that, although demand declines in the short-run in response to a food safety problem, consumers generally do not allow the food safety problem to impact their long-run consumption habits. Only repeated food safety problems, which keeps the issue in front of consumers for an extended period of time, leads to an ongoing demand loss. So, whether or not the BSE case in Washington turns out to be an isolated incident, or the first of several, will be key in determining how much impact BSE will have on American consumers demand for beef. The experience of this past summer in Canada lends credence to Piggott and Marsh's research. There was only one BSE case in Canada and it appeared that Canadian consumers did not back away from beef.

How low will prices go? It's too soon to answer that question definitively. After averaging near $98/cwt. this past fall, cash prices were expected to fall (prior to the BSE announcement) to an upper $80's/cwt. average this winter. Loss of export markets alone is likely to push cash prices into the low to mid-$70's/cwt. this winter, although a dip into the $60's/cwt. cannot be ruled out. If no additional BSE cases are uncovered, the impact on domestic demand could be minimal. The discovery of additional BSE cases, however, would likely lead to serious erosion in domestic beef demand, and even lower prices.”

All this being said, should we expect cattle prices to plummet over the next few weeks? Not if we listen to the consumers who retain a strong demand for beef. Also, what can we, as members of the beef industry do to help “keep the ship afloat?”

We have two primary tasks at hand. One is to keep a cool head and remain calm. Situations like this produce enough “knee-jerk” reactions (our import/export partners for instance). Secondly we need to reassure the consumer that beef remains a safe product to eat and that we have the safest supply in the world. Remember that this is an animal disease problem and not a food safety issue. In a report on December 24 from the same web page, Bob Price reminds us of several implications we need to remember:

1. The food safety system worked. A suspect animal — one of 20,526 tested to date in the U.S. in 2003 — tested presumptive positive for BSE and a rigorous system that had been put into place for that potential was activated. The food supply is not contaminated based on any known scientific evidence. Hopefully the media and the industry will get that message out to consumers.

2. Beef prices are high and that has already resulted in some substitution for abundant supplies of both pork and poultry. This event could spur some more of that substitution. Beef prices will not stay at record high prices forever, but we already knew that.

3. It will be interesting to see how fast the U.S. can conduct the trace back and trace forward from this animal. The Canadian result was nothing short of spectacular in their effort. The critical need for an individual animal identification system will be even more evident as the investigation unfolds.

4. Maybe the proponents of the disastrous Country Of Origin Labeling law will not be quite so quick to try to use the Canadian BSE incident as political fodder.

5. The North America beef industry may be able to move even faster on getting a minimal risk category established for evaluating trade with countries that have a confirmed case of BSE. It is critical that the world get to a point that BSE does not continue to be a political issue that gets blown into a health scare.

Conclusions

Our industry has once again encountered a significant challenge it must deal with. Fortunately, individuals and agencies are in place that are working diligently to research and handle this matter to reduce the overall effects to our markets and to reassure the consumer that we produce a safe product. I encourage each producer no matter how large or small to be proactive on this issue, learn as many of the facts as you can and pass this on to our non-producer neighbors.

Finally, as we start 2004, from BLN Consulting and the Blezinger family we wish you all the happiest, most blessed and productive New Year ever!

Dr. Steve Blezinger is and nutritional and management consultant with an office in Sulphur Springs Texas. He can be reached at 667 CR 4711 Sulphur Springs, TX 75482, by phone at (903) 885-7992 or by e-mail at sblez@peoplescom.net.

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