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HUNTIN' DAYLIGHT -- LATEST BSE BLUNDER COULD BE COSTLIEST

by: Wes Ishmael

Those few pounds of veal—still attached to the backbone—that USDA inspectors approved for shipment to Japan, may be the straw that breaks the economic back of U.S. producers down the road.

“I can't overemphasize the need to get our beef export markets back and get them back quickly,” said Randy Blach, Cattle-Fax CEO at that organization's Outlook Seminar in February. “If we don't get those markets (export) back by then it would be like losing 10 percent of our demand.”

The future Blach refers to is the end of this decade when Cattle-Fax estimates there will be three billion pounds more beef production than last year—1 billion lb. more is expected this year.

If domestic consumption remains flat for the remainder of the decade, while the domestic population grows, Blach says the market can absorb another billion pounds of beef. It's the other two billion pounds of beef production expected by 2010 that must be moved outside the country if market strength is to be maintained.

All of that assumes that domestic beef consumption remains robust, though not necessarily growing like it has the past few years.

Mike Miller, Cattle-Fax Director of Research, explained at the same seminar, “Beef demand has increased dramatically in the past several years, but, that doesn't mean consumers here (U.S.) are eating more of it; they're paying more for it.” Net beef supplies have remained fairly flat, while consumers have been willing to pay a higher price. In fact, on a retail price basis, he says demand declined 1-2 percent last year.

That doesn't mean demand is poor—it's still 25 percent higher than 2002—but such heady increases in demand growth can't rationally be expected over the next several years. It also means consumer expenditures for beef will likely decline, meaning that retail beef prices should be flat or a touch softer through the expansion phase of the cattle cycle.

Consequently, export markets are even more important than they have been in the past.

The Japanese Question

By allowing banned product to make it to Japan, though not intentional, USDA humiliated the Japanese officials who had worked to convince folks in that country that U.S. beef was safe. Yes, the beef that was shipped is safe, far as the science goes. Some would argue that shipping the bone prohibited in the agreement with Japan was just a technical error, so let bygones be bygones.

Unfortunately, even before you consider cultural differences that might make it difficult to believe the mistake wasn't intentional product misrepresentation, the event makes a tough situation even tougher for negotiators who have been supporting trade resumption. The fact that such a mindless gaffe could occur from the get-go should rightfully concern the Japanese. Moreover, it should concern producers here.

In this case, logic says the inspector who allowed the banned product to slip through was either asleep at the switch or didn't understand the regulations. Even though veal was a late-comer to USDA's Beef Export Verification (BEV) program, if the inspector didn't understand the regulations, then he/she did a poor job learning them or USDA has done a lousy job of preparing inspectors for trade resumption.

Agriculture Secretary Mike Johanns has emphasized USDA is responsible for the error and that it should have never happened. He has also pointed out the error in question has to do with a specific agreement with Japan, not with the safety of U.S. beef. More specifically, the U.S. agreed to export only beef to Japan from cattle 20 months old and younger, while science and the rest of the world is amenable to beef from cattle 30 months old and younger.

Speaking at the annual National Cattlemen's Beef Association (NCBA) meeting in February, Johanns emphasized, “Both as a beef consumer, and as your Agriculture Secretary I can tell you that American beef is absolutely safe…Not only is U.S. beef safe, I can report to you—with a tremendous amount of data to back it up—that the U.S. cowherd is healthy.”

That may fall short of soothing the fears of Japanese consumers, however. Japanese media representatives at the NCBA meeting explained that consumers in Japan are also concerned about the February report from USDA's Office of the Inspector General (OIG), which outlined shortcomings in USDA's Enhanced Bovine Spongiform Encephalopathy Surveillance program.

For instance, the report states: “We did not identify Specified Risk Materials (SRMs) entering the food supply. However, due to a lack of adequate records, we could not determine whether SRM procedures were followed and/or were adequate in 9 of the 12 establishments visited during the audit.”

While beef remains safe, you've got to wonder, how many more careless mistakes before consumers begin questioning either the safety of beef or the ability of the government to ensure that safety.

Earlier this year, the world's largest beef consumer expressed this very concern. According to various sources, McDonald's Corporation, as part of a larger group, urged the Food and Drug Administration to do more to ensure the safety of the feed supply and the human food supply from BSE risk.

Economics in the Short-Run

In the meantime, cattle feeders, stocker operators, backgrounders, and cow-calf producers should all experience slimmer operating margins during 2006 due to larger available beef supplies. Market cow and breeding cattle prices are expected to be mostly steady during 2006. However, conditions could change if the drought persists in the Southern Plains.

That's a summation of the market perspective Cattle-Fax provided at their Outlook Seminar.

More specifically, one million or so more steers and heifers are expected to be harvested in 2006, pushing net beef production up by about one billion pounds.

Besides more cattle, cheap corn and heavier carcass weights have a way of doing that. According to Cattle-Fax average carcass weights have been increasing 5.9 pounds per year over time. The increase was right at 10 pounds last year.

At the same time, Miller points out wholesale beef prices are up 6-7 percent, while wholesale pork prices are down 15-20 percent and wholesale poultry prices are down 20-35 percent.

In other words, beef supply and the supply of competing meats are becoming the primary drivers once again, rather than demand.

In terms of prices, Cattle-Fax predicts fed cattle will average $85-$87 in 2006—mid $90's at the spring highs and upper $70's for summer lows. They look for feeder cattle prices to average $106-$108, which is $2 to $4 lower than last year—from $105 at the spring low to $115+ during the seasonal high points. Calf prices are projected to trade in a range of $115- $135 during the course of the year and average about $125.

As these numbers suggest, record price volatility is expected to continue this year.

“It doesn't mean that we're going to have a train wreck, but we're past the best of the news in the cattle cycle,” says Blach.

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