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CATTLE TODAY

HUNTIN' DAYLIGHT -- PROTECTIVE VERSUS PRODUCTIVE

by: Wes Ishmael

“If there's any part of our value system we need to rebuild in this country, it's personal responsibility,” says John Kasich, a former Congressman, who is now a best selling author, motivational speaker and Fox News commentator.

The son of blue-collar parents—the grandson of immigrants—Kasich shared his message at the recent annual meeting of the National Cattlemen's Beef Association (NCBA). He focused on virtues most cattle producers are old friends with: humility, honesty, integrity and teamwork.

“To me, the issue we face in this country is between the people who embrace these values even when times get tough and those who will sell them out in a heartbeat,” said Kasich.

Hitched to a similar wagon, do you believe in free speech just as long as you agree with what you're hearing? Do you believe in freedom, just as long as there's someone there to bail you out of a jam? Do you believe in free trade and competition, only so long as you have a competitive advantage?     

Such illogic, sincere as it may be, seems to be growing in the cattle business.

Meaning What You Say

Consider mandatory Country of Origin Labeling (COOL) which became law in the current Farm Bill. Proponents argue that it will increase the competitive advantage for native beef, that U.S. consumers will prefer it and be willing to pay more for it than beef born and raised in other countries, or beef derived from a mixture of domestic and international beef. Some even take the broad and wrong inferential leap of suggesting such labeling enhances safety for U.S. consumers.

Deb White, Associate General Counsel for the Food Marketing Institute told folks at the NCBA Joint International Markets Committee that their experience with COOL and seafood—the law has already been in force—is that costs have been 10 times more than USDA predicted. In return there has been no additional revenue, no benefit to retailers or to consumers. COOL for beef and other meats is currently scheduled to take effect March 16. USDA estimates first-year costs at $2.5 billion.

Agriculture Secretary Tom Vilsack recently announced that the final mandatory Country of Origin Labeling (COOL) Rule submitted to the Federal Register—then withdrawn for review by the Administration—will go into effect March 16, as the final rule indicated.

But, in a letter to industry representatives the same day, Vilsack wrote, “The Department of Agriculture will be closely reviewing industry compliance with the regulation and its performance in relation to these suggestions (more later) for voluntary action. Depending on this performance, I will carefully consider whether modifications to the rule will be necessary to achieve the intent of Congress.”

Among the suggestions for voluntary implementation, Vilsack says he is concerned about the regulation's treatment of product from multiple countries. Apparently this is aimed at the possible strategy—fully in keeping with the mandatory law—of labeling product that is born, raised in and/or slaughtered in the U.S. and not imported for immediate slaughter—as a product of the U.S. and the other countries involved in the process. It's one way packers might be able to reduce the costs COOL imposes, while also recognizing the value added by U.S. producers to a product originating somewhere else. In this case, let consumers know the product stems from U.S. production and that of other specific countries.

Instead, Vilsack emphasized in his letter, “In order to provide consumers with sufficient information about the origin of products, processors should voluntarily include information about what production step occurred in each country when multiple countries appear on the label.”

To do so obviously requires exponentially more paperwork, especially since the law expressly prohibits a national animal identification system that would give meaning to COOL.

It's a whole lot like saying, “The mandatory tax rate is X percent. If you don't voluntarily pay two percent more than that—which I'm sure was really intended by the law, then I'll have no choice but to make sure the law is changed.”

Talk to Mexican cattle producers who ship calves to the U.S. and they'll tell you that four-weight calves are being discounted more than $60 per head at the border because of COOL. The folks buying them aren't looking to line their pockets; they're trying to protect themselves, expecting these same cattle will be severely discounted by feedlots, who expect them to be discounted by packers, who will have lots more cost in sorting and labeling these cattle. Handling them will require devoting entire kill shifts or plants to non-native cattle. Unsurprisingly, Mexican producers have filed suit with the World Trade Organization. U.S. producers would likely do the same if the tables were turned.

Just let those Mexicans go soak their heads; they need our beef a lot more than we need their cattle. That's how some on this side of the border view it. Trade runs both ways, though.

“CattleFax estimates that, at the very least, it will cost cattle producers $50 to $60 per head if we lose the NAFTA export markets,” says Erin Daley, U.S. Meat Export Federation (USMEF) Economist. “In addition to the large volume of variety meats that we export to Mexico, rounds are a very popular item in that market. Rounds also make up a large portion of our exports to eastern Canada. It would be very hard to absorb these products into the domestic market.”

Daley was speaking as part of a COOL panel discussion in the Livestock Marketing Council at the NCBA annual meeting. She said Mexico and Canada combined to account for about $2 billion in U.S. beef export purchases last year – about 60 percent of the worldwide 2008 total. So any disruption in trade could have serious consequences for U.S. cattle producers.

Plus, Daley points out the U.S. processing industry will have even more excess capacity if live cattle imports from Canada and Mexico continue to decline. This drags down the industry's level of efficiency, making it more difficult for U.S. beef to compete in global markets with exports from countries such as Australia and Brazil.

Keep in mind, this would come at a time when the lowest cattle inventory since the 1950's is already supporting prices.

The January 1 total for all cattle stands at 94.49 million head, which is 1.6 percent less than a year ago. “The real kicker was the downward revision of the 2008 inventory count by another 628,000 head, which actually puts the current report at 2.2 percent less cattle than previously thought,” say analysts with the Agricultural Marketing Service. “This is the smallest number of cattle reported in the United States in 50 years, when there were 127 million fewer people living within our borders.”

“USDA estimated the U.S. beef cowherd at 31.67 million head, 2.4 percent smaller than a year ago, while the dairy cowherd at 9.33 million head was up about one percent,” say analysts with the Livestock Marketing Information Center (LMIC).

On a percentage basis, the only states with at least 50,000 beef cows reporting an increase in beef cows are: Arizona (+3%), Hawaii (+2%); Louisiana (+1%); North Carolina (+3%); Ohio (+3%).

“Given higher feedstuff prices in 2008 and the placement of calves at heavier weights, the estimated number of cattle outside of feedlots was expected to be larger than last year. As of January 1, the calculated available supply of feeder cattle outside feedlots was 27.6 million head, up about 261,000 head (+1%) from last year,” say the folks at LMIC.

Safety at all Costs

The mindset supporting COOL represents the same kind of protectionist myopia that suggests cattle would be worth more if packers were forbidden to enter into marketing agreements with producers who find advantage in doing so. It's the same logic that supposes the industry would be stronger with less efficient packers. Paint it how you like, but that's the crux of the outcome of JBS-Swift withdrawing its purchase agreement for National Beef.

JBS announced the acquisition March 5, 2008. In October the U.S. Justice Department filed a complaint to challenge the purchase. Since that time, JBS had worked to find a solution agreeable with the Justice Department that would allow them to move forward with the purchase -- $970 million, including the assumption of National's debt at the time (about $420 million).

When the Justice Department blocked the purchase, Wesley Batista, JBS USA's President and CEO said, "We disagree with the Department of Justice's decision to try and block this transaction. This transaction is highly pro-competitive and will generate significant efficiencies and synergies that will benefit our cattle suppliers and our beef customers.”

Let those packers go jump in a lake; what did they ever do for me, always trying to buy cattle as cheaply as they can? Aside from the fact packers are THE customer of all fed cattle, thank goodness the industry is as consolidated today as it is. Even with the baggage it brings, a less consolidated industry with less efficiency would mean that all cattle today were worth less.

Of course, this type of thinking seems to go part and parcel with a society more willing to believe that government is the solution to the nation's economic woes. Own the banks, the auto industry, the health care system, whatever you want, too many seem to be saying to the government, just as long as my personal economic pain is limited, or best of all, prevented.

One View of Capitalism

Milton Friedman, the Nobel Prize winning economist who championed capitalism and argued against government economic controls was asked by a popular talk show host some years back: “When you see around the globe the mal-distribution of wealth, the desperate plight of millions of people in undeveloped countries, when you see so few haves and so many have-nots, when you see the greed and the concentration of power, did you ever have a moment of doubt about capitalism?”

Whether you call it greed or self-interest, Friedman pointed out that in all societies, people pursue their separate self-interests.

“The great achievements of civilization have not come from government bureaus,” said Friedman. “Einstein did not construct his Theory under order from a bureaucrat. Henry Ford didn't revolutionize the automobile industry that way.

“In the only cases in which the masses have escaped from the kind of grinding poverty you're talking about, the only cases in recorded history, are where they have had capitalism and largely free trade. If you want to know where the masses are worst off, it's exactly in the kinds of societies that depart from that.

“So, the record of history is absolutely crystal clear, that there is no alternative way so far discovered of improving the lot of the ordinary people that can hold a candle to the productive activities unleashed by a free enterprise system.”

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