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January 2004
To: ANR Educators
From: Chris Hurt, Agricultural Economics
Date: December 31, 2003
Here are some thoughts on things we can tell producers
and media about BSE USA. There of course will be many uncertainties
in coming days and weeks, so we need to continue to emphasis
the uncertainties as we are sensitive to our producers.
These are my best opinions at this time.
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Will U.S. consumers dramatically reduce their
interest in beef? No, we do not believe this
will have a substantially negative impact on beef demand
in the U.S. When the BSE announcement was made in Canada
on May 20, 2003, there was a brief hesitation of consumers
in the U.S. but within a week we could observe that beef
demand was little affected. We were buying about 9% of
beef consumed in the U.S. at that time from Canada and
it did not seem to have any negative impact within a week.
- Why
aren’t consumers more fearful of new health concerns
from eating beef? The scientific information
suggests that there is no measurable increase in the risk
from eating U.S. beef today versus the pre-December 23,
2003 BSE announcement.
- But
is this really TRUE? I think the answer is yes,
there is not a measurably greater risk from eating beef.
Multiple U.S. regulatory agencies have been looking for
BSE for over a decade. In 1989, the USDA restricted imports
of live animals or feed products that might contain BSE
from infected countries. All cattle that exhibit physical
signs of nervous order problems characteristic of BSE
are tested for BSE. In the past two years alone this has
been over 20,000 animals per year. In 1997, feed products
from ruminants were banned by the FDA from being fed back
to ruminants in both Canada and the U.S. The incubation
period of BSE in cattle can vary considerably and I have
seen that quoted from 3 years up to 8 years. Thus there
remains some possibility that an animal could have been
exposed prior to the feeding ban in 1997. All animals
are physically inspected by either federal or state graders
(USDA). The BSE organism resides primarily in the brain
and spinal cord tissue which is not to be used for human
food. Those products from cattle are rendered and used
for swine, poultry, or pet food. In Europe where BSE was
a major problem, over 180,000 cattle tested positive for
BSE, but there have only been 153 total human deaths from
the related human disease.
-
How will markets respond? The full extent
of the story is of course not known in the early going.
However, if we assume that U.S. consumers do not have
a substantially negative beef demand impact, then the
biggest price impact will come from the loss of most of
our exports which are about 10% of U.S. production. This
means that the beef that had been exported will now have
to come back into the U.S. market. Given historic relationships
a 10% increase in the amount of beef would drop live prices
by about 15% on average.
-
How much price drop on live cattle and calves?
Again assuming that U.S. consumption reasonable holds,
and that we lose most of the export market for some period,
a 15% drop in live cattle prices would put them back into
the higher $70s per live hundredweight, or a drop of maybe
$12 to $15 per hundredweight. Calf prices would be somewhat
more maybe more in the $15 to $18 range.
-
How long might this impact last? The
length of impact will heavily depend on how quickly we
can open foreign markets (as well as the unknown evolution
of the BSE story in coming weeks). Thus, the time frame
is unknown. We do know that Canada has been in the process
of trying to get the world to take their beef for over
7 months now. Perhaps the U.S. and Canada working together
can encourage the world to move more quickly now. My personal
guess is that it will be months and not weeks. For my
estimates of impact I am using 6 months. This seems to
be somewhat consistent with price action on live cattle
futures at the Chicago Mercantile Exchange.
-
Will BSE USA cause financial devastation for our
producers in 2004? Again, we do not know how
this story will evolve, so we need to be sensitive to
the uncertainty placed upon our producers, ranchers, processors,
and meat industry firms. But, the early guess is that
live cattle prices will be lower by perhaps $7 to $8 per
live hundredweight for calendar year 2004 than we would
have had in the absence of BSE USA. The USDA had been
estimating that Nebraska finished steers would average
$84 to $91 per live hundredweight for 2004. Subtracting
$8 from this level says they now drop to $76 to $83. The
mean of this range is $79.50 per live hundredweight. This
compares with $85 in 2003 (record high); $67 in 2002;
and $72.70 in 2001. In fact the $79.50 potential price
for 2004 would be the second highest yearly price ever
after the 2003 highs.
-
What about calf prices? In 2003, 500-550
pound steer calves at Oklahoma City averaged $103 per
live hundredweight. Given the decrease in fed cattle suggested
in the preceding paragraph this would reduce calf prices
into the high $80 to very low $90s for an average yearly
price. Cost of production might be in about the $80 range,
and this includes pasture rental, all labor and depreciation
on fences and facilities. So cow-calf operations would
still be expected to have good profits in 2004.
-
How big is the Indiana cattle industry?
Indiana Ag Statistics reports in 2002 there were 19,000
operations that had cattle. This included 2,600 farms
with dairy cows and 12,000 farms with beef cows. The state
had a calf crop in 2002 of 340,000 head. On January 1,
2003, the state had 145,000 milk cows. The value of cattle
and calves on January 1, 2003 was $619 million. Cash receipts
from cattle and calves in 2002 in Indiana was $204 million
and an additional $317 million from selling milk. In terms
of total Indiana farm cash receipts in 2002, beef cattle
and calves represented 4.2% and the milk sales were 6.6%
of the $4.8 billion total from crops and animals. Indiana
is not a major processor of beef. In 2002, while 340,000
calves were born in the state, only 39,400 head of finished
cattle, cows, and bulls were harvested, with an additional
29,200 head of young calves, primarily for the veal market.
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