Iowa Farm Outlook. June 1, 2003 Ames, Iowa Econ. Info BSE in Canada

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1 Iowa Farm Outlook June 1, 2003 Ames, Iowa Econ. Info BSE in Canada The big news in the cattle market this week and perhaps for the year was the discovery of BSE, commonly called Mad Cow Disease, in Canada. The Canadian government announced Tuesday, May 20 that a 6-8 year old Angus cow had tested positive for BSE. US officials immediately stopped all imports of cattle, beef, and beef products from Canada. Perhaps the most surprising outcome is that the US cattle and beef market, following an initial decline has continued quite strong. This Iowa Farm Outlook will examine the Canadian beef industry and trade with the US and why markets have behaved as they have. What do we know??? In late January 2003, a six-year-old downer cow was sent for slaughter to a provincially licensed meat facility. The cow was identified as being unhealthy and an Alberta Agriculture, Food and Rural Development (AAFRD) Meat Inspector condemned the carcass as unsuitable for human consumption. The remains of the cow were sent for rendering. The head of the animal was collected and submitted routinely as part of AAFRD's surveillance program for BSE. Testing was not completed until May 16, The preliminary test was confirmed by the Canadian Food Inspection Agency (CFIA) May 18, The sample was confirmed positive for BSE early on May 20th. No part of the animal entered the human food chain. As of May 27, Canadian officials are continuing to investigate all of the herds identified through tracebacks and traceouts, and more herds may be identified as they proceed. To date officials have quarantined 17 herds totaling about 2,000 animals. They are depopulating, sampling and testing 369 cattle up to this time. A good website to monitor the progress of the investigation is the Alberta Agriculture site. Canadian Beef Industry The Canadian cattle inventory is less than one-sixth the size of the US. Canada has 15% fewer beef cows that the state of Texas. Alberta is the largest producer in Canada but has fewer beef cows than Oklahoma and would be the 4 th largest beef cow state. The number of cattle in feedlots is just over a million head, making its feedlot sector a little larger than Iowa s.

2 Cattle Inventories in Alberta, Canada, and the US Alberta Canada US 1,000 Head Total Cattle & Calves 5,220 13,372 96,106 Cows & Heifers That Have Calved 1,937 5,691 42,099 Beef Cows 1,845 4,616 32,947 Milk Cows 92 1,075 9,152 1 Year and Over* Over 500# Heifers 1 Year And Over Or Over 500# 771 1,925 19,601 Steers 1 Year And Over Or Over 500# 678 1,135 16,590 Bulls 1 Year And Over Or Over 500# ,253 Calves Under 1 Year Or Under 500# 1,740 4,383 15,563 *Canada reports inventory by age and the US reports by weight. Imports from Canada to the US The US imported 1.09 billion pounds of beef from Canada in 2002, 3.9% of US consumption (Table 1). Beef imports have increased slightly in recent years. The US also imported live cattle from Canada as slaughter cattle and cows, feeder cattle and breeding animals. Assuming a 790 pound carcass these live animals will contribute an additional 4.3% of US consumption. In total Canadian born cattle contributed approximately 8% of the US beef supply. Table 1. Canadian Beef Imported to the US % of US Consumption Million Pounds As Beef As Cattle Total % 2.7% 6.1% % 3.6% 7.2% % 4.3% 8.2% The increase in feeder cattle in 2001 and 2002 is attributed largely to the drought in western Canada and resulting higher feed prices (Table 2). Feeder cattle imports for January through the first week of May this year were less than half the number for the same period in Slaughter steers, heifers and cows were running percent ahead of last year. Table 2. Live Cattle Imports from Canada Slaughter Feeder Cattle Steers & Heifers Slaughter Cows Slaughter Bulls Breeding Males Breeding Females Other Cattle Total ,367 84, , ,867 32,311 2,422 4, , , , ,426 47,501 2,649 8,186 35,842 1,270, , , ,509 46,117 2,279 6,377 84,157 1,610,232 Jan-Apr 03 87, ,171 85,768 14,221 1,074 1,219 9, ,734 Market reaction

3 The market reaction was interesting to say the least. Live cattle futures dropped the limit ($1.50/cwt) on the morning of the official press conference on the announcement that there would be a press conference about finding BSE in Alberta. However, the following day the market opened lower, but closed higher. June futures closed higher for at least the first four days after the announcement and are currently higher than before May 20 th. Buyers and sellers in the cattle market both went to the sidelines on the day of the report, but returned cautiously the following day. Live prices are slightly lower than before the announcement. Seasonally, prices are expected to decline during this time period and thus lower prices are not a surprise. However, boxed beef prices have worked steadily higher since the announcement and have set record high price levels. May 27, the Tuesday following Memorial Day saw Choice boxed beef prices at $145.36, a record and $2.80 higher than prices on May 20. As a result live prices may not decline as fast as they have in other years. There are two offsetting factors market factors at work in the US market supply and demand. First, there is a reduced supply of beef and cattle due to temporary suspension of Canadian imports. This immediately reduced supplies of beef and cattle to buyers that had relationships with Canadian suppliers and these buyers had to look elsewhere for supplies. This reshuffling has helped push boxed beef prices to record levels. It will be interesting to see how prices react when US officials allow Canadian imports to resume. There was an initial concern that US consumers may reduce demand for beef based on the discovery in Canada, but a week after the announcement that doesn t appear to be the case. I have not yet seen reports of what happened to beef demand in Canada, but it appears that US consumers trust the US supply and the actions of the USDA to halt imports from Canada. If the Canadian investigation into how the cow contracted BSE turns up significantly more infected animals or does not provide convincing evidence that the disease is contained there may yet be a consumer backlash. In Japan and Europe beef consumption dropped dramatically following the discovery of BSE. Beef consumption initially dropped 30 percent in Japan after they found BSE in their herd and preliminary numbers for all of 2002 are that beef consumption is down 15 percent. European countries also saw significant drop in demand. In addition to the potential demand negative from US consumers, there is a potential export demand benefit for the US as other importing countries have stopped imports of Canadian beef until the BSE investigation is complete. Longer-term implications The market implications will largely depend upon time. How quickly is the investigation resolved? How long does the US prevent Canadian beef and cattle imports? How long do other importing countries buy from other suppliers? And, once the findings are announced and bans are lifted how long before markets return to the previous equilibrium? There have been some calls for immediately placing a long-term ban on Canadian imports to assure the US consumer that the US beef supply is safe. The concern is that such action may become the normal practice. If the US ever has a confirmed case of BSE other countries may then decide to place a long-term ban on imports from the US that lasts for years after the investigation is resolved. It appears that the US beef market has dodged the bullet, but may be impacted if more cases are found and BSE stays in the news. If the case is resolved quickly, but Canadian consumers shift away from beef Canadian exports may increase at reduced prices that could impact the US. Time will tell. Another import implication is that the Canadian BSE case occurred during the rule writing phase of mandatory Country of Origin Labeling (COOL). It is possible that the final rules will be

4 more restrictive than they may have been without BSE in Canada. For one, it will be difficult for opponents of mandatory COOL to claim consumers don t care where their meat comes from. The BSE case will also increase support for a national animal ID and traceability system. Tom Ridge has supported ID and traceability as part of national security program. National animal ID would be a key line of defense in an outbreak of a contagious disease like Foot and Mouth Disease. It can also serve to quickly follow an infected animal as they are doing in Canada now. Canada implemented a mandatory cattle ID system in This cow was born before the system was in place. John Lawrence Crop Progress, Grain Prices, and Marketing Considerations After peaking in mid-may, corn, soybean, and wheat prices fell sharply on May 28 in response to improved planting progress, wheat harvesting in the southern Great Plains, indications that Egypt may not be interested in U.S. wheat, and the International Grains Commission projection for a record world grain harvest in In this two-week period, July Chicago corn, soybean, and wheat futures prices lost 14.5, 25.75, and cents per bushel, respectively. Losses for December 2003 futures were 11.0, 11.25, and per bushel, respectively. Market conditions contributing to this spring s substantial price volatility include: Historically low U.S. and world feed grain and wheat carryover stocks Very low U.S. soybean carryover stocks Widespread planting delays for U.S. soybeans Modest U.S. corn planting delays in Iowa and a few other major corn producing states At least one private weather forecaster anticipating drought problems in the U.S. Corn Belt this summer Very large speculative purchases of grain and soybean futures contracts by commodity fund traders For the next few weeks, grain price volatility is likely to be substantial as market participants attempt to get a better reading on U.S. and world supply-demand prospects. History suggests new-crop corn and soybean futures prices may contain a moderate risk premium that would disappear if U.S. crop yields are approximately normal this year. But uncertainty about yield potential coupled with low stocks will cause commodity fund traders to be speculative buyers if they see significant chances for serious weather and yield problems. Under those conditions, grain users also would want to buy futures to cover upcoming grain needs and protect against higher prices. Their market actions would add additional upward volatility to prices. Indications that crops are developing normally and that yields may approach trend levels would cause fund traders to quickly take profits and close out positions. The way out for these traders is to sell their positions, thus putting downward pressure on prices. For sustained strength in corn prices, (1) several weeks of large U.S. export sales (30-35 million bushels per week or more) and/or (2) strong indications of below-normal U.S. average corn yields would almost certainly be needed. Corn Planting Progress USDA s May 27 issue of the Weekly Weather and Crop Bulletin indicated corn growers in much of the Midwest had moved up to approximately normal planting progress, except for four states. As shown in Table 1, planting progress through May 27 continued to lag behind normal in Nebraska,

5 Wisconsin, Michigan, and Indiana. For most of the major producing area including Nebraska, planting progress likely is nearing completion with good weather this past week. However, some parts of Indiana, Wisconsin, and Michigan still lag well behind normal because of excessive rains. In a normal year, these three states would produce about 1.4 to 1.5 billion bushels of corn or 15 % of U.S. production. A 15 % loss of yields in these states because of late planting on the last 1/3 of the crop, if that should happen, would reduce U.S. production by about 2 % or about 200 million bushels. A 15 % loss on all acres in these states would require approximately a 40 to 50 % drop in yields on the last 30 % of their planted acres, a shift of corn acreage to soybeans or prevented planting for crop insurance, or serious weather problems this summer. Unless there are further delays or summer weather is quite unfavorable, planting progress to date suggests a U.S. production loss of that size may be too pessimistic. To see how various sizes of crop losses would affect next season s U.S. corn supply demand balance, adjust the data in our corn balance sheet at: Figure 1 below shows this year s corn planting progress for major states as a group vs. recent normal planting progress. It also shows the longer-run trend toward earlier planting. Earlier planting is one of several technologies and management practices contributing to the upward trend in yields.

6 Soybean Planting Progress In contrast to corn, soybean plantings have been delayed in all major producing states this year, as shown in Table 2 below. The most severe delays are in Nebraska, Indiana, Wisconsin, Michigan, Kentucky, and Tennessee. Normally, these six states produce about 24 percent of the U.S. crop or about 700 million bushels. Figure 2 shows major-states soybean planting progress for this year as well as 2002, and the average progress. U.S. plantings are well behind normal and the lag is about the same as a year ago. Planting delays are less serious for soybeans than for corn, but would be a more serious concern if they continue beyond the first week of June. April Soybean Crush Down 8.7% From a Year Earlier The domestic soybean crush (processing use), in contrast to exports, has been moderately below a year

7 earlier since last fall. The rate of decline accelerated in April, according to the U.S. Census Bureau s latest oilseed crushings report. Soybean crushings for the first eight months of the marketing year (Sept.-April) were 4.6 % below a year earlier. For the remaining four months, the crush will need to be 4.9 % below a year earlier to reach the USDA s projected marketing year total. April s crushing rate, at 8.7 % below a year earlier, indicates crushings have slowed more than needed in recent weeks. Figure 2 shows average monthly crushings needed from May through August to meet the projected USDA marketing year total. April s crushing rate and recent decisions by two large processors to shift pricing from July to November futures hint that the projected domestic soybean crush may have to be lowered modestly. History of U.S. Yields Figures 3 and 4 below show U.S. the long-term history of average corn and soybean yields. Yields 10 % or more below the long-term trend have occurred about 18% of the time over the years indicated. Robert Wisner