Structural Implications of Persistent Disharmony in North American Beef and Pork Industries Jean-Philippe Gervais Laval University Ted C. Schroeder Kansas State University
Issue NAFTA began January 1, 1994. 11 years later North American pork and beef industries are in substantial disharmony Canadian/US border closed to live cattle trade On-going anti-dumping / countervailing duties court battle in hog and pork trade
Goals of our Presentation Demonstrate the nature of beef and pork trade disharmony Provide economic measures of adverse impacts Consider potential policy responses
US Canadian Cattle / Beef Border 2003: May: BSE discovery in Alberta US border shut August: US border opens to Canadian boneless boxed beef from cattle <30 months 2005: March 7: border scheduled to open to live cattle <30 months of age March 2: Montana judge issues injunction on behalf of R-CALF USDA, AMI, NAMP, NCBA, NPPC, AFBF, Tyson file Amicus Briefs to US 9 th Circuit Court of Appeal Appears this will persist at least until late May.
Market Shares of World Beef Production, Four Largest Producers and Canada, 2000-2005 ('05 forecasted) 25 US Production Share (%) 20 15 10 EUROPEAN UNION 4.4% Avg. Annual Growth BRAZIL China 5.6% Avg. Annual Growth 5 Canada 0 2000 2001 2002 2003 2004 2005 Source: Foreign Ag Service, USDA Year
Market Shares of Seven Largest World Beef Exporters by Country, 2000-2005 ('05 forecasted) 30 Export Market Share (%) 25 20 15 10 5 India Canada New Zealand BRAZIL AUSTRALIA Argentina US 0 2000 2001 2002 2003 2004 2005 Source: Foreign Ag Service, USDA Year
Annual US Imports of Canadian Slaughter Cattle, 1999-2004 1,200,000 Number of Cattle (head) 1,000,000 800,000 600,000 400,000 200,000 0 * Import restrictions started in May 2003. Source: US Department of Agriculture 1999 2000 2001 2002 2003* 2004 Year
Annual Canadian Boxed Beef (Converted to Head) and Fed Slaughter Cattle Exported to the US, 2000-2004 2.5 Fed Cattle Boxed Beef Exports (Million Head Equivalent) 2.0 1.5 1.32 1.45 1.23 1.0 1.09 1.77 0.5 0.65 0.83 0.75 0.28 0.0 2000 2001 2002 2003 2004 Source: Data from Livestock Marketing Information Center, boxed beef converted to number of head by authors Year
Monthly Average Prices for 700-800 Pound Steers in Kansas and Alberta, January 2000 - March 2005 130.00 120.00 110.00 Kansas 100.00 Price (US $/cwt) 90.00 80.00 70.00 60.00 50.00 Alberta 40.00 30.00 Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Source: USDA and CanFax Month
Monthly Average Prices for Fed Steers in Kansas and Alberta, January 2000 - March 2005 110.00 100.00 90.00 Western Kansas Price (US $/cwt) 80.00 70.00 60.00 50.00 40.00 Alberta 30.00 20.00 Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Source: USDA and CanFax Month
Monthly Average Prices for Slaughter Cows in Kansas and Alberta, January 2000 - March 2005 70 60 Average Western Kansas Price Price (US $/cwt) 50 40 30 20 10 Weighted Average Alberta Price 0 Jan-00 Jul-00 Jan-01 Jul-01 Jan-02 Jul-02 Jan-03 Jul-03 Jan-04 Jul-04 Jan-05 Source: Livestock Marketing Information Center Date (Months)
U.S. Imports of Canadian Slaughter Cattle and Imports as a Percentage of Slaughter, 8 Leading Import States, 2002 U.S. Imports a (head) Total Slaughter b (head) Import Share (% of Total) State of Slaughter Utah 205,931 680,800 30.2 Washington 180,242 970,040 18.6 Minnesota 145,684 1,252,600 11.6 Nebraska 125,703 8,621,400 1.5 Pennsylvania 101,941 1,471,800 6.9 Wisconsin 95,551 1,766,340 5.4 Idaho 52,868 1,051,000 5.0 Michigan 52,028 519,600 10.0 Total from USDA Data b 1,087,430 35,122,000 3.1 a Source: Agriculture and Agri-Food Canada b Source: US Department of Agriculture
Estimated Value of U.S. Imports of Canadian Slaughter Cattle and Boxed Beef and Byproduct Sales Value by U.S. Slaughter Firms, 8 Leading Import States, 2002 Live Value of Imports a (U.S. $) Estimated Beef & Byproduct Sales Value of Imports b (U.S $) Estimated Beef & Byproduct Value Less Live Cost c (U.S.$) State Utah 174,081,618 203,384,176 29,302,558 Washington 135,176,001 160,823,192 25,647,191 Minnesota 82,120,068 102,849,894 20,729,826 Nebraska 98,565,909 116,452,577 17,886,668 Pennsylvania 71,597,141 86,102,641 14,505,500 Wisconsin 66,995,411 80,591,658 13,596,247 Idaho 34,532,851 42,055,602 7,522,751 Michigan 39,761,838 47,165,063 7,403,225 Estimated Total (USDA Data) 801,296,047 956,029,819 154,733,772 a Source: Agriculture and Agri-Food Canada b Source: US Department of Agriculture
Total Annual Employment Impact of Reduced Meat Processing Activity to the U.S. by Economic Sector, 2003 U.S. Dollars Impacted Sector Total Income Employment (millions $) (count) Agriculture -1.07-39 Mining -2.82-14 Construction -3.97-79 Manufacturing -100.90-2,163 Transportation, utilities, etc. -24.65-266 Trade -41.34-753 Finance, Ins., Real Estate -48.79-317 Services -56.34-1,291 Government -2.33-38 Total -282.21-4,960 Source: Schroeder and Leatherman (2004)
Common US Beef Industry News January 10, 2005 National Beef joins Tyson, Swift in cutting beef production Meatingplace.com In what is now an industry trend, National Beef Packing Co. has joined Tyson Foods and Swift & Co. in reducing beef production. March 4, 2005 KANSAS CITY (Dow Jones)--Cargill Meat Solutions announced Friday that it is making additional cuts in production at seven of its U.S. beef plants, citing poor market conditions.
Annual F.I. Canadian Cattle Slaughter 2000-2004 and Projections through 2006 Assuming 90% Utilization Slaughter (Million Head). 5.0 4.5 4.0 3.5 3.0 2.5 2.0 1.5 1.0 3.26 3.21 3.30 2.97 3.89 4.38 4.63 0.5 0.0 2000 2001 2002 2003 2004* 2005* 2006* Year Source: CanFax, * As projected by CanFax
Beef industry adjustments Canada is investing heavily in beef slaughtering US has closed some packing plants and reduced slaughter at most plants If border re-opens, what are costs and who will survive? We will have over-invested in beef slaughtering and processing in North America
Beef industry adjustments Policy response in Eastern Canada has been to facilitate ($) ownership transfer of packing plants to producers (dairy and beef). A floor price was established for dairy cows. Increase in milk prices (part of it to cover BSE costs). Is there an economic rationale for intervention (in other words, what is the market failure? Monopsony position?).
Issues in the hog/pork industry Two different policies with similar effects: 1. Countervailing duties (CVD) / Anti-dumping (AD) duties 2. Country of Origin Labeling (COOL) One objective is to understand location decisions resulting from the two policies in terms of regional and commodity implications. Price signals (provided they are not too distorted by subsidies) will ultimately influence location issues.
Overview of the pork industry structure Snapshot of the Canadian / U.S. / Mexican hog/pork industries Breakdown of the Canadian industry on regional and commodity basis
Snapshot of the Canadian / U.S. / Mexican hog/pork industries 2004 hog inventories in the U.S., Canada and Mexico were 60,444; 14,623 and 10,668 (000 head) respectively. Canada, U.S. and Mexico were the 2 nd, 3rd and 7th world largest pork exporters in 2004 respectively. Despite being large exporters, Canada and Mexico only produce 2.1% and 1.3% of world pork production respectively. U.S. is also the 3rd largest pork importer
The U.S. / Canadian relative growth of the pork industry (Canadian industry as % of the U.S. ) Year Hog slaughter (head) Pork imports (000 MT) Pork exports (000 MT) 1994 95,905 (15.9) 338,077 (8.3) 284,114 (98.1) 1995 96,517 (16.1) 301,801 (8.9) 365,259 (98.5) 1996 92,394 (16.2) 281,311 (12.5) 413,166 (93.2) 1997 91,966 (16.5) 287,316 (18.0) 458,311 (91.8) 1998 101,028 (16.5) 320,302 (19.4) 528,939 (89.5) 1999 101,694 (18.6) 375,961 (15.4) 580,501 (89.5) 2000 97,977 (20.1) 439,359 (13.5) 584,846 (108.9) 2001 97,962 (21.0) 432,157 (15.8) 708,845 (101.4) 2002 100,263 (21.9) 486,694 (15.9) 732,831 (122.9) 2003 100,777 (22.1) 538,724 (20.2) 780,387(118.4)
Provincial share of total Canadian hog marketings (as percentage of total number of head) in 2003. Alberta 12.9% Sask 2.5% BC 1.0% Maritimes 12.3% Manitoba 22.8% Québec 24.8% Ontario 23.8%
Market destination of all hogs marketed in Quebec, Ontario and Manitoba in 2003 8,000,000 7,000,000 6,000,000 5,000,000 Heads 4,000,000 3,000,000 2,000,000 1,000,000 0 Québec Ontario Manitoba Exports - slaughter Interprovincial transfers Exports - feeder Slaughtered within the province
Exports of slaughter hogs from Quebec, Ontario and Manitoba to the U.S in 2003 2,500,000 2,000,000 1,500,000 Heads 1,000,000 500,000 0 1988 1990 1992 1994 1996 1998 2000 2002 Manitoba Ontario Québec
Exports of feeder pigs from Quebec, Ontario and Manitoba to the U.S in 2003 8,000,000 7,000,000 6,000,000 5,000,000 Heads 4,000,000 3,000,000 2,000,000 1,000,000 0 1988 1990 1992 1994 1996 1998 2000 2002 Manitoba Ontario Québec
Pork meat exports from Quebec to the U.S. and Japan from January 1992 to December 2003 U.S. Japan 18,000 16,000 14,000 12,000 000 MT 10,000 8,000 6,000 4,000 2,000 0 Jan-92 Jan-93 Jan-94 Jan-95 Jan-96 Jan-97 Jan-98 Jan-99 Jan-00 Jan-01 Jan-02 Jan-03
Policy Analysis Countervailing duties (CVD) / Anti-dumping (AD) duties are import tariffs imposed either because of unfair subsidies or unfair commercial practices. Import tariffs can always be decomposed into a consumption tax and production subsidy. Terms of trade impacts can be understood through simple partial equilibrium model.
Market equilibrium p S( p; r) p ES ( p) US p0 D( p) ED( p; r) r S( r) US Q0 D Q Q p US 0 Processed product U.S. market r M US Processed product trade market ES ( r) US r0 D( r; p) ED( r; p) US H0 US Q0 Q US M r Q Raw product U.S. market Raw product trade market
Terms of trade impacts p S ( p; r) S( p; r) p ES ( p) US p0 D( p) ED ED r US Q1 S( r) US Q0 US D0 Processed product U.S. market Q r p M US p M US Processed product trade market ES( r) Q US r1 US r0 CAN r1 H 0 H 1 Q 1 Q 0 D D( r; p) ( r; p) Q M US r US M r ED ED Q Raw product U.S. market Raw product trade market
Impacts of CVD / AD duties CVD / AD duties are likely to raise hog and pork prices in the U.S. and decrease hog prices in Canada. Canadian pork prices are likely to increase as well. In case of COOL, all of the above arguments hold at expense of additional transaction costs for the U.S. industry.
COOL results Preliminary research report (Abdesselem, Bonroy, and Gervais, 2005) suggests pork prices in the U.S. could go up by as much as 6% while Canadian pork prices could fall by as much as 2%. Impact on hog prices are minimal. Results are based on rather optimistic assumptions with regard to U.S. consumers behavior (premium of 0.25Can$ per Kg paid by 90% of consumers). Also includes a transaction cost of 0.10Can$ per Kg).
Pork industry adjustments and policy responses Policy implications from the Canadian perspective? First-best solution is laissez-faire. This policy prescription holds in the case of no-uncertainty, perfect competition, etc. If lump-sum redistribution is impossible, what is the optimal policy?
Options Potential policy / adjustment: 1. Promotion of Canadian products (COOL) 2. Increase packing capacity 3. More subsidies (!)
Promotion of Canadian products Canadian pork exporting firms are not pure price takers in the U.S. market. For example, Gervais and Larue (2005) find that the export price elasticity with respect to the exchange rate is about 0.2 for Quebec exports. They obtain larger elasticities for exports originating from Ontario and Manitoba. Role for generic promotion? Incentives to change usual supply chains to target U.S. distributors that cannot profit from the label system?
Increase capacity? Packing capacity in Canada does not seem to be a problem. No plant is operating double shifts on a constant basis. The issue is not more plants but bigger plants because of potential (unexploited) economies of scale (MacDonald and Ollinger, 2000). There are still large differences in plant size between the U.S. and Canada. Is policy conducive to investments in capacity? Real option theory would suggest no!
Increase capacity? Real issue is where all these pigs will be fed to ready-to-market weight assuming that some of them do not cross the border. Hog finishing capacity is intrinsically linked to environmental issues and constraints. Two-year moratorium on production in Quebec has just been lifted. Stricter environmental standards have been issued. Casual evidence suggests that producers converted their maternity permit to finishing operations during moratorium. There have been some feeder pig imports from Ontario. Income stabilization program (ASRA) creates strong incentives to finish hogs in Quebec.
Increase capacity? (cont d) Hog marketing institutions in Quebec are however less flexible than elsewhere. These factors are not favorable to new investment in packing plants. Hornung and Ward (2005) argue that the opening of the Brandon plant had a negligible effect on hog prices in Manitoba. Their result is consistent with a well integrated and open North American market. That s unlikely to hold in case of important bottlenecks at the border.
Is location of production demand or supply driven? Hog finishing operations would locate where there is a comparative cost advantage in feeds. The Prairie region is an obvious candidate; but Manitoba is a net importer of corn and should import feed wheat from other provinces (Kraft and Rude, 2002). This is conducive of an increase in feed prices. Need more subsidies for hog finishing operations to grow (but highly undesirable option).
Conclusions Global beef competition is intensifying BSE discoveries created lost market access especially to Japan and South Korea Border closure forces Canada to expand beef slaughter while US plants are under-utilized North America has added substantial costs to beef industry through border restrictions.
Conclusions (cont d) After the final hog/pork CVD and AD rulings, the attention is shifting to COOL. Despite positive rulings from the Canadian perspective, efforts will likely intensify to expand hog finishing capacities. Likely to see further consolidation in the packing industry. Future growth in Canadian production is likely to be impeded by pressures to reduce domestic support and the value of the U.S. dollar.