Mad Cow

Daniel Sumner: Effect on U.S. agriculture and consumers

Daniel Sumner

Daniel Sumner is a is a professor of agricultural and resource economics and director of the University of California Agricultural Issues Center, based at UC Davis. Sumner discusses the impact of mad cow disease on international beef trade with the media. He has studied the Canada outbreak of mad cow disease/BSE. His overall research involves the consequences of farm and trade policy on agriculture and the economy.

(Sumner also participated on the Feb. 5, 2004 mad-cow threat panel sponsored by the Institute of Governmental Affairs that can be viewed as an online video*.)

Q. How will the finding of mad cow disease in the United States affect the nation's international beef trade in the long-run?

A. Most analysts expect the long-run implications to be very small. The import restrictions should be removed in a matter of a very few months and consumption patterns globally are likely to get back to normal.

Immediately after the BSE case in the United States was announced, large international markets for U.S. beef -- Japan, South Korea, Mexico and others -- were closed. The United States is the world's No. 1 beef exporter in terms of value. Japan, South Korea, and Mexico together account for 80 percent of the export value of U.S. beef and beef by-products. Japan alone has purchased about $1 billion of beef and beef by-products from the United States each year. Exports are about 10 percent of total U.S. beef sales.

If main export markets remained closed to U.S. exports for a long period of time, the effect would be large. The United States is also the world's biggest importer of beef. If it could not export beef, then production would be directed toward the domestic market, reducing imports and hence affecting the trade with the most important providers, such as Australia and New Zealand. But, the United States tends to export expensive cuts and import cheap cuts, so the substitution is less than perfect.

However, with only an isolated case and vigorous U.S. government and industry action to prove to the international community that U.S. beef is safe for human consumption, then international trade would be back to where it was in December 2003 and the long-run effects would be minimal. This seems most likely.

Canada, which relies much more on exports, suffered from an isolated case of BSE detected in May 2003. Exports plummeted from about $125 million per month on average to only $14 million in August 2003. But last October, although Japanese imports were still well below the historical average, Canada exported $140 million of beef and meat preparations.

Another important factor is consumer behavior. In the UK in
1996 and Japan in 2001, but not in Canada, local consumption of beef and meat preparations fell immediately after the
identificationof the first case, but returned to normal quickly. In Canada, beef consumption went up substantially when BSE was found, and the United States seems to be following the Canadian example, which also involved an ioslated case.

Q. Now that BSE has been found in both Canada and the United States, how will trade relationships between the two nations be affected?

A. The finding that the cow with BSE was of Canadian origin may complicate matters but will not significantly change our relationship in the long run (although trade in live cattle has been temporarily interrupted). The main effect will be indirect and may turn out to be a positive one. There is a growing understanding of the need for a reliable cattle identification system that will improve the traceability of animals and products. Past cooperative efforts made to provide more safety to the industry will be reinforced.

Q. Will there be economic ripple effects of BSE throughout U.S. agriculture and what will they be?

A. The discovery of this one BSE case in the United States will affect the livestock industry, but not necesarily other agricultural sectors. The major effect will be on the meat-processing plants, because they will have to change and/or eliminate some of the industrial processes. For example, air-injection stunning has just been prohibited, as well as the selling of the small intestine.

The biggest first-round impact is lower cattle prices and lower farm income for cattle producers. The prices prior to the BSE event were very high and this has brought thme back into the normal range.
There will be some short-term impacts related to the increased availability of beef in the U.S. domestic market and the lower price of beef to producers. The lower price of beef will mean less consumption of other meats in the next few months. Over the next year, the lower price of cattle will cause some adjustments to cattle culling rates and herd build up. It may also reduce the demand for cattle feed. The timing of these adjustments is quite complex and their impacts are likely to be relatively small. The effects on the entire agriculture of the United States will be noticeable if this is not an isolated case and the problem persists -- something very unlikely -- because national beef production would in that case diminish and demand for inputs, such as feedstuffs, would decrease.

Q. Should consumers expect to be paying considerably more for beef due to increases in regulations that will evolve from the mad cow finding in the United States?

A. The short-term price of beef in the United States will be lower for a while because of reduced exports. In the longer term, the regulations and other practices will add to costs, but the added costs will be relatively small at the retail level for consumers. The aggregate dollars will be large, but in the range of a several cents per pound of beef.

The U.S. beef market is a relatively open one. Prices depend on supply and demand, and regulatory measures will affect the price only marginally. If export markets remain closed for several months, the supply of domestically produced beef will increase, negatively affecting imports. The United States mostly exports high-quality beef and imports lower quality beef, much of it ground beef. Hence, the available supply of high-quality beef in the U.S. market would increase, leading to a decrease in prices. Consumers will be favored while producers will lose.

New regulations will have an effect on the processing industry, by increasing their costs and banning some of their products, hence reducing the whole business profitability.

*To view the webcast, download the "RealOne Player" plug-in. Tip: Look in the upper right corner of the Real home page for the link to the free player.

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