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New rules for the U.S. beef market

Japan banned U.S. beef two years ago after the U.S. reported its first case of mad cow disease. When trading resumes, producers and beef plants must document that beef shipped to Japan came from cattle 20 months of age or younger. This will mean a paper trail that tracks cattle from birth to the slaughterhouse and beyond.
/ Source: Reuters

Stan Isaacson can look at the cattle in his sprawling Texas feedlot and estimate each animal's age fairly accurately.

That skill has served him well in managing his cattle, but it will not be enough if he and other cattle producers intend to ship beef to Japan when that market reopens, perhaps as soon as late this month.

Japan and other countries banned U.S. beef two years ago after the U.S. reported its first case of mad cow disease.

When trading resumes, producers and beef plants must document that beef shipped to Japan came from cattle 20 months of age or younger. This will mean a paper trail that tracks cattle from birth to the slaughterhouse and beyond.

"They are making this so complicated, so difficult," Isaacson said in a telephone interview. "They are trying to create such a bookkeeping nightmare."

Cattle 20 months or younger are believed to be safe from the disease.

Formally known as bovine spongiform encephalopathy (BSE), mad cow disease is a fatal brain condition in cattle. Since December 2003, there have been two cases in the United States. Scientists believe people can contract a similar fatal disease by eating certain beef parts from an infected animal.

Before the bans, Japan was the top overseas market for U.S. beef, buying about $1.4 billion worth or a little more than a third of all U.S. beef exported in 2003.

That is why the cattle industry and the U.S. government have worked hard to get that business back. Deals were made regarding the handling and documenting of the beef to ensure it is free of the disease.

New rules for an old market
The U.S. government set up an Export Verification Program and participation is required for producers and beef plants intending to do business with Japan. It will involve training and increased record keeping.

John Lawrence, agricultural economist at Iowa State University, has been advising producers on how to comply with the new rules, which he said could add to production costs but also net higher prices for cattle that meet the requirements.

"There is going to be a change in the way we do business," said Lawrence. "I think it will speed us toward a voluntary national animal ID system."

Getting Japan's business back was a priority not only because it was the leading buyer, but it is assumed that other countries will follow Japan's lead. One country may be South Korea, which had been a key buyer of U.S. beef before the mad cow discovery.

"Before the bans, exports accounted for about $15 per hundredweight (100 lbs) in the price of the animal," said Greg Doud, chief economist for the National Cattlemen's Beef Association. "We have $5 of that back with Mexico and Canada. We have $10 to go. Japan is about $5 of that $10."

Beef cattle currently sell for about $1,150 per head, or $92 per 100 lbs.

Consumers may pay more
The NCBA estimates 50 to 60 feedlots are set up to serve the Japanese. But economists and industry leaders believe the first beef shipments to Japan will be small because not many cattle have the necessary documentation.

"I think there will be a photo opportunity yet this year. I don't think there will be an economically significant quantity until sometime in 2006," said Jim Robb, economist at the Livestock Marketing Information Center.

A Japanese food panel this fall ruled that U.S. beef would be deemed safe if certain materials that could transmit the disease were removed. A public comment period in Japan recently concluded, and once the comments are evaluated U.S. officials expect trading to resume.

As more cattle qualify for Japan, the premium paid for those cattle should decrease, analysts said.

And as beef sales to Japan increase, U.S. consumers may pay more for beef.

"If we start exporting beef to Japan, it would reduce the supply here. All things being equal, you would expect higher prices at the store," said Lawrence.

But it will be a slow process, according to the U.S. Meat Export Federation.

"We are projecting it will take about four years to fully recover that market," said Lynn Heinze, spokesman for the Federation.

U.S. cattle prices have bounded higher recently in futures trading at the Chicago Mercantile Exchange, with some of those gains attributed to anticipation of renewed sales to Japan.

However, the price increases may have been excessive relative to the expected small volume of beef that will be involved in the early shipments, analysts said.

"I would say maybe 25 percent of the rally in the past couple of weeks has been due to the anticipation of Japan," said Rich Nelson, analyst with Allendale Inc.