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Cattlemen positioned to weather storm

U.S. cattle ranchers were celebrating the end of one of their best years ever.  Then came news last month  that mad cow disease was found in Washington state. Now farmers are holding their breath as they try to assess the economic impact of this reversal of fortunes.
Cattle Are Auctioned In Shadow Of Mad Cow Scare
Two men inspect a Holstein cow up for auction Dec. 31 at the Escalon Livestock Market in Escalon, Calif. U.S. cattle farmers were enjoying a banner year before mad cow disease was found in a Washington state cow last month.Justin Sullivan / Getty Images file
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Just weeks ago, cattle ranchers were celebrating the end of one of their best years ever, enjoying the profitable results of a surge in beef prices to record levels. Reporters dispatched to small towns in South Dakota and Montana returned with stories of men in manure-splattered boots splurging on gifts of jewelry and fancy clothes as well as new cars and houses.

The party came to an abrupt end just before Christmas with the report of a case of mad cow disease in Washington state. Now farmers are holding their breath as they try to assess the economic impact of this sudden reversal of fortunes.

Assuming that no further cases are discovered and that U.S. consumers remain confident in the safety of the food supply, the overall economic impact is likely to be minimal -- far smaller than in Canada, where a single case of mad cow, or bovine spongiform encephalopathy, was discovered in May.  But the impact could be substantial on some businesses in rural communities, particularly where farmers face the possibility of mass culling of affected herds.

“In the short term there is quite a bit disruption,” said John Lawrence, director of the Iowa Beef Center at Iowa State University. “The thing with the cattle industry is that we have cattle production in every state, and often in every county. So it’s very important to rural communities.”

Producer-level sales of calves and cattle account for about $40 billion in annual revenue, or less than 0.4 percent of the nation’s $11 trillion gross domestic product, according to the Agriculture Department, so even a major downturn would be unlikely to affect the overall pace of expansion.

Chris Hurt, an agricultural economist at Purdue University, estimated that the mad-cow outbreak could cost the beef industry $2 billion based on a projected average 15 percent drop in prices over the next year. His estimate presumes that U.S. beef consumption remains steady and that major foreign markets remain closed for months. It does not include any costs stemming from tougher new regulations, including the banning of so-called “downer” cows from human consumption.

Since the U.S. Department of Agriculture announced the discovery of BSE on Dec. 23, beef prices have fallen about 19 percent on the Chicago futures market, although prices rose slightly Friday after five straight sessions of losses at or near the market’s daily limit.

Prices stable
While the drop will mean a sharp decline in revenue at the massive feedlots where most cattle are prepared for slaughter, the current price of about 74 cents a pound for live cattle is just a few cents below where prices were before BSE was diagnosed in Canada in May.  And the price change is nothing like the collapse experienced last year in Canada, where live cattle prices plunged 65 percent to about 35 cents a pound in the weeks after the case of mad cow was announced there.

U.S. producers enjoy a major advantage over their Canadian counterparts in that only 10 percent of U.S. beef production is destined for foreign markets led by Japan, Mexico and South Korea. Canada exports about 60 percent of its beef, so when the United States and other markets closed their borders Canada immediately was stuck with a glut of beef that could not be consumed domestically.

“We can absorb 10 percent more consumption,” said Hurt. “Canadians could not absorb 60 percent more.”

"We may be able to eat our way out of this additional supply," agreed Lawrence of the Iowa Beef Center.

The Canadian mad-cow case has cost the industry an estimated $3.3 billion in direct costs, plus another $1.8 billion in secondary losses to rural businesses, according to a November report commissioned by the Canadian Animal Health Coalition, a government and industry group. That is a major blow to Canada's $8 billion beef industry and a measurable loss for its $1 trillion national economy.

“The aggregate economic and financial impacts of this outbreak represents the greatest threat and shock the Canadian agricultural industry has ever experienced,” said the group’s report.

More than seven months after the case of BSE was diagnosed in Alberta, Canadian ranchers continue to suffer as the United States, which buys 90 percent of Canada’s beef exports, still has not fully reopened its borders. Wendy Holm, an economist in British Columbia who has written extensively about the impact of mad-cow disease, said that by keeping its borders closed so long, U.S. officials violated the North American Free Trade Agreement.

“Much of this is politics rather than trade,” she said.

Hedging on the herd
Peter Morici, professor of international business at the University of Maryland and former chief economist for the U.S. International Trade Commission, agreed that politics is playing a major role.

“Given the psychological environment that exists about mad cow, it’s not surprising” the Canadian border remains partly closed, Morici said. “Also, it’s beneficial to the [U.S.] cattlemen.”

“It’s going to be very hard for us to scream too loudly” at foreign governments that may not reopen their borders to U.S. beef for months, he said.

The losers, he said, will be U.S. cattle ranchers and smaller processors who cannot easily switch to other forms of protein such as poultry. Many of the nation’s 800,000 beef farmers may go virtually unaffected, assuming prices remain steady by the time they are ready to sell their next crop in the fall, said Mike Miller, a director of Cattle-Fax, a non-profit beef industry research firm.

But Lawrence said many farmers normally wait for tax reasons until after Jan. 1 to sell their calves.  “We’re likely to see a lot of people postpone sales to see what’s happening,” he said. “The risk is that if the story gets worse, prices could be lower a month from now.”

He predicted the mad-cow scare could quicken the pace of a seven-year beef industry “liquidation” that has seen the annual crop of calves fall to its lowest level in 50 years.

But so far there are no signs that fears have curbed Americans’ appetite for beef.

Recent research indicates that while there may be a short-term impact on consumption, over the long term consumers do not change their dietary habits for food-safety reasons.  That means the impact of changing dietary preferences, including fashionable protein-heavy diets like the Atkins, are likely be more important over the long run than a sick cow in Washington state.