Primer on how to kill a market
Daryll E. Ray and the Agricultural Policy Analysis Center,
University of Tennessee, Knoxville, TN
With last December's reopening of the Japanese market to US beef we thought
that just maybe the BSE (bovine spongiform encephalopathy or mad cow
disease) story was winding to a close. But our hopes were dashed with two
late January announcements. A US packer included spinal column material in a
shipment of veal to Japan resulting in the Japanese once more closing their
market to US beef. The second story was the discovery of another Canadian
animal with BSE.
But that wasn't the worst of it. Mixed into all of this was a case of
foot-in-mouth disease on the part of a USDA official who was reported by the
Japanese press to have said "that there was a higher probability of being
hit by a car while going to buy beef at a store than being harmed by eating
beef infected with mad cow disease."
While that may be true from a statistical perspective, such a statement does
not communicate any awareness of how seriously the Japanese take the problem
of BSE. One can get by with ridiculing one's enemies, but that is hardly the
way to treat a customer who prior to the discovery of BSE in one cow in
December 2003 purchased $1.4 billion worth of beef a year.
As we review this whole saga from its start in late 2003, it appears to us
that the US response to Japanese concerns has been ill-considered at best.
>From the beginning US officials have treated the issue as if the Japanese
response were a matter of trade protectionism on their part – protecting
their domestic beef market – instead of treating it as a reflection of a
real concern on the part of the Japanese public.
The result has been to run the risk of driving the Japanese beef consumer
into the arms of one of our export competitors. Australia. While US
officials did everything they could to force the Japanese to back down on
their demand that every animal be tested for BSE, the Australians were
moving into the market and capturing a part of the market share that had
been occupied by US beef producers. The wrangle lasted for nearly two years
giving the Australians plenty of time to convince Japanese consumers of the
quality of their product.
Much of this could have been avoided if the USDA and the US meat industry
had remembered the old adage, "The customer is always right," even if a
majority of other market participants disagree. The traffic death toll
matters little if what the customer is concerned about is BSE.
Within a month and a half of the discovery of BSE in the US herd, Creekstone
Farms submitted a request to USDA to be allowed to conduct private BSE
testing at their plant in Arkansas City, Kansas. The Japanese were willing
to cover the extra testing cost and open their market to Creekstone's
product. If the USDA had permitted Creekstone to test all of the animals it
sent to Japan, US exports could have resumed quickly giving the Australians
little time to move into that market.
Instead the USDA waited six weeks before refusing Creekstone's request. In
part the USDA argued that if they allowed one company to test for BSE in
order to sell into the Japanese market it would force all other companies
wishing to sell to the Japanese to test for BSE as well. And if it became
the norm a fear was that domestic consumers may begin to demand testing as
well.
What an interesting perspective. One company makes an innovation like
painting cars red, yellow, green, and blue and pretty soon all car companies
will have to do it, even though black cars work just as well as green ones
and green paint is a little more expensive. Ford ignored consumer preference
and ended up permanently losing market share.
Having been forced to buy other brands to get the color they wanted,
consumers developed loyalties to these companies. When growing up we knew
several generations of families who only bought Plymouths or Chevys or
Pontiacs.
Other innovations fall by the wayside like the huge fins on the back of 50s
and 60s Chrysler Corporation vehicles. Consumer preference is the way the
market sorts out various innovations.
Our guess is that if the USDA had quickly approved Creekstone's request the
market interruption for US beef would have been less than three months,
giving little time for competitors to establish themselves in the market. In
addition it would have signaled our attentiveness to the concerns of
Japanese consumers.
Instead, we are once again at loggerheads with Japanese agricultural and
trade officials – hardly a position from which we are likely to quickly
recapture a market worth $1.4 billion.
Daryll E. Ray holds the Blasingame Chair of Excellence in Agricultural
Policy, Institute of Agriculture, University of Tennessee, and is the
Director of UT's Agricultural Policy Analysis Center (APAC). Daryll Ray's
column is written with the research and assistance of Harwood D. Schaffer,
Research Associate with APAC.
utk.edu
Daryll E. Ray and the Agricultural Policy Analysis Center,
University of Tennessee, Knoxville, TN
With last December's reopening of the Japanese market to US beef we thought
that just maybe the BSE (bovine spongiform encephalopathy or mad cow
disease) story was winding to a close. But our hopes were dashed with two
late January announcements. A US packer included spinal column material in a
shipment of veal to Japan resulting in the Japanese once more closing their
market to US beef. The second story was the discovery of another Canadian
animal with BSE.
But that wasn't the worst of it. Mixed into all of this was a case of
foot-in-mouth disease on the part of a USDA official who was reported by the
Japanese press to have said "that there was a higher probability of being
hit by a car while going to buy beef at a store than being harmed by eating
beef infected with mad cow disease."
While that may be true from a statistical perspective, such a statement does
not communicate any awareness of how seriously the Japanese take the problem
of BSE. One can get by with ridiculing one's enemies, but that is hardly the
way to treat a customer who prior to the discovery of BSE in one cow in
December 2003 purchased $1.4 billion worth of beef a year.
As we review this whole saga from its start in late 2003, it appears to us
that the US response to Japanese concerns has been ill-considered at best.
>From the beginning US officials have treated the issue as if the Japanese
response were a matter of trade protectionism on their part – protecting
their domestic beef market – instead of treating it as a reflection of a
real concern on the part of the Japanese public.
The result has been to run the risk of driving the Japanese beef consumer
into the arms of one of our export competitors. Australia. While US
officials did everything they could to force the Japanese to back down on
their demand that every animal be tested for BSE, the Australians were
moving into the market and capturing a part of the market share that had
been occupied by US beef producers. The wrangle lasted for nearly two years
giving the Australians plenty of time to convince Japanese consumers of the
quality of their product.
Much of this could have been avoided if the USDA and the US meat industry
had remembered the old adage, "The customer is always right," even if a
majority of other market participants disagree. The traffic death toll
matters little if what the customer is concerned about is BSE.
Within a month and a half of the discovery of BSE in the US herd, Creekstone
Farms submitted a request to USDA to be allowed to conduct private BSE
testing at their plant in Arkansas City, Kansas. The Japanese were willing
to cover the extra testing cost and open their market to Creekstone's
product. If the USDA had permitted Creekstone to test all of the animals it
sent to Japan, US exports could have resumed quickly giving the Australians
little time to move into that market.
Instead the USDA waited six weeks before refusing Creekstone's request. In
part the USDA argued that if they allowed one company to test for BSE in
order to sell into the Japanese market it would force all other companies
wishing to sell to the Japanese to test for BSE as well. And if it became
the norm a fear was that domestic consumers may begin to demand testing as
well.
What an interesting perspective. One company makes an innovation like
painting cars red, yellow, green, and blue and pretty soon all car companies
will have to do it, even though black cars work just as well as green ones
and green paint is a little more expensive. Ford ignored consumer preference
and ended up permanently losing market share.
Having been forced to buy other brands to get the color they wanted,
consumers developed loyalties to these companies. When growing up we knew
several generations of families who only bought Plymouths or Chevys or
Pontiacs.
Other innovations fall by the wayside like the huge fins on the back of 50s
and 60s Chrysler Corporation vehicles. Consumer preference is the way the
market sorts out various innovations.
Our guess is that if the USDA had quickly approved Creekstone's request the
market interruption for US beef would have been less than three months,
giving little time for competitors to establish themselves in the market. In
addition it would have signaled our attentiveness to the concerns of
Japanese consumers.
Instead, we are once again at loggerheads with Japanese agricultural and
trade officials – hardly a position from which we are likely to quickly
recapture a market worth $1.4 billion.
Daryll E. Ray holds the Blasingame Chair of Excellence in Agricultural
Policy, Institute of Agriculture, University of Tennessee, and is the
Director of UT's Agricultural Policy Analysis Center (APAC). Daryll Ray's
column is written with the research and assistance of Harwood D. Schaffer,
Research Associate with APAC.
utk.edu
