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Aaron

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4/6/2005

Border decision increases risk

by: Wes Ishmael, Contributing Editor

If you believe in science as the objective basis from which to make decisions about the safety of international trade, the Canada border should have opened March 7.

If you believe in free-trade fundamentals as the basis from which to calculate market opportunities and challenges, the preliminary court injunction that extended the ban on Canadian live cattle imports promises to return more net risk to the U.S. industry than any short-term gains it may serve up.

Ironically, producers who live in the Northwest — where the organization requesting the injunction is headquartered — will likely experience the negative consequences of the court decision the soonest and most severely.

“In the Northwest, I think we have a fairly serious problem because it's unlikely both of the primary packing plants in that region will be able to continue operating without Canadian cattle,” explains Clem Ward, Oklahoma State University agricultural economist.

Given the sparse domestic cattle supply in that region, plants there have relied on Canadian cattle to keep the doors open and provide producers with local market access.

Similarly, Ted Schroeder, Kansas State University agricultural economist, points out harvest facilities in the Northeast — primarily cow plants — are facing the same kinds of challenges for the same reasons.

If a plant in a region like the Northwest throws in the towel, basis changes to the disadvantage of producers there. If the packing industry quits the region altogether, there is no basis. That leaves producers to absorb the added freight and shrink of hauling cattle states away.

Though packing plants — and producers — in the Central Plains might benefit initially from the additional supply due to regional plant closings elsewhere, Ward says, “It does affect other parts of the country, too, indirectly if not directly.”

Canada is gearing up


For one thing, even though Canadian slaughter capacity was set to increase before the delayed border opening, the indefinite nature of the border situation has further spurred investment. Specifically, according to a National Cattlemen's Beef Association trade team sent there in January, Canadian slaughter capacity is expected to increase 18% this year and another 12% the next two years.

Besides having the capacity to harvest all the cattle produced there, Canadians will have less incentive or need to send cattle to the U.S., especially if the dollar continues to remain weak. Meanwhile, the Canadian expansion is in the form of new facilities, meaning they should be more technologically efficient than the older U.S. facilities.

Part and parcel with that, Schroeder points out Canadian cattle previously purchased and processed by U.S. buyers had value added to them in U.S. plants by U.S. citizens. That meant the U.S. was the beneficiary of the added value. As Canada becomes self-sufficient in cattle harvest, those opportunities decrease for the U.S.

By the way, did anyone notice after the preliminary injunction was issued that two of the largest U.S. beef packers announced further reductions in harvest production?

“We've lost packing plants from Iowa to Washington during the last few years. We've lost market access in areas of the country where market access was already an issue,” Schroeder says. “The structural change has already started chugging.”

Ward adds, “I think we'll see some packer consolidation, partly due to the added delay in opening the border and partly due to the fact it's been closed so long already.”

Long-term effect unknown


You don't have to love, or even like, packers to understand that a decrease in buyers, and the amount of time buyers are in the market for a given product, is negative, compared to maintaining or expanding the number of buyers for a given supply and the time they spend competing for it.

Bottom line, between the lingering border mess and other recent, significant shocks to the system, accelerated packer consolidation and regional packer concentration should be expected rather than come as a surprise.

As Schroeder says, “We need to make sure we understand and appreciate the implications of what we do as an industry, short-term and long-term. With the border reopening to Canada there would be a small but modest negative effect on cattle prices, but how does keeping it closed affect us long-term when it comes to global market access for our products, and market access for producers here?”

Of course, maybe none of this will happen. Maybe market fundamentals are useless tools. Perhaps we'll learn that free trade within the vacuum of isolationism actually expands opportunity for everyone rather than limits it.

Maybe the Easter Bunny will start leaving C-notes under our pillows for lost teeth, too.
 

whiteface

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Very good article Aaron and something that all of us in Canada have pondered over and over. Long term the industry up here looks good, short term it would be helpful if more Americans had really considered the long term consequenses of R-calf's actions. But I hope their cashing in while they can, I do think they're in for a rough ride in the not so distant future. Have a good day all!
 

Sandhusker

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The big US packers have crowded your plants out of business before. What is going to stop them from doing this again?
 

Kato

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A lot of the new ones are co-ops where the producers have ownership and a stake in how well the plant does. They also have all had cattle committed to them before even going ahead with business plans.

Not all cattle are in Alberta, and right now in Manitoba it costs us almost 10 cents a pound to ship there for slaughter. This is an advantage itself for local plants. Besides, with the price of fuel going the way it is, the cost of getting those cattle to the plants is going to become a lot bigger concern than it is even now. :?
 

Big Muddy rancher

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Sandhusker said:
The big US packers have crowded your plants out of business before. What is going to stop them from doing this again?

Alot of those plants that closed were older plants nearing the end of usefulness. That will be differnt this time as the plants will be new with modern technology. The older plants in the U.S. may fall by the wayside.
 

agman

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Sandhusker said:
The big US packers have crowded your plants out of business before. What is going to stop them from doing this again?

Response...Only in your mind could you draw the conclusion you have. The attrition of plants is a result of inefficiency. If new plants have good management, are efficient and have a market for their product they will survive. Good competition is appreciated and makes everyone better, that is except R-Calfer's who would jsut rather bitch and complain.
 

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