A Publication of:

OSU Extension - Fairfield County

831 College Ave., Suite D, Lancaster, OH 43130

Phone: 740.653.5419

and the

OSU Extension BEEF Team

BEEF Cattle questions may be directed to the OSU Extension BEEF Team through Stephen Boyles or Stan Smith, Editor

Previous issues of the BEEF Cattle letter

Issue # 373

January 7, 2004



17 Implications Of BSE In The U.S. - Troy Marshall, Editor, The Seedstock Digest (reprinted with permission from the Cow-Calf Weekly e-newsletter)

It's still too early to understand all the implications from this single incident of BSE in Washington State, but there are already numerous takeaway points for the industry:

1. Individual animal identification (ID) is on the fast track. The industry has understood for a time that it must have the capability to trace animals throughout their productive life quickly. Now, the political momentum for a national ID system has been ratcheted up by a factor of 10 or more.

Ironically, the only reason the tracking process on the Washington BSE case progressed as quickly as it did was that the cow carried a Canadian tag that identified her and the records were in place to trace her back to her origin in Canada.

2. The issue of downer cows has moved front and center. While the beef industry had largely rejected the marketing of downer cows, the practice still occurs. Admittedly, however, prevalence of the practice tends to be higher in the dairy industry.

USDA, the National Cattlemen's Beef Association, the U.S. Congress and public perception have all called for a change to the downer policy. Yesterday, USDA mandated that change.

3. The sad and sobering fact is that there is much about BSE that is still unknown. While we can be certain that our safeguards and firewalls will prevent the widespread BSE outbreak, a risk remains.

4. It's absolutely essential that trade policy decisions be based on sound science. While it appears this BSE case is not in an animal of domestic origin, the incident illustrates how important it is for the U.S. to establish and maintain the precedent of relying on sound science in trade issues. As tempting as it maybe to implement protectionist, emotion-based policies, we must consider that one day we may be walking a similar path to the one our trading partners are walking.

5. The industry will likely lose hundreds of millions of dollars, but the figure easily could have reached into the billions.

6. The importation of live cattle less than 30 months of age is most likely to be delayed. NCBA, R-CALF and others have asked for a delay. The comment period for the proposed rule ends Jan. 5. While USDA is prohibited from commenting, the agency has hinted that a second case in Canada would most likely lead to a significant delay in reopening the Canadian border to live cattle.

7. Food safety is an issue we can't afford to politicize. While some within the industry and many anti-industry groups have attempted to politicize the BSE issue and use it to serve their political aims, the industry has, for the most part, done an excellent job of ensuring the consuming public that the food safety-net is an effective one.

8. The value and importance of the futures market was illustrated. While the futures market has earned its critics from time to time, the importance of the futures from a risk management and price discovery tool was certainly validated.

While the CME's response in expanding the limits was vital to getting liquidity back into the marketplace, the industry will continue to oppose CME efforts to institutionally expand the trading limits. While limits had to be expanded from time to time with the rapidly moving markets since May, the fact is that the CME response worked and the increased volatility of recent times should be seen as what it is -- an anomaly.

9. Irresponsible media coverage is inevitable. The repeated showings of a 14-year-old tape depicting a British Holstein cow suffering neurological distress has left an image that will take time to erase. The entire BSE situation is all about perception and little about reality. More people die every year from salmonella in chickens than will ever die from BSE by probably a factor of five. Yet, the fear, mass slaughtering and images from the UK outbreak have probably forever changed the consumer's perception of the risk.

10. USDA, NCBA and its affiliated state cattle associations, along with the Cattlemen's Beef Board and state beef councils, did a wonderful job in managing the BSE crisis thus far. The industry's response was swift and very well coordinated. Most importantly, it was highly effective.

11. Perception is reality.

12. A new level of anger is directed at the dairy industry. As a result of BSE being found in a Holstein cow, many producers are expressing a level of frustration regarding the dairy industry. Some effort will have to be made to mend fences, whether the sentiment is justified or not.

13. Unity in crisis. The importance of unity and not presenting a divided front was crucial to maintaining consumer confidence in our product. The industry was very fortunate to have a study like the Harvard Risk Analysis study to refer to, and these outside experts were critical to getting the facts out.

14. The risk from BSE is economic, not one of public health. Unfortunately, public perception and media coverage doesn't understand this (see 11). BSE is an animal disease challenge and not a food safety issue.

15. The debate over country-of-origin labeling (COOL) will gain momentum. While COOL is not a food safety program, nor does it provide traceability of the product, it will definitely be positioned as such in the coming discussion.

16. Advanced meat recovery systems will be looked at intensely. These systems have improved efficiency and lowered packer margins, but their use may be called into question as they have been shown to occasionally bring along central nervous system tissue.

17. USDA is to be applauded for the speed and thoroughness of its BSE investigation and the openness with which the agency has reported on its activities. The transparency of the investigation and the timeliness of USDA information have been key factors in work by government and industry to accurately inform and assure consumers worldwide about the safety of U.S. beef.





Post-BSE Damage Control Strategies For U.S. Producers - Harlan Hughes, North Dakota State University professor emeritus

Damage control has to be foremost in the minds of most U.S. ranchers in light of the recent discovery of a single Holstein cow in Washington State infected with BSE. The December 23 announcement by USDA has to have U.S. ranchers asking: "What kind of economic damage is this going to do to my ranch business?"

Over the last eight months, I've made several trips to Canada to work with Canadian ranchers facing the same economic challenge. I'll first share some philosophy I observed in Canadian ranchers, then summarize my early assessment of the U.S. beef market's potential reaction. Finally, I'll suggest economic damage control strategies U.S. ranchers might consider in light of the BSE incident.

* In my work with Canadian ranchers, I observed two philosophical approaches to their BSE crisis. Members of Group 1 recognized they could do nothing to impact market prices so they focused on what they could impact -- their own beef cow herd's production level and their herd's unit cost of producing a hundredweight of calf (UCOP).

Meanwhile, the second group, unsure that foreign borders would ever reopen to Canadian beef exports, focused their emotional energies on getting things back to "the way it was before." They used their management energies to fight the border closure, the broken marketing system and politicians.

Group 1 ranchers recognize it's not "management as usual." They have faith the U.S. border will reopen; it's only a question of when. They're managing to survive until that time comes.

Market delaying tactics are prominently on their minds but they're continuously pressured by cash flow needs. They know that many bankers are nervous and are asking for added security deposits.

Group 1 also understands that ranchers with the lowest unit cost of producing a UCOP will survive the crisis best, regardless of the absolute level of domestic market prices. They recognize that becoming a low-cost producer is directly in their hands.

Group 1 ranchers are using their beef crisis as motivation for an all-out effort to intensify their herd management programs. They're placing a pronounced focus on lowering their herd's UCOP and on surviving until the border reopens. Their fundamental strategy is "to own cattle when the border re-opens."

That's not to say that all is well with Group 1. Their emotions are in a roller-coaster state, going up and down as the border closure continues with no certainty as to when it will reopen. No one can remain positive all the time, but these ranchers are positive most of the time.

I recommend U.S. ranchers do everything they can to put themselves into Group 1. Focus all your management energies on what you can impact, and that is your herd's production level and your herd's UCOP in 2004, 2005 and 2006 calves.

* At this point, I project 2004 market prices will come under considerable pressure through much of 2004. That may initially be as much as 20% below the last quarter of 2003. Given that exports account for about 10% of U.S. domestic production, U.S. beef consumers will have 10% more beef to consume. This extra beef could become a drag on U.S. retail beef prices.

"Price flexibility" is the economic term used to measure a market's price response to changing supply. With an estimated price flexibility for beef of 1.6, a 10% increase in domestic beef supply is projected to lower beef prices by 16% (10% x 1.6). I'm anticipating another immediate 4% drop in beef prices due to enhanced consumer food safety concerns. This adds up to a projected 20% immediate drop in beef prices.

The key to a market recovery is having consumers stay with the beef industry like Canadian consumers did with Canadian beef producers. Thus far, U.S. consumers appear to be staying with U.S. beef. On Dec. 29, the National Cattlemen's Beef Association said that, after talking to food service and retail companies, it found "the companies reported no significant slowdown in beef sales and that consumers are still buying beef."

* While a projected 20% immediate drop in beef prices sounds, and is, serious, with the industry coming off record highs in fourth quarter 2003, these projected prices aren't as bad as one might initially think. I took this projected 20% price drop in 2004 and applied those prices to my IRM Demonstration Beef Cow Herd to simulate what kind of financial impact a 20% price drop might have on U.S. ranches in 2004. This demonstration ranch produced 557 pound calves in 2003 that were sold in late October for $112/cwt. for the steer calves.

Steer calves, heifer calves and cull cows were priced at a 20% discount for 2004. Surprisingly, the 2004 projections for my IRM Demonstration Herd still generated close to $100/cow earned-net returns to the unpaid family and operator labor, management and equity capital. How many years has your family generated $100 profit/cow?

A 20% drop in steer-calf prices suggests $92 steer calves for fall 2004. How many years have you sold calves above $92/cwt.?

Whatever happens in 2004, the tendency will be to compare it to 2003 -- a year of record beef prices. I think most ranchers will be able to live with a 20% drop from fall 2003 record prices.

* Clearly, it isn't "management as usual" for U.S. ranchers. Markets will overreact and market timing will become critical for cattlemen in the coming months. Optimum market timing in 2004 probably won't correspond with your peak cash flow needs. Visit your banker early to apprize him or her of your new marketing intentions.

Cattlemen will undoubtedly be dissatisfied with market prices in early 2004 and maybe all of 2004. Many may choose to hold cattle to take advantage of later market corrections. Canada's experience suggests markets will readjust later.

U.S. ranchers will focus on market-delaying strategies. Selling 2003 calves as backgrounded calves or yearlings off grass, or as finished cattle, could be an effective market-delaying strategy.

Given where we are in the cattle cycle, converting 2003 heifer calves from feeders to bred females would be another market-delaying strategy. I expect low-priced heifer calves will stimulate heifer retention on a national basis.

In summary, now's the time to tighten down the ship, increase your management power and lower UCOP. If a rancher can lower production costs by 5%/year over the next three years, the average cost of producing $100 calves in 2003 will be down to $85 in 2006 -- just the year that we could see another price-cycle top.





Weekly Purcell Agricultural Commodity Market Report for January 6, 2004
Wayne D. Purcell, Agricultural and Applied Economics, Virginia Tech
http://www.ext.vt.edu/news/periodicals/purcell/

It was a record year for the cattle markets, up and down. Cash fed cattle are around $74-$75 in limited early week trading. Cash prices were well over $100 a few weeks back riding the strength of a 9 percent or so reduction in fed cattle supplies from the BSE-induced closing of the Canadian border to cattle trade with beef demand strong in this country. Then, just before Christmas, BSE was discovered in the state of Washington. Light Choice box beef values were above $190 back in October and were at $150.43 on December 24, but by Monday afternoon they were at $137.09.

We are in uncharted waters in the cattle complex. My advice across the past several weeks has been to maintain short hedge positions in live cattle futures even if you had to pay a margin call. I did not know this BSE shock was coming, but the markets were and still are very uncertain. I would not be quick to see the rally since the live cattle and feeder cattle stopped the free fall last week as a bottom. The price plunge has been so big there will surely be short covering to take profits, and that is the source of this rally. The BSE cloud is still hanging over this market, and we are not sure yet what the long term impact on the demand side will be. I would hold any short positions and be inclined to replace any closed out short positions on any rallies later this week until we see more information on the source of the BSE and assurances to the consuming public, here and abroad, that it has been contained. If it is several months before we see significant movement into the Japanese, Mexican and South Korean markets again, there will be a big hit in export demand which has been a factor in strengthening demand for U. S. beef across the past 5-8 years.





Visit the OSU Beef Team calendar of meetings and upcoming events



BEEF Cattle is a weekly publication of Ohio State University Extension in Fairfield County and the OSU Beef Team. Contributors include members of the Beef Team and other beef cattle specialists and economists from across the U.S.

All educational programs conducted by Ohio State University Extension are available to clientele on a nondiscriminatory basis without regard to race, color, creed, religion, sexual orientation, national origin, gender, age, disability or Vietnam-era veteran status. Keith L. Smith, Associate Vice President for Ag. Admin. and Director, OSU Extension. TDD No. 800-589-8292 (Ohio only) or 614-292-1868



Fairfield County Agriculture and Natural Resources