December 30, 2003

US Cattle Prices Expected To Fall 8-10%

US cattle prices are expected to fall by 8-10% from loss of trade alone due to the country's first case of mad cow disease.

Only 10% of US beef goes overseas, while 40-50% of Canadian beef is exported. That means US beef producers won't experience the drop in prices that Canadian farmers did when BSE was discovered there earlier this year, says Brian Roe, Ohio State University Extension agricultural economist.

"My model suggests that if exports were reabsorbed into US consumption, there should be a $7 to $8 per hundredweight impact on prices," which translates to an 8% to 10% drop in farm prices.

As of Monday, more than two dozen trading partners, accounting for 90% of US beef exports, had placed a ban on US beef.

Further impact on US beef prices depends on how consumers take the news, Roe says. Future prices will likely drop from the $95/cwt range observed on Dec. 23 to the $75/cwt range. That means with only $7 to $8 of that drop related to loss of trade, the market expects consumer demand to cause an additional $12 to $13 drop in prices.

"Canada actually saw an increase in beef consumption. With 40% to 50% more beef on the market, it was a heck of a bargain," Roe says. It actually ended up hurting the pork industry. Part of the increased consumption was out of loyalty, too. They felt they were getting a raw deal internationally."

So far, what's known about the US case supports the idea that consumer confidence won't be affected, Roe said. "We're talking about one animal, a dairy animal, that was not from a dominant beef area. The fact that it was from Canada and was born before the implementation of the ruminant feed ban was established to prevent BSE could help assuage consumer fear. But, one new fact could change that," he said.

If more cases of mad cow are found, beef producers could see an additional $5 to $7 drop in prices, but poultry and pork producers would benefit. "The high protein craze remains, and we'll continue to see that," Roe said.

"The best case scenario for farmers would be if the loop holes are plugged or shown to have already been plugged, international trade is hit for only a month or two or three, and there's no long term erosion of consumer confidence," Roe said. The beef industry was in good economic shape going into the mad cow news. "So, this potentially could still be a strong year for beef, if exports are reinstated and if consumer confidence is high."

Also unclear is what might happen to grocery store prices, Roe says. "Retailers are reticent to change prices at the retail level. It's costly for them to do so. Dropping prices precipitously would signal that something is wrong, and would say that they too believe something is wrong," Roe said.

There's a chance high-end beef cuts might become more affordable, as well. Japan has now it's border to US beef exports. It is the largest buyer of US beef, and tends to buy more high-end cuts.

"We could see a clip in those prices," Roe said.