THE IMPACT OF MAD COW DISEASE

The discovery of Canada’s first indigenous case of Bovine Spongiform Encephalopathy (BSE), which is popularly known as mad cow disease, on May 20, 2003 has been a severe blow to the Canadian cattle and beef industry. It has also had negative consequences for many related industries, including feedlots, packing, rendering and trucking. While the United States loosened its ban in August, and a few other countries reduced their restrictions, all of Canadian cattle and a considerable portion of beef output remain shut out of foreign markets.

In October 2003, the U.S. Department of Agriculture issued proposed rules for further easing the restrictions on Canadian cattle and beef exports. Regrettably, the task of reopening markets became more formidable in December, as a new case of BSE was discovered in the United States and was traced back to Canada. However, in a recent positive development, the U.S. has announced that it will not change the rules proposed in October and has set a deadline of April 7 for comments. As a result, the Canadian cattle and beef industry is filled with hope and anticipation, as it waits a final U.S. decision. This report presents the economic impact of the first case of mad cow disease (BSE1) and tries to place the fallout of the second BSE case (BSE2) into some perspective.

IMPACT OF BSE1

With the discovery of BSE1, the impact of the subsequent bans on Canadian live cattle and beef by the United States and several other countries was quite easy to surmise. Export earnings from cattle and beef would fall, domestic inventories would rise, Canadian cattle and beef prices would plunge, while those in the United States would increase, and consequently, domestic cattle and beef producers would experience financial hardships. There would also be negative consequences on the various components of the cattle and beef industry and those servicing the sector – such as feedlots, packers, truckers, lenders, etc. So, how did the actual numbers play out?

Canadian export earnings from live cattle and beef products tumbled from $4.2 billion in 2002 to $2.2 billion in 2003, a 48 per cent drop (Appendix Table 1). The decline was even more pronounced during the period when the U.S. ban on Canadian cattle and beef exports was in place. For the period May to December 2003, the value of Canada’s cattle and beef export earnings plunged by 71 per cent from year-ago levels. In a normal year, say in 2002, the value of Canada’s export earnings from beef products is worth slightly more than earnings from live cattle. However, in the case of the U.S. market, which provides about 90 per cent of Canada’s export revenues from cattle and beef, the share is almost equally distributed between those two products. Canada exports only a limited number of live cattle offshore, so its export earnings from other countries are largely derived from beef products.

While the overall picture looks bleak, it is important to note just how quickly the exports of boneless beef recovered once the United States lifted the ban on this product in August. In October 2003, just one full month after Canadian shipments resumed, the value of Canadian export shipments of boneless beef (fresh, chilled and frozen) surpassed its pre-BSE level of a year-ago. This good performance continued in November and December. In 2002, boneless beef accounted for 80 per cent of the total value of all Canadian beef cuts exported to the United States.

Canadian inventories of cattle and calves

Reflecting the closure of export markets to Canadian live cattle and beef following the discovery of BSE in Canada in May 2003, the national herd rose to a record 14.7 million head on January 1, 2004, up 8.7 per cent from a year ago. All provinces registered an increase, with Manitoba recording the largest gain of 16 per cent (Appendix Table 2). In Alberta, which is the largest cattle producer in the country and accounts for nearly 40 per cent of the nation’s inventory, the herd rose by about 7 per cent. Meanwhile, in Saskatchewan, the second largest producer with a 20 per cent share, the count rose by 12 per cent.

The increase in cattle inventory is likely temporary. If the U.S. border remains closed to Canadian live cattle exports, then the nation’s inventory will have to shrink eventually to adjust supply to demand. With the uncertainties regarding the reopening of the U.S. border, some Canadian producers may decide not to replace their slaughtered cattle, or may opt to close their business altogether.

Canadian inventories of beef

Domestic inventories of frozen and chilled beef and veal rose as one might expect, reaching an all-time high of 43,000 tonnes in October. However, with the partial opening of the U.S. border, beef inventories fell in the subsequent two months (Appendix Table 3). Nonetheless, the December inventory was still 55 per cent higher than the year-ago level. Beef inventories piled up in spite of reduced cattle slaughter activity since the ban in May.

As anticipated, Canadian cattle prices plunged in the wake of the first BSE case. Although domestic consumption remained steady, the closure of several export markets led cattle prices to tumble, with Alberta prices for slaughter steers down by 58 per cent in July from a year ago (Appendix Table 4 ). However, with the relaxation of the U.S. ban on Canadian beef in August, Canadian prices quickly turned around, so that by November 2003 prices were just 17 per cent lower than a year ago. These are prices in Canadian dollars. Expressed in U.S. dollars, prices in November were almost back to the level of a year ago (Appendix Table 5).

The late December announcement of the second case of BSE, however, halted the rebound in prices. Canadian dollar prices of Alberta slaughter steers fell by 2 per cent month-on-month in December and were 22 per cent lower than a year ago. These price drops not only reduced the sales revenues of producers across the spectrum of the cattle industry (from the cow-calf operators to the backgrounders and the feedlot operators), but also depressed the values of the producers’ cattle holdings. The latter affects the credit standing of producers with their financiers.

Prices paid by retail consumers, however, did not fall nearly as much – even allowing for the traditional lag between changes in cattle prices and retail beef prices (Appendix Table 6). Statistics Canada’s retail price index for fresh or frozen beef showed that prices were only about 10 per cent lower year-over-year in August and September, while using a one-month lag, prices for slaughter steers in Alberta were 58 per cent lower in July and August. And, retail prices in November were one per cent higher than their year-ago level, while prices in December were only slightly lower than the year earlier.

The reverse trend, with a lag, occurred in the United States. In Nebraska, prices of slaughter steers fell initially in June and July, but then climbed in each of the following three months, so that prices in October were more than 60 per cent higher than a year ago. Although cattle prices gave back some of the gains in November and December, the levels remained very high, with December prices still up 30 per cent from a year ago. In contrast to Canada, the impact of the higher steer prices did show up at the retail market, with December prices for beef and veal up by 23 per cent from a year ago (Appendix Table 7).

Canadian cattle farmers’ cash receipts

Cattle farmers’ cash receipts, which include both gross income of farmers and government payments, tumbled to $5.2 billion in 2003, from $7.7 billion in 2002 (Appendix Table 8). The total included $582 million paid out by the federal and various provincial governments last year, as assistance to the producers in response to the BSE crisis (Appendix Table 9). Over the past year, the federal government, working jointly with the various provincial governments, initiated two main financing programs to help the sector. In June, a $460 million disaster assistance program, with the cost shared on a 60:40 basis, was launched and the federal government extended an additional $36 million funding for this program in August. In November, the federal government launched an initiative to deal with the older cattle that need to be culled from herds. The federal government committed $120 million as base funding for this program. With provincial governments sharing the program on a 60:40 federal/provincial basis, the total assistance will reach $200 million. So far, the bulk of the money received by the cattle industry came from the first program. Only $250,000 was given last year from the second program. The provincial governments also had some assistance programs of their own, which in total provided $138 million last year.

Two programs will also be available to help the industry starting in 2004. In March, the Canadian Agricultural Income Stabilization Program (CAIS) will begin to replace the less comprehensive Net Income Stabilization Account (NISA). CAIS is a government program designed to protect farmers from both small and large drops in income. Producers and the governments will share the cost of replacing the lost income, with the share of the latter increasing as the losses deepen. In April, beef producers will begin to receive payments from the $680 million industry support program announced by Prime Minister Paul Martin on March 22. The assistance will be a direct payment of up to $80 per eligible cattle on inventory as of December 31, 2003. All cattle are eligible except mature cows and bulls, which are covered by another program. In addition to the $680 million, a further $250 million will be made available to all agricultural producers as bridge financing to CAIS. (Government support payments will be discussed again towards the end of this report.)

Impact on the Related Sectors

There are four primary segments in cattle and beef production: the cow/calf operation, the stocker or backgrounder operation, the feedlot operation and the packers/processors. The cow/calf operators are the traditional ranchers and farmers who are in the business of breeding cows and producing calves. The gestation period for cattle is approximately 283 days. Once the calves have been weaned at six to ten months and have reached 300 to 600 pounds, they are sold to the stockers or the backgrounders. The backgrounders will fatten the calves to bring them to 600-800 pounds before they go into the feedlots at 8-14 months. At this point they are called feeder cattle. The feedlot operators buy feeder cattle and bring them to a slaughter weight of 900-1,400 pounds. The cattle reach these weights at 12-22 months. Then they get sold to packers or processors who slaughter the animals and process the carcasses into wholesale cuts. Wholesale cuts are sold as boxed beef to further processors, retailers or food service operators who further process them into retail cuts or value-added products which are sold to consumers.

Feedlot operators suffered from both a tumble in prices for fed cattle prices and a drop in volumes of their business. In Alberta and Saskatchewan, which feed about 80 per cent of the country’s “finished” cattle, the number of cattle on feed, which declined in 2001-02 due to a drought, dropped even more in the immediate aftermath of BSE1 (Appendix Table 10). The term “finished” refers to cattle ready for slaughter. The low point was reached in September 2003, when the number of head on feed dropped to 339,000, or 42 per cent lower than the year before. It bounced back gradually over the next few months, reaching 668,000 head in December. Nonetheless, that number was still about 25 per cent lower than the year before. In January and February of 2004, the numbers reversed course and fell again. By February, the number of cattle on feed was almost 44 per cent lower than the year before.

Impact on Packers

The impact of the BSE crisis on packers has been very controversial. Packers have been accused of “gouging” and “profiteering” in the midst of the current crisis because producers were paid very low prices for their cattle, but beef prices to retail customers did not decline significantly. This implied wider profit margins for either packers or retail vendors. In a meeting called by the House of Commons agriculture committee in August of last year, executives of packer plants admitted that they had been profitable lately. However, they pointed out that it would only partly compensate them for the tremendous losses incurred during the first few weeks of the crisis when they were stuck with cattle purchased at pre-May 20 prices. They also operated at very reduced levels during the early weeks of the crisis.

Impact on Renderers

The rendering industry, which is not well-known to the public, has been greatly affected by the BSE crisis. This industry serves not only the cattle industry, but also other livestock industries (hog, etc.), butchers, supermarkets and restaurants in handling their by-products and wastes and turning them into useful materials. Rendering is a cooking and separating process that uses raw materials such as bone, fat, hides and feathers to produce purified fat and protein products. The portions of animals not fit for human consumption are cooked at high temperatures to remove moisture, kill bacteria and separate the fat from the protein. The fat is used traditionally in making candles and soaps. It also has other uses, such as in the manufacture of pet food and livestock feed and is a source of fatty acids and glycerin for the chemical industry. The protein is used in the manufacture of cosmetics and is sold to producers as a source of high quality protein (such as for swine, poultry and pet foods).

The BSE crisis has forced changes in the rendering industry and still continues to transform it. While the renderers used to pay a fee to producers for handling and obtaining their animal by-products and dead stock, now the reverse has happened. Producers now pay the renderers for this disposal service, because the renderers have lost most of their export markets for the rendered products. Moreover, after the BSE discovery, the Canadian government placed greater restrictions on the handling of specific risk materials, such as cattle brain, spine, etc., which essentially excluded them as raw materials for rendering. These specific raw materials now go to landfills.

Nevertheless, there is still need for the rendering service, since the raw waste has to be reduced in volume before going to the landfills. Nonetheless, the industry is looking for new uses for rendered products. The industry thinks that biodiesel for oils and new fertilizers for the proteins offer some future economic possibilities.

Impact on Truckers

Truckers who haul cattle, or deliver the boxed beef, have lost a great deal of their business because of the U.S. ban. In a panel discussion hosted by the Calgary Chamber of Commerce last July, it was reported that trucking companies in Alberta had lost at least 60 per cent of their business, although it is unclear whether the term “business” means shipments or revenues. Meanwhile, Ontario’s livestock transporters have reported a decline of as much as 85 per cent in revenues, as there is limited opportunity for them to shift to other types of freight, given the specialized nature of their equipment. Regardless, conditions probably improved somewhat in recent months in reaction to the partial opening of the U.S. border to exports of Canadian beef.

Since May 20, 2003, Canadian feed companies have noted that U.S. tests for possible feed contaminants have become very strict. If there is a contaminant, or even suspicion of a contaminant (such as a hair or a filament of a feather in a feed), the shipments get turned back. This has probably stopped some feed exports. The increased vigilance on the part of U.S. authorities stems from the fact that BSE is believed to be spread by recycling meat and bones from infected animal back into the cattle feed. Canadian and U.S. authorities have banned giving such feed to cattle, but still allow it to be fed to other livestock. The threat of cross-contamination exists because the feed can get mixed up inadvertently on farms.

Impact on Dairy Farmers

Although dairy farmers are in the business of producing milk, they have been directly hit by the BSE crisis. The fallout on dairy farmers is due to the fact that when dairy cows are culled after their productive stage, they are either slaughtered for their meat or they are sold live for export. According to the Canadian Cattlemen’s Association, dairy farmers, on average, cull from 20-25 per cent of their herd a year, compared to a 10 per cent culling rate in a beef herd.

The closure of export markets to Canadian live cattle meant that there is no export outlet for the cull dairy cows. They all have to be absorbed domestically, and that has led to severely depressed prices for these animals. Moreover, when the U.S. market was reopened to boneless beef from cattle younger than 30 months, it excluded dairy cows, as they are culled at an average age of five years. Sales of culls and bred heifers represent up to 20 per cent of the income of an average dairy farm. In most cases, sales of those animals often amount to the net profit for the year for a dairy farm.

Some dairy cattle are also exported to the United States for breeding purposes, but they constitute only a tiny portion of the total. Dairy farmers have also lost some important export markets for their embryo sales due to the BSE crisis. Although Mexico has now reopened its border to Canadian embryos, China remains closed.

The fact that BSE2 was a dairy cow, while BSE1 was a beef cattle, has nothing to do with the hardships being experienced by dairy farmers. Scientific research shows that the milk and dairy products from a herd with BSE represent no risk in terms of public health.

Impact on Lenders

So far, loan delinquency has not been a major issue to the lenders. Lenders have been sensitive to the plight of the catttle and beef industry. As a result, in many cases financial institutions have been willing to delay payments and/or restructure loans. Clearly, the situation calls for increased flexibility to allow farmers to ride out the storm. The challenge for lenders is differentiating between those in financial hardship due to BSE and those that would have run into trouble meeting their financial obligations because of poor business practices. Accordingly, most decisions are being made on a case-by-case basis.

There are other repercussions of the BSE case in Canada that will not be expounded here. Suffice it to say that the plunge in cattle prices in Canada has had a negative impact on domestic hog and pork prices and a consequent redirection of Canadian hog exports to the U.S. market. Foreign markets were also affected by the BSE case, as the international ban on Canadian cattle and beef benefited other foreign producers such as Australia, New Zealand and Latin American countries.

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