FROM DREAM TO NIGHTMARE FOR CATTLEMEN
by Dan Manternach
For cattlemen, 2003 turned from dream to nightmare in a week. The rise in beef demand as a result of the low-carbohydrate Atkins diet craze was accelerated by the discovery of one case of BSE (mad cow disease) in Canada in May, shutting U.S. borders to Canadian supplies. The strong demand, coupled with shrinking supplies due to the import ban and falling domestic production, caused cattle prices to soar.
But then the dream turned to nightmare on Dec. 23 when a mad cow case was confirmed in Washington state, traced to a single cow that had been among a herd purchased from Canada in August of 2001. The first shoe to fall was the near immediate loss of virtually the entire U.S. export market.
The price impact hit first at cattle futures markets, where Chicago Mercantile Exchange officials moved quickly to expand daily trading limits in hopes buyers looking for bargains would help panicky longs exit their positions. But all traders had to go on was the recent experience in Canada, where prices dropped 65 percent in just eight weeks following the discovery of a mad cow case in Alberta. Weekly cattle auctions had to be canceled because there was no way for buyers to hedge their purchases. It took a second day with a $5 limit before nearby contracts would trade — and there was even a $7.50 limit on standby.
But analysts held out hope that the U.S. train wreck might not be as bad as Canada's. For one thing, Canada moved 60 percent of its production through export markets. For the United States, the figure is 10 percent. Even if domestic demand held up, Doane analysts calculated that having to absorb a 10 percent boost in domestic supply could be expected to drive prices down about 17 percent, to the upper $70s to low $80s.
Initially, the break was worse than that because there was a lot of skepticism that demand would hold up. February futures bottomed out around $71, 21 percent off the $90 area they were trading when the report hit. But domestic demand has held up. And since then, futures have already gained back more than half that loss, confirming the Doane analysis.
Media and Consumers Hold the Key to Long-Term Damage
The one piece of comfort American producers can take from the Canadian experience is that the Canadian media did a remarkably responsible job of educating consumers on the extremely low risks posed to the nation's beef supply. As plunging cattle prices eventually led to a glut of bargain-priced beef, Canadian consumers readily boosted consumption.
Indeed, the initial fallout here has been just as encouraging. Mass media ranging from CNN to USA Today have done a balanced job of reporting the facts, stressing that the infected cow came from Canada, that the brain and spinal cord (where BSE primarily resides) did not enter the food chain at all, and that the rest of the meat from that cow (and the meat it was co-mingled with) has been tracked down.
Even more encouraging, the Wall Street Journal reported that officials from Wendy's, McDonald's, and Burger King say they have seen no impact on demand so far. Wal-Mart said sales of fresh and frozen beef during the first week following the announcement were "in line with projections." The same article cited a consumer poll showing that while Americans aren't planning to reduce beef consumption, the percentage "concerned" about mad cow disease has risen to 71 percent from 56 percent in early December. And in the ensuing weeks, the poll proved accurate. Beef demand has held up well.
Other Mitigating Factors Offer Hope of Damage Control
USDA moved very quickly to make several critical policy changes. First, meat from downer cattle (those that cannot stand for whatever reason upon arrival at the packing house) cannot enter the human food chain, regardless of cause. Second, meat from animals suspected of BSE cannot enter the human food chain until test results come back negative. Third, specific risk material (skull, brain, eyes, spinal cord, etc.) cannot enter the human food chain in any form, and new guidelines for processing carcasses are coming to prevent inadvertent contamination of meat from such parts. The only controversial issue remaining is on the use of meat and bone meal (MBM). USDA will most likely prohibit specific risk material from being used in the manufacture of MBM to avoid inadvertent feeding to cattle. But some want a ban on the manufacture of MBM altogether, which science suggests would be overkill.
Another thing going in the cattleman's favor is the low-carb diet craze. You see fast food merchants like Hardee's touting their low-carb burger (wrapped in lettuce instead of a bun). You see Miller Lite boasting "half the carbs" of Bud Light. A diet craze that lets marketers turn even burgers and beer into a "healthy choice" has got a lot going for it. It'll take more than one mad cow to stop it.
Biggest Threat Comes From Opportunists
It didn't take long for producers of "natural" beef to fan the fears, hoping to win new customers, even though the mad cow incident had nothing to do with the use of hormone implants or antibiotics. It didn't take long for another group to call on USDA to close the U.S. border to all imported beef, cattle and livestock feed "until the circumstances surrounding the suspected case are fully disclosed and understood" — but adding this would help drive up domestic prices as an added benefit. It didn't take long for some to call for a ban on the use of meat and bone meal altogether, whether it contains brain and spinal tissue or not (which would punch soybean meal prices sharply higher).
And predictably, radical animal rights groups such as PETA (People for the Ethical Treatment of Animals) will try to use the mad cow scare to their advantage. Watch in coming weeks for PETA ads featuring gun-wielding chickens, pointing right at you with the caption, "If the beef doesn't kill you, I will!" The ads outrageously purport that even pork and chicken can transmit a variant of mad cow disease to humans.
Our Prognosis So Far
For now, we expect there will be only a modest reduction in domestic meat demand, and the biggest impact will be on exports. With potential increases in poultry and pork production offsetting the cut in beef, there will probably be little effect on feed demand.
It is too early to know how big an impact this will really have on the farm economy. The cattle sector is a huge source of revenue for the economy, accounting for about 20 percent of total cash receipts. Even under a fairly optimistic set of assumptions, the case of BSE could cut farm cash receipts by as much as $5 billion to $10 billion in 2004. This would push net cash farm income back toward the mid-$50 billion range, down from near $65 billion in 2003.
If the beef industry and government continue to act wisely and quickly, and media coverage remains fair and balanced, we could win our export market back within a few months and the losses could be less than that. But if they don't, media coverage will turn ugly, the opportunists will be emboldened, and it could be far worse as they begin to frighten domestic consumers away from beef along with the importing countries.
Dan Manternach is vice president of ag services for Doane and serves as editor and publisher of Doane's Agricultural Report.