First US Case of BSE: Implications and Producer Decisions

John D. Lawrence, Extension Livestock Economist and Director, Iowa Beef Center

On December 23, Agriculture Secretary Ann Veneman announced the first-ever suspected case of BSE (Bovine Spongiform Encephalopathy) in the U.S. is being investigated in Washington state. One Holstein cow was reportedly tested Dec. 9 when the animal was presented at a slaughter facility in Washington state.  The animal was a "downer" and was tested as part of the routine slaughter surveillance program.  Veneman said the cow tested "presumptively positive" for BSE, commonly known as mad cow disease.

The brain and spinal cord, which are the potentially infected tissue, were rendered and did not enter the food supply. The infectious agent of BSE has never been found in muscle cuts of beef so the risk to consumers remains very low.

Market implications

Market implications are difficult to anticipate, but some reactions are known or can be anticipated. It is also important to sort out short-term shock to the market from the longer-term fundamental supply and demand implications. It is also likely that markets and prices will evolve over time in reaction to announcements about trade negotiations, consumer reactions, and possible government compensation programs. A few factors to watch:

· Markets are thinly traded during the Christmas and New Year holiday and thus prone to volatility. The Chicago Mercantile Exchange had planned and will trade only until noon on Wednesday. There will likely be smaller volume on Friday as traders take a holiday. Some beef packers had already planned reduced hours because of tight beef supplies and the holiday. For example, Tyson had planned earlier in the week to close Wednesday through Sunday. Others may do the same and this cooling off period may help the markets.

· Japan and South Korea announced that they would suspend imports from the US at least temporarily. Other trading partners are expected to do the same. Some countries such as Mexico that, like the US, accept minimal risk products from Canada (boxed beef from cattle under 30 months of age) may continue to accept these products as soon as packers and USDA establish as system to verify age of the cattle.

· Domestic consumers account for the purchase of approximately 90% of US beef production, and thus their confidence in beef and reaction to the announcement will be significant. Canadian consumers continued to buy Canadian beef. US consumers have been consuming Canadian beef as well. In 2002, 8 percent of US beef was from Canada and the US began to import beef from Canada September 1, 2003.

Different from Canada

Many people remember what happen to cattle prices in Canada when they found a single cow with BSE earlier this year. Prices fell from $107 CND to near $30 CND in eight weeks. However, there are important differences between US and Canada cattle industries.

· More than 50% of Canadian beef is exported as beef or live cattle each year, and 80 percent of their exports, 40 percent of their total beef, go to the US. This massive market closed instantly with their May 20^th announcement of finding one cow with BSE.

· The US exports approximately 10 percent of the beef we produce and we import a slightly higher quantity. Thus, the US is in a much better position to store or eat our way through the problem. Imports will be expected to decline as our trading partners see no incentive to sell into the US and ship more to our export markets like Japan and South Korea. Our supply and demand will return to equilibrium more quickly that it did in Canada.

· US prices will still decline due to the export restriction. The US benefits from trade or we would trade in the first place. The US exports a higher value product (middle meats) and imports a lower value product (lean trimmings) from Australia and New Zealand.

For more information about the Canadian cattle industry, how it reacted to their BSE crisis, and their national cattle identification system see the article at http://www.card.iastate.edu/publications/synopsis.aspx?id=500

Producer strategies

When there is significant uncertainty in the market buyers become very conservative and sellers often desperate. Prices are expected to decline and bid prices will likely fall significantly. Large price differences may emerge as some sellers are more willing than others to move cattle at any price. Sellers will need to do a much better job marketing because the chances of widely differing prices are much higher than they were before December 23. Look for information and contact others that are selling to see what bid prices are available.

It will take a few days for retailers to determine how consumes will react, but they will not likely want to hold inventory in case consumer purchases do decline. Likewise, others in the supply chain are reluctant to hold inventory if its value is going to decrease. Packers are expected to bid conservatively also. Feedlots may not refill pens until they have a clearer picture on what prices will be for this summer. Everyone will take a wait and see attitude.

Waiting at least a few days is probably a good strategy as markets will not function as normal until there is more information on how consumers will react. Feedlots are very current at this time and while holding cattle a few days will add to supplies, the industry is in a much better position than is was a year ago. Feedlots have estimated breakevens in the near $80/cwt for yearlings to be sold in January and they trend higher through the spring. Feeder cattle producers that waited until after the first of the year to sell their calves may want to wait a little longer.

While waiting for markets to sort out is advised, the risk is that prices trend lower as time passes. In Canada, there was no market the first week following the announcement. Prices dropped 25 percent the first week they traded and trended slightly lower for three weeks and then dropped dramatically once the Canadian government announced a partial compensation program. It paid producers part of the difference between US and Canadian prices. As you might expect fed cattle prices did decline but the producer price did not decline as fast.

Futures markets are expected to trade sharply lower on Wednesday and probably Friday. Options may be a way to protect a producer from sharply lower prices, but they will be expensive due to the increased volatility in the futures. Producers that were pre-approved for Livestock Revenue Insurance will be able to buy coverage on Wednesday base on prices before the announcement. There is an upper limit on how much insurance can be sold and may hit the limit.

Summary

Stay tuned. We have no other experience like this to fully gauge how market participants and consumers will react. The market will be sensitive to any new information, both negative and positive, and will likely be volatile for quite some time.

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