AGRI Committee Report

BSE Impacts

The impacts of BSE can be grouped into those that affected the beef industry in the short term and those that will affect it in the longer term. The short-term impacts of BSE ensue from the closing of borders across the industrialized world to Canadian beef and cattle. These impacts fell disproportionately on cattlemen and other livestock producers, but also on packers, their employees and suppliers. They are one-time burdens and they will remain burdens until the borders are once again open. The long-term impacts ensue from the imposition of more regulations on the processing of beef to ensure food safety. These impacts have fallen disproportionately on packers, but to some extent on cattlemen and consumers. This burden will be borne in perpetuity. Beef cattle operations have already experienced significant attrition over the last 30 years, dropping from 159,387 in 1971 to 90,066 in 2001, as displayed in Figure 2.2. This attrition will likely continue in part because of the immediate impacts of BSE, despite government assistance; in part because some of these long-term BSE impacts are likely to be passed down the value chain from packers to cattlemen; and in part because other longer-term trends are likely to continue.

Short-term Impacts

The closing of borders across the industrialized world to Canadian beef and cattle imposed losses in a variety of ways on many Canadians and their businesses. For example, about 25,000 head of cattle per week normally destined for the United States were put on the Canadian market — after the packers had ratcheted up their production to approximately 90% of capacity in the fall and, therefore, had little ability to absorb this excess supply (see Figure 3.1). As a result, cattlemen and feedlots incurred substantial losses on the sale of their cattle. For the cattle they could not or chose not to sell, they will incur greater feed costs and will eventually suffer significant price discounts on their aging cattle when they do sell. Packers also incurred demurrage and destruction costs on some of their product, while incurring high storage and refrigeration costs on backlogged products held in container yards and bonded warehouses.

Although a large number of different parties suffered losses because of the BSE crisis, some of those losses were a gain on the balance sheets of other Canadians. For example, the extra cattle feed costs incurred by cattlemen are revenues to cattle feed companies — this industry will actually benefit from the BSE crisis in the short term. The warehouses and container yards that stored the backlogged beef of packers also gained as a result of the BSE crisis. The customers of Canada’s food banks gained more than $1 million of donated beef products. For this reason, summing the gains and losses of the different parties affected by the BSE crisis is not an efficient way of determining the cost of the BSE crisis to Canada. Such a list does, however, serve to indicate to government which groups may deserve emergency assistance and compensation.

Figure 3.1
Canadian Weekly Slaughter Numbers at Federally Inspected Plants

Source: Canfax, George Morris Centre

Another but very crude way of estimating the adverse economic impact of BSE on Canada for 2003 is simply to calculate Canada’s lost beef and cattle exports in 2003. This can be done by subtracting Canadian beef and cattle exports of $1.8 billion in 2003 from the estimated value of Canadian exports had BSE not been detected. Since exports in 2003 prior to 20 May were at levels similar to their average performance in the same period over the past three years, it would not be unreasonable to substitute Canada’s average export performance of $3.6 billion over the past three years for what Canada would have exported in 2003 in the absence of the BSE crisis. This methodology suggests that the BSE crisis cost Canada $1.8 billion in lost beef and cattle exports.

However, two caveats should be understood before using this estimate. Some beef products previously destined for the lucrative export market, such as short ribs bound to Korea, have been diverted post-BSE to lower-value domestic ground beef markets. Therefore, packers were able to recoup some lost export sales through domestic sales. In this sense, the $1.8 billion estimate is too high. At the same time, the loss of approximately $1.8 billion in export receipts by Canadian packers and cattlemen would have a negative impact on aggregate spending that would ripple through the Canadian economy, with the ripples being largest in cattle country. In this sense, the $1.8 billion estimate is too low. Caution is thus warranted when quoting the $1.8 billion estimate.

Long-term Impacts

The long-term impacts of the BSE crisis will ensue largely from the imposition of more regulations on the processing of beef and the separation of cattle to ensure food safety. The direct beneficiaries of these regulations will be Canadian consumers. Secondary beneficiaries will be the veterinarians whose skills will be in higher demand, and the regulators who will administer the new health and safety regulations. Canadian packers will bear the brunt of these added costs, but to the extent that these costs can be passed up or down the value chain, cattlemen and consumers may also lose. Presumably, from the viewpoint of ensuring health and safety, consumers will gain more than they lose and will be net winners from the new regulations.

Although it is still too early to estimate the added processing costs faced by packers, they claim the following cost increases:

The George Morris Centre speculates that the average unit operating costs for Canadian packers of about $150 per head pre-BSE will be about $250 per head post-BSE. Given this huge increase, it is uncertain whether all 19 federally inspected packers will remain economically viable. In the longer term, some packers may have to leave the business, find a new owner, or merge with an existing operator.

In the intermediate term, however, it appears that Canadian packers are financially viable. Indeed, the excess cattle supply of 25,000 head per week has led to huge increases in packer gross margins,⁴ far more than the estimated average operating cost increase of $100 per head. A report produced by the Alberta Cattle Feeders Association and presented to the Government of Alberta, entitled Consolidated Beef Industry Action Plan: Actions for Industry if Borders Remain Closed, states that the average gross margin received by Canadian packers for the period 22 September 2003 to 16 February 2004 was $431 per carcass, as compared to $144 per head one year earlier and to CAN$208 per head for the U.S. packer industry in the same period. The report claims Canadian packer margins are 200% higher than one year ago and 107% higher than in the United States in the same period.

If these estimates are correct, they paint a picture in which Canadian packers may have profited from the excess supply of Canadian cattle in the intermediate period between the immediate aftermath of the BSE crisis, wherein almost everyone including packers suffered, and the longer term wherein packers will likely suffer the most. Such findings, however, should be approached with caution. For example, the George Morris Centre’s gross margin estimates assume Canadian packers receive the list price for some of their products sold, even when these products are discounted from their list prices. Moreover, cow slaughter or production declined 327,630 head in 2003 from 2002 (see Figure 3.1), thereby raising packers’ cost of capital per head by 10% on average.

The Federal-Provincial BSE Recovery Program

In the weeks following the closing of borders to Canadian beef, the packing industry reduced its weekly cattle slaughter to 30,000 head, down from an average of slightly less than 70,000 head per week in May (see Figure 3.1). The BSE crisis resulted in a huge discrepancy in the prices for fed cattle that feedlot operators were asking and packers were offering. Packers needed to bid lower prices for fed cattle because they were getting less for their product and their costs were increasing exponentially. Feedlots, on the other hand, were reluctant to sell fed cattle at the lower prices packers were offering because they were unwilling to realize the huge losses these prices implied.

With the aim of ending this stand-off and helping to unplug the backlog of cattle, on 18 June 2003, federal, provincial and territorial agriculture ministers announced a program to provide $500 million in temporary assistance to the beef industry. The Federal-Provincial Governments BSE Recovery Program (BSE Recovery Program) would pay producers the difference between the weekly average U.S. fed cattle price (in Canadian dollars) and the weekly average Alberta market price, up to a maximum of 50% of the U.S. reference price. The federal and provincial governments shared the cost of the program on a 60:40 basis; that is, 60% federal and 40% provincial.

The BSE Recovery Program had two primary objectives: (1) encourage feedlots to sell in a depressed market; and (2) increase the volume of slaughter at packing plants. The program was fully subscribed for, and ended in August. Measured against the two stated objectives, the program was a success. As shown in Figure 3.1, weekly slaughter rates gradually increased to more than 60,000 head by the end of August and, with the opening of the U.S. border to Canadian boxed beef in September, they have hovered about this level ever since.

Feedlot sector operators were able to maintain prices closer to historical levels as a result of the BSE Recovery Program. This, in turn, instilled confidence in the cattle industry and allowed feedlot operators to bid for fall calves at prices comparable to those of 2002. Figure 3.2 indicates that even though Alberta fed cattle prices declined to a recent low of $35.06/cwt, after factoring in government payments, feedlot operators’ receipts did not fall below $80/cwt. These government payments significantly reduced the impact of depressed prices resulting from the oversupply of cattle and helped maintain the viability of many feedlot operations in the summer when borders were closed to both live cattle and beef.

Figure 3.2
Estimated Fed Cattle Receipts per Head

Source: Alberta Agriculture, Food and Rural Development, Review of Pricing in the Beef Industry,
March 2004, p. 8.

The BSE Recovery Program is not without its critics. Some commentators have noted that the program’s design, which specified a program termination date, encouraged a rush of cattle to the slaughterhouse, depressing prices further than they would have been in the absence of the program. There is some truth to this criticism, but it masks the more important consequences of the program.

The Alberta fed steer price declined 70.2% from its peak of $117.52/cwt in the second week of February to its trough of $35.06/cwt in the fourth week of August 2003. By 20 June 2003, the Alberta fed steer price had already declined 28.6% to $67.16/cwt, but by the week following the announcement of the BSE Recovery Program it had fallen another 18.7% to $47.02/cwt. This price fell another 14% by the fourth week in August, at the end of the program, and it has generally risen from that point forward. These price developments suggest that the BSE Recovery Program did indeed cushion the drop in prices received by cattlemen and feedlot operators, but because of the oversupply of cattle, packers indirectly benefited in the order of $20.14 to $32.10/cwt per head for the cattle they purchased throughout the summer of 2003.

Such a conclusion, however, overstates the case. It should be recognized that there is a seasonable component to the Alberta fed steer price: it declines throughout spring and summer every year, only to recover each fall and winter. For example, the Alberta fed steer price, on average, declined 23% from its peak to its trough in both 2001 and 2002. The peak price was attained in the second and third week of March, respectively. The trough price was recorded in the fourth week of September and the second week in July, respectively. The percentage decline in 2003 was, therefore, 47% more than in the previous two years and the depressed price was more protracted, as it lasted six and a half months compared to an average of five and a quarter months in the previous two years. In light of these two performances, it seems reasonable to conclude that the Alberta fed steer price would have likely declined in the summer months of 2003 in the absence of the BSE Recovery Program, though not as starkly as 18.7% in one week from the announcement of the program.

Had the government program not tied its payment to prevailing prices and the slaughter of cattle, thereby focusing the program’s purpose solely on partially compensating cattlemen and feedlot operators for their losses, the industry’s recovery would likely have been slower. Fewer cattle would have been slaughtered, meaning that more would have accumulated in feedlots, thus increasing feedlot operators’ costs and necessitating some discounting of the market price for the older animals.