AGRI Committee Report

Canadian Cattle Prices and the BSE Crisis

Following the implementation of the FTA in 1988, and the NAFTA in 1994, the Canadian, U.S. and Mexican markets for cattle and beef became fully integrated into a North American market. As one industry stakeholder put it:

The market for cattle and beef in Canada is a competitive free market, and prior to the closure of international borders with the discovery of one case of BSE in Canada, the market really was a fully integrated market with the United States of live cattle, beef, and veal.

Jim Laws, Canadian Meat Council
Standing Committee on Agriculture and Agri-Food
Evidence No. 4-16:45, 3rd Session
37th Parliament
Ottawa, 23 February 2004

Canada subsequently enjoyed a comparative advantage in cattle and other live animals and a competitive advantage in beef and beef products. These economic advantages came through in the trade data, as Canada became a major net exporter of both these goods. Canada is, in fact, the world’s third leading exporter of beef and cattle.

An integrated North American beef and cattle market has its advantages and its disadvantages. On the positive side, Canada has enjoyed greater wealth and prosperity by focusing and specializing its resources, as well as attracting substantial foreign capital, in this industry. Canadians also enjoy similar prices of beef and cattle to Americans, as an integrated market will tend to eliminate price differences (that is, market forces are arbitraging prices across the different regions of North America). On the negative side, Canadian cattlemen, feedlot operators and packers are vulnerable to disruption should the United States shut its borders to Canadian beef and cattle exports, which, on 20 May 2003, in fact happened.

That event led to an oversupply of both cattle and beef in Canada and to an undersupply in the United States. In fact, the U.S. cattle inventory on 1 January 2004 totalled 94.9 million head. This is the lowest cattle inventory level in the United States since 1952.  Later, when the U.S. market became open to boneless beef cuts from cattle no more than 30 months of age, the Canadian oversupply remained only in cattle. The U.S. ban on Canadian cattle had the following impact:

There is no part of our industry more negatively affected now than feedlot producers. Their live cattle are banned from the U.S., and this has resulted in significant oversupply of live animals in Canada over the past several months. … The oversupply of cattle in Canada has put significant downward pressure on producers’ bottom lines. It’s a simple equation: more cattle with no increase in demand means lower prices.

Willie Van Solkema, Cargill Foods
Standing Committee on Agriculture and Agri-Food
Evidence No. 7-15:35, 3rd Session 37th Parliament
Ottawa, 10 March 2004

In other words, the marketplace did what it always does in face of an oversupply situation. Industry participants allowed or forced a drop in the prices of cattle to stimulate domestic demand and reduce the number of surplus cattle. In the absence of the U.S. market for cattle, holding prices at pre-BSE levels would have preserved the oversupply, substantially raised feed costs and led to the financial ruin of many cattlemen. The U.S. market did the opposite. Industry participants raised cattle prices to the benefit of U.S. cattlemen, but to the detriment of U.S. packers. The de-integration of the North American market for cattle meant that the prices of cattle in Canada and the United States would no longer be arbitraged; they would differ substantially. Some of these impacts were quantified in a letter tabled with the Committee:

Since the U.S. border with Canada was opened last fall to boxed beef from Canadian cattle under 30 months of age — but remains closed to the import of those very same cattle — the devastation to our domestic livelihood is staggering:

Cattle processing volume in the U.S. has fallen 12% … The drop started immediately after the U.S. border was opened to Canadian boxed beef …

Canadian cattle have sold for an average of $275 per head less than comparable domestic cattle — enabling Canadian processors to undercut U.S. processors in our own marketplace.

In the past four months alone, we estimate that the financial loss to a single beef processing plant — Greeley, Colorado — exceeds $100 million from diminished economic activity due to declining production levels.

John Simons, President and CEO, Swift & Company
Letter of 3 March 2004
Standing Committee on Agriculture and Agri-Food
3rd Session, 37th Parliament

In the opinion of most witnesses appearing before the Committee, the market responded. In the words of one witness:

The market is functioning, albeit not as it would arbitrage if the border was open for live cattle.

Garnett Altwasser, Lakeside Packers Ltd.
Standing Committee on Agriculture and Agri-Food
Evidence No. 7-15:50, 3rd Session 37th Parliament
Ottawa, 10 March 2004

The Committee recognizes that the market did respond to the oversupply situation, but that this response was grossly inequitable to some players in the industry. The government, whether federal and/or provincial, needed to intervene and redistribute the hardship inflicted by the U.S. embargo.

Comparative Advantage in Beef and Packer Gross Margins

In the immediate aftermath of the discovery of BSE in Canada, the closing of borders across the industrialized world to Canadian beef had a devastating impact on Canadian packers. According to the Canadian Meat Council, Canadian packers lost an estimated $50 million during the first weeks of the BSE crisis. Once the U.S. embargo on Canadian boneless beef products from cattle no more than 30 months of age was lifted, however, the fortunes of Canadian packers rebounded. The change of circumstance was described as one where:

We have a huge surplus of cattle, we don’t have a huge surplus of meat. The meat has moved quite nicely through the system, given what we’ve been through … The packing plants are running flat out for their export markets, with as many cows as they can put through, and the meat’s not going into the freezer, not being stored some more, it is being consumed.

Scott Zies, Alliance for Fair Trade in Beef
Standing Committee on Agriculture and Agri-Food
Evidence No. 4-16:15, 3rd Session 37th Parliament
Ottawa, 23 February 2004

In other words, Canada’s oversupply of beef and cattle became simply a glut of cattle. Not surprisingly, both wholesale and retail prices of beef products that were headed downward throughout the summer had reversed course and were heading upward from September 2003 until 23 December when a case of BSE was found in Washington State. Nevertheless, Canadian consumers today still benefit from a very slight price advantage in some cases, according to at least one retailer:

The slaughterhouses are giving us just about the same prices as last year, maybe a little less. We take advantage of this, because there is a lot more beef this year, which means that when there are cuts on special, when the prices are lower, of course we use them for our specials. With the regular prices, the price is about the same, just a little lower than last year.

Paul Fortin, The Great Atlantic & Pacific Company of Canada Limited
Standing Committee on Agriculture and Agri-Food
Evidence No. 9-17:15, 3rd Session 37th Parliament
Ottawa, 22 March 2004

With wholesale beef prices approaching pre-BSE prices and cattle prices still mired at recent lows to eliminate the oversupply predicament, a significant comparative advantage has been inadvertently bestowed upon Canadian packers relative to their American competitors. American packers have been paying cattle prices well above pre-BSE levels since the crisis began, so Canadian packers can undercut American packers in their own beef market. As such, Canadian packers’ gross margins, and possibly profit margins, have soared to levels never seen before. One Canadian packer company described his situation as follows:

Our losses in May and June were horrendous. In July and August, we did make some money, and in September and October, yes. The question you have to ask yourself, though, is how you value your inventory. … If you valued the inventory at what the markets were before the BSE crisis, you made an awful lot of money. But if you value it on what the expectations are and take off the carrying costs and the value of keeping an office in Japan that cost us about $10,000 a week to keep operating, the question is out.

Lorne Goldstein, Better Beef Limited
Standing Committee on Agriculture and Agri-Food
Evidence No. 4-17:20, 3rd Session 37th Parliament
Ottawa, 23 February 2004

The financial data for 2003 are not yet in. In the wake of the BSE crisis, packers stated that they face a number of economic hurdles themselves:

The first variable that must be taken into consideration is the change in value of the Canadian dollar. Cattle are priced in North America in U.S. dollars. The Canadian dollar has appreciated 15%. That equates to 13¢ a pound live. That takes our 87¢ up to one dollar. Because of BSE, … we must bone out a considerable portion of the fronts on the cattle. This would add a cost of $20 to $30 a head or $2.00 to $2.25 per hundredweight. The other major factor is … that is we can’t collect on the export premium and … that equates to approximately $190 per animal. The other factor is the increased expense on the rendering. Rendering for the large companies was a revenue source. Today, it’s an expense or a wash. Another factor … Canadian packers trading boneless product into the U.S. today are being discounted a nickel to a dime a pound on triple A, or the U.S. equivalent grade would [be] USDA choice, and that reduces their revenues from $2.00 to $3.00 a hundred[weight]. You add all those factors up and you’re about $1.13.

Ben Thorlakson, Canada Beef Export
Federation
Standing Committee on Agriculture and Agri-Food
Evidence No. 9-16:30, 3rd Session 37th Parliament
Ottawa, 22 March 2004

One Canadian packer roughly calculated the financial impact of BSE on his operations in the following way:

I did a comparison in my company last week. My sale price on my meat last week was roughly $275 an animal less than it was a year ago. I compared what I was paying for steers, and I’m paying about $300 less. ... My operating costs are actually ... not doing as well in killing steers as I was a year ago.

Brian Nilsson, XL Beef
Standing Committee on Agriculture and Agri Food
Evidence No. 7-16:45, 3rd Session 37th Parliament
Ottawa, 10 March 2004

A Canadian retailer advanced an argument that the depressed cattle prices in Canada were the direct result of lost foreign markets for by-product carcass values:

With an animal that weighs about 1,200 lbs, by the time you’ve taken away the hide and the bones, there are about 450 lbs left, but there are a lot of products that are exported, such as tongue, heart, beef cuts called tri-tips … But now, that is what they cannot sell elsewhere, it is what they cannot sell abroad. That is why now farmers perhaps aren’t getting the price they should be getting for their animals.

Paul Fortin, The Great Atlantic & Pacific Company of Canada Limited
Standing Committee on Agriculture and Agri-Food
Evidence No. 9-16:00, 3rd Session 37th Parliament
Ottawa, 22 March 2004

The Committee, however, observes that Canadian packers’ production consistently approached, or sometimes exceeded, its slaughter capacity for a number of weeks this past fall. Moreover, in November 2003, Canadian packers exported as much boneless beef products to the United States as they did in November 2002, despite a 20% appreciation of the Canadian dollar vis-à-vis the U.S. dollar. Given the highly concentrated ownership structure of the packing industry, as shown in Chapter 2, the Committee is concerned that, beyond the possibility that the packing segment of the industry may be unduly profiting from the oversupply of cattle in Canada, the packers may, in fact, be exploiting their market (buying) power at the expense of Canadian cattlemen.

For this reason, the Committee began its hearings on the pricing of beef and cattle by meeting with the Commissioner of Competition Sheridan Scott. During that meeting, the Commissioner explained the parameters and limitations of the Competition Act. She then discussed the reasons why the Committee’s evidence of last year and its report of November 2003 did not provide sufficient grounds for the Competition Bureau to conduct an inquiry into the pricing of beef. The Committee understands that the Act does not address issues of fairness or unfairness per se. The Act focuses on the behaviour and business practices of the marketplace, notably on price conspiracies and abuse of dominance. Despite these limitations, the Commissioner also recognized that the BSE crisis had imposed a very difficult set of circumstances on the livestock market:

I don’t underestimate the huge impact. … I understand the major changes that are taking place in this market and the devastating effect it’s having on many people. So it’s difficult for me to come here and say to you that I’m limited by my legislation, but the reality is I am limited by my legislation. I’m trying to be as helpful as possible by finding provisions that we can pursue to look at how we can help address this matter …

Sheridan Scott, Commissioner of Competition
Standing Committee on Agriculture and Agri-Food
Evidence No. 2-16:10, 3rd Session 37th Parliament
Ottawa, 16 February 2004

The Committee believes that all aspects of the livestock marketplace must be carefully monitored in the current crisis. The Committee exercised its privilege of asking the Minister of Industry to conduct an inquiry by approving the following motion:

That this Committee requests the Minister of Industry to instruct the Competition Bureau to conduct an inquiry under Section 45 of the Competition Act on the pricing of beef at the slaughter, wholesale and retail levels in the context of the BSE crisis in Canada.

The Committee notes that the Minister of Agriculture and Agri-Food also requested that the Minister of Industry ask the Commissioner of Competition to undertake such an inquiry, but the Minister has not yet done so. Given the information contained in this report and in an accompanying letter to the Minister of Industry, the Committee recommends:

RECOMMENDATION 1

That the Minister of Industry instruct the Commissioner of Competition, under section 10 of the Competition Act, to conduct immediately an inquiry into the pricing of slaughter cattle and beef at the wholesale level.

In the meantime, the Committee recommends:

RECOMMENDATION 2

That the Competition Bureau monitor the wholesale and retail pricing of beef, as well as the fed and feeder cattle prices, and that the Commissioner of Competition report periodically, or at the call of the Chair, to the House of Commons Standing Committee on Agriculture and Agri-Food.

The Competition Bureau, as a criminal and civil investigative body, does not have a mandate to undertake a study of the competitive aspects of an industry. Parliament has not seen fit to grant these powers to the Bureau. Yet the Committee would recommend such a study to be conducted to make more transparent the business practices of the cattle and beef products industry. When faced with a similar set of circumstances with respect to the petroleum and gasoline industry in 2000, the government chose to engage the Conference Board of Canada to conduct a very extensive and detailed study of the industry. The Committee requests the same to be done for the beef industry and recommends:

RECOMMENDATION 3

That the Government of Canada engage an independent body to conduct a comprehensive study of the competitive aspects of the cattle and beef products industry in Canada.

Government Financial Assistance Programs in Retrospect

In the face of an enormous oversupply of cattle in Canada and many financially strapped livestock producers, government intervention was seen as necessary to get the industry back on its feet. The crux of the problem was put to the Committee as follows:

The fact of the matter is, prior to that program, the industry was at a stalemate. We needed to buy the cattle cheaper because we were cut out of the U.S. market. The producer had his costs in these cattle and didn’t sell. If you go back through the kill volumes, there were six weeks where the kill volumes were very light; in fact, they were about half.

The bottom line is that the government money did not create cattle or take cattle away. The supply and demand for cattle remained the same, whether the government money was there or not. What the government money did was give the producer an assurance that if he sold the cattle to where they were going anyway, he was going to get a portion of the money to bail out his losses. The business started to operate and they started to move cattle.

Garnett Altwasser, Lakeside Packers Ltd.
Standing Committee on Agriculture and Agri-Food
Evidence No. 7-16:35, 3rd Session 37th Parliament
Ottawa, 10 March 2004

The federal and provincial governments’ $500-million BSE Recovery Program accomplished some of its objectives; for instance, it made possible the return to near-capacity production levels by Canadian packers and helped to reduce the oversupply of cattle in a timely manner. However, the program did not raise market prices for Canadian livestock that would have helped financially distressed livestock producers.

The Committee is also aware that another government program, the $200-million Cull Animal Program, does not meet the objective set by producers in terms of the oversupply reduction required. In a letter dated 9 March 2004 to the Committee, Dairy Farmers of Canada indicated that the cull rate for dairy herds “recognized by Agriculture and Agri-Food” is 25%. The program, however, applies only to 16% of the dairy herd. Although this program could alleviate the problem, it is not seen by the Committee as a solution to the oversupply of dairy cows and the low prices received by producers.

The Committee concludes that, overall, the BSE Recovery Program was flawed, not only in its design but also in one of its objectives. Given the program’s two stated objectives, the two levels of government were correct in specifying a date for the termination of the program. The deadline encouraged the quickest return to “business as usual” for the packer and processing segment of the industry, but not for livestock producers. The Committee believes, however, that the program should have given a higher priority to cushioning the impact of the oversupply of cattle on cattlemen and ranchers than to increasing the volume of slaughter at packing plants (the program’s second stated priority). Had this been the case, the optimal design of the program would not have specified a deadline for its termination. A specific date could only encourage cattle owners to sell their cattle prior to that date — rather than when it would be optimal to do so — to take advantage of the government payment. Only such a deadline could explain the almost 20% decline in the Alberta fed cattle price in just one week (the announcement week of 18-25 June 2003) and the price’s rise immediately after the program terminated. In the Committee’s view, the program should have tied and delivered the government payment directly to a cattle or livestock owner, with the program deadline being the date when the U.S. government lifts its embargo on affected Canadian livestock. In this way, the program would not have influenced the timing of the cattle being offered for slaughter, and the benefits of the program would have accrued largely to cattlemen and livestock owners. The benefits would not have been appropriated by the packers through further depressed prices throughout the summer.

On 22 March 2004, the Government of Canada announced its Transitional Industry Support Program, which will provide $680 million to cattle producers who have suffered from the prolonged closure of the Canada-U.S. border. The funding will be delivered as a direct payment of up to $80 per eligible bovine animal on inventory as of 23 December 2003. All bovine animals are eligible except for mature bulls and cows (cows that have calved and intact bulls older than one year). Similar measures will be available for producers of other ruminants who have lost access to the U.S. market.

The Committee also assessed the potential policy alternative of regulating a minimum price for cattle, but no support was found within the industry for such an intervention. Some witnesses stated that such a policy would not be in the best interest of the Canadian beef and cattle industry, nor in the interest of Canadian consumers.

Slaughter and Value-Added Products Processing Capacity

At the Committee’s hearings, it became clear that many industry stakeholders believe Canada would be better off with more domestic slaughter and processing capacity. As mentioned in Chapter 2, the packing industry has undergone considerable consolidation in the recent past, with plants and jobs disappearing to such an extent that there remain only three major players in Western Canada, and one in Eastern Canada. While this consolidation was occurring, increasing numbers of live cattle were being exported to the United States and, paradoxically, Canada was importing more boneless cuts.

The year prior [to BSE], we imported 130,000 tonnes of imported boneless cuts into this country versus 760,000 tonnes into the United States. If you compare the respective populations, we brought in two times the amount per capita. On the other hand, from the supply or the production side, when you consider that we have to export 60% to 70% of our product, and we have a much greater need to export than the Americans, here we are bringing in twice as much imported product as do the Americans.

Garnett Altwasser, Lakeside Packers Ltd.
Standing Committee on Agriculture and Agri-Food
Evidence No 7-16:00, 3rd Session 37th Parliament
Ottawa, 16 February 2004.

In the past three decades, the industry has forged a new equilibrium based on a domestic weekly slaughter capacity of about 65,000 head, a live animal export market of 25,000 head, and supplemental imports of beef products, of which the United States is by far the largest supplier. On one day in May 2003, this well-functioning, integrated North American market became dysfunctional. A single case of BSE in Canada destabilized this equilibrium. A profitable industry that has historically declined direct government support began losing several millions of dollars per day. Total losses to Canada were in the vicinity of $1.8 billion in 2003, but this total rises with every passing day that the U.S. border remains closed to live animals.

The events triggered by the finding of BSE in Canada have made stakeholders (particularly cattlemen) aware of just how essential the export market for live animals is to their livelihood. It has also demonstrated the vulnerability of the integrated North American market. The two countries’ separate food safety and security systems are the weak link in the system. While it is almost back to “business as usual” for the packing segment of the Canadian industry, because many beef products can once again be exported, livestock producers require federal and provincial government assistance for their survival.

Various livestock producers across Canada are nevertheless looking for opportunities to invest in value-added activities. In some regions, livestock producers have only one major slaughter or processing plant to supply. From their perspective, the market is too concentrated. In other regions, slaughter and processing plants are non-existent. For these reasons, some stakeholders appearing before the Committee suggested that there might be investment opportunities for farmers to venture into beef processing.

Why don't we take our own destiny in our hands. Get another plant going or expanding the plants that we have here in Canada and after that sell it to them our cut and keep the jobs in Canada. I think that's what we should … be doing instead of waiting for the U.S. to reopen the border.

Paul Fortin, The Great Atlantic & Pacific Company of Canada Limited
Standing Committee on Agriculture and Agri-Food
Evidence No. 9-17:00, 3rd Session 37th Parliament
Ottawa, 22 March 2004

However, based on the contradictory evidence received by the Committee, it is unclear whether or not the timing of any additional slaughter capacity in Canada is appropriate.

In its report of November 2003, the Committee recommended to government that it support the development of new market opportunities in the livestock sectors. In the 2004 Federal Budget Plan, the government announced its intentions to inject an additional $270 million for new investment in venture capital to be delivered by the Business Development Bank of Canada and Farm Credit Canada. The Committee once again recommends:

RECOMMENDATION 4

That the Government of Canada and its agencies involved in the agri-food sector work with livestock producers and processors to find new business opportunities in the livestock processing sector, with a particular emphasis on increasing livestock slaughter and value-added products processing capacity.

Fully Open Export Markets and Clear Rules

The Canadian cattle and beef industry is fully integrated within a North American market, but the NAFTA countries have still to develop and implement import-export policies and rules in accordance with international standards — standards that would prevent the use of sanitary measures as a barrier to trade. The BSE cases in Canada and United States highlighted the vulnerability of the cattle and beef products industry, particularly the primary livestock producers. Such action, which is not based on sound science or risk assessment, must be stopped if the Canadian cattle industry is to remain economically viable in the longer term. Canada and the United States do not benefit from imposing import embargoes on each other.

Consultations between the North American trading partners are ongoing, but these trading partners are also competitor countries in many markets, a fact that should not be underestimated when negotiating the harmonization of national food safety and security systems. Last year, in the context of its hearings on the BSE crisis, the Committee wrote to the Director General of the World Organisation for Animal Health (OIE) to clarify whether or not countries could legitimately protect their markets when another country reports only one case of BSE. In his letter of response to the Committee, the Director General wrote:

One of the most important of the conclusions of the recent meeting of the expert group in September 2003 was that the scientific basis of the Code chapter was still valid. The experts concluded that the current trade restrictions have resulted from the fact that countries are not applying the OIE Code as written. Many countries are applying trade embargoes as soon as an exporting country reports its first case of BSE, without having conducted a risk assessment as is recommended in the Code. In any case, the present Code does not recommend a total embargo on animals and animal products coming from BSE infected countries, but approaches the BSE risks through increasing levels of restrictions depending on the category of the exporting country. I believe that your efforts should be directed at helping the OIE to encourage OIE Member Countries, including Canada, to follow the OIE Code in setting their import measures.

Dr. Bernard Vallat, Director General, OIE
Letter to Standing Committee on Agriculture
and Agri-Food
2rd Session, 37th Parliament
Ottawa, 3 november 2003

In addition, the panel of international experts on BSE, in its report on measures relating to BSE in the United States, stated:

	•	The subcommittee appreciates the intent of the US government to follow a science based approach to policy formulation.
	•	The North American cases demonstrate again that exporting countries feel significant national social and financial impacts when importing countries fail to comply with international rules regarding trade.
	•	Therefore, the subcommittee recommends that the US should demonstrate leadership in trade matters by adopting import/export policy in accordance with international standards, and thus encourage the discontinuation of irrational trade barriers when countries identify their first case of BSE.

The Committee believes that trade rules harmonization has to be done correctly and promptly. Without it, future market disruptions in agriculture and agri-food trade will be more costly and protracted than the current one. If the NAFTA countries truly believe in an integrated North American market for cattle and beef products, they must fully respect international codes. The Committee recognizes the ongoing efforts on both sides of the border to re-establish exports of all livestock and other related commodities, but is concerned about the negative effects that time spent in political negotiations has had on Canada’s livestock market. The primary producers of competitor countries are making inroads into traditional Canadian export markets. The Committee recommends:

RECOMMENDATION 5

That the Governments of Canada and the United States immediately implement the World Organisation for Animal Health Code and repeal both countries’ import embargoes, while continuing to negotiate other modalities of an implementation plan that would improve the free flow of livestock and meat.