mad cow debacle

How one Canadian cow and one domestic cow, who posed no threat to human or animal health, were able to wreak havoc on consumer confidence, government policy and one of the country's largest industries, is a question that will be pondered for years. Long after the short term market effects are realized, the beef industry in this country will be changed forever.

The harsh realities of the fall out from mad cow have played out in the early part of this century. Markets have been dominated by rumor and perceptions and politics and public relations have replaced fundamentals as drivers of price action. The industry badly needs a restoration and resumption of normal production and marketing patterns. Decisions by farmers and ranchers to sell feeder cattle, grain positions of the feedyards, and most importantly the reopening of the export markets will take time and in the meantime there will be much uncertainty. 

The market moves of the past two years is a tale of a handful of mad cows. None posed a danger to human or animal health but all triggered a series of events that have roiled the markets for good and bad depending on your perspective.

The discovery of a mad cow in Canada touched off reactions that devastated the Canadian beef industry -- leaving it crippled today.  For U.S. beef producers it produced a boon.  Windfall profits occurred in this country as a result of shutting the door to Canadian beef and picking up their export markets. The result for U.S. producers was record live and beef prices during the fall of 2003. 

The discovery of a U.S. mad cow late in 2003 and followed by an additional case in 2004, confirmed in 2005,, may take a toll far worse than many imagine. The windfall profits of 2003 may translate into large losses in late 2005 and 2006 as feedlots back up sales and packers moderate slaughter numbers in order to hold on to margins.

Domestic consumption can increase, and will, with lower prices. The extent to which domestic consumption can absorb additional tonnage will be tested. The export markets, with the exception of Mexico, will be slow to open. Difficult trade negotiations with the Japanese will required extremely skilled negotiators and it is unknown if the government has the talent available for the job.

The primary task is negotiations with trading partners. These extremely sensitive talks need to be in the hands of experts not government functionaries. The Japanese understand the science, the talks are about politics and trade power.

THE FARM, RANCH AND FEEDLOT

Mandatory identification of all animals is the U.S. herd is a certainty and a necessity. The proposals by NCBA and USDA are flowed and inadequate for the needs of the industry and will need to be modified and escalated in order to assure a system that will allow traceback of individual animals in the herd. The cost, types of ID, rules and regulations will need thorough analysis and industry input. 

BEEF PROCESSING

Beef packers will immediately begin to age the animals in the plant using teeth dentition. Cattle over 30 months of age will suffer large discounts.  Downer cattle will be refused by all slaughter plants. Meat from animals tested for BSE will not move into the beef pipeline.

MARKETING

There will be an increase in the warranties provided by beef processors to consumers of beef whether domestic or foreign.  Negotiations with importers of U.S. beef will largely determine the nature of these representations.

OUTLOOK

The outlook for cattle feeding is not bright. Custom cattle feeding, the business of accepting customer cattle and selling feed, with no risk to the feedyard, is a dying business. Breakevens on current feeder cattle purchases are running dollars above the futures market. All operations are regrouping to determine how to maintain operations in this troubling time.

The mad cows occurred at a time when the supply of feeder cattle was in decline.  Absent the mad cow, feedyards would still have struggled with tight supplies of replacement cattle. Now they compete for small supplies of feeder cattle, rising corn cost and depressed board prices – a bad combination.  T

The nation’s feeding capacity has simply outgrown the supply of cattle. This means some feedyards must bid up prices to keep numbers up and others must drop in capacity and some must close. It is a game of chicken with no winners. Feedlots who have built their business on hedged inventories are either, dropping capacities, hedging losses or putting the feedlot up for sale.

Stocker, feeder, and breeder operations will benefit as feedlots bid up prices for scarce supplies of cattle. The problem for the owners of cattle in the feedlot is, in spite of lower placements, there still may be too many cattle for domestic consumption and if the export markets do not quickly reopen, current purchases may sell on markets that are much lower than today. In other words, even lower placements of cattle on feed, may be too many.

This backdrop occurs at a time when beef has been revived as a mainstay of the diet.  It also coincides with new international respect and demand for the premium beef products sold by U.S. producers. The challenge is not to accept Japanese posturing on trade policy but to move forward with a strategic plan, executed by trade professionals, to reopen the markets.

LIVING WITH BSE

The discovery of two mad cows have devastated the markets and wreaked havoc on the industry. It would be comforting to believe, and expect others to believe, this is an isolated incidents and will not occur again. While everyone hopes this is the case, it is wrongheaded not to prepare beef consumers for additional cases.

An international panel appointed by Secretary Veneman, suggested a “high probability” additional cases will be discovered in the U.S. herd. A Swiss scientist forecast as many as one a month to be reported.  There is little statistical or scientific support for this prediction and the Swiss scientist is guilty of an intemperate remark.  His prediction is an unlikely scenario. Another member of the panel, William Hueston, director of the Center for Animal Health and Food Safety at the University of Minnesota, told reporters that he "wouldn't be surprised if they found two or three more cases in the United States." This view is a more likely one. Current USDA Secretary Johanns is currently changing the testing regime to use both the ICH and Western Blot test to confirm the rapid test.

Cattle industry groups and government officials quickly moved to object to the forecasts.  Many industry leaders were quick to dismiss the panel and insist we are only dealing with one isolated Canadian mad cow that had crossed the border. This approach tends to understate the case and leave the industry vulnerable to charges of over-promising and underestimating the risks.

It is important to prepare the public for additional mad cows. When and if they are discovered in this country, this preparation will lend itself to more credibility and confidence in the industry and the government. More importantly, it will lead to more confidence in the beef products we produce and prevent the crisis atmosphere of the current discovery.

Government and industry leaders need to concentrate their energies on educating the public to understand that, if and when we find additional cases, they will present no threat to human or animal health. This message needs to be grounded in solid science and substantive measures to provide the protection represented to the public. We need to assure the beef eating public the firewalls are in place and if another animal is discovered, American beef will continue to be safe.

BSE TESTS