Under Siege: The U.S. Live Cattle Industry

Article excerpt

ii. Foreign Product Substitutes

As confirmed by the United States International Trade Commission ("USITC"), the U.S. cattle market is highly sensitive to even slight changes in cattle supplies. The USITC found that the farm level elasticity of demand for slaughter cattle is such that "each 1 percent increase in fed cattle numbers would be expected to decrease fed cattle prices by 2 percent." (129) Researchers at the University of Nebraska-Lincoln found that fed cattle prices were even more susceptible to supply changes and stated that a 1% increase in fed cattle supplies would be expected to reduce fed cattle prices by up to 2.5%. (130) Because of this extreme price sensitivity to increased supplies, domestic cattle prices are susceptible to manipulation from the meatpackers' strategic importation of live cattle from foreign sources, which are substitute products that compete directly with domestic cattle for the meatpacker's weekly available shackle space.

Recent experience shows that nominal U.S. fed cattle prices jumped to the highest level in the industry's history within just five months after the importation of live cattle into the U.S. from Canada ceased. The importation was temporarily curtailed due to the discovery of bovine spongiform encephalopathy ("BSE") in the Canadian herd. As shown in Chart 3, the price for domestic cattle increased a remarkable $26 per cwt between May 2003, the month when Canadian cattle imports were curtailed, and October 2003, just five months later. This domestic price increase occurred even after beef imports from Canada were resumed in August 2003. This price increase represents an unprecedented per head increase of $325 for an average Nebraska Direct Choice steer weighing 1,250 pounds.


Apparently, the USDA does not have the modeling capability to evaluate accurately the price impact on the U.S. cattle industry caused by the meatpackers' strategic timing of live cattle imports. When the USDA issued its 2005 final rule to allow the resumption of imports of Canadian cattle younger than 30 months of age into the United States, it projected the largest decline in U.S. fed cattle prices would occur in the first or second quarter of the year following such resumption. The USDA estimated price declines during the first and second quarter ranging from a low of $3.10 per cwt to a high of $6.05 per cwt. (131) However, during the third and fourth quarters following the resumption of Canadian cattle imports, U.S. fed cattle prices fell from $96.50 per cwt in December 2005 to $79.10 per cwt in May 2006, a dramatic decline of $17.40 per cwt--nearly three times greater than what the USDA projected for the upper boundary of expected losses. (132)

These wild and dramatic price swings coinciding with the curtailment and resumption of live cattle imports suggest that imported cattle have a much more severe impact on domestic cattle prices than currently estimated by the USDA or any other contemporary cattle industry analyst. Moreover, imported cattle appear to defy the transportation constraints that researchers found to limit shipments of fed cattle when distances to the slaughter plant exceeded approximately 300 miles. (133) Based on information and belief, fed cattle from Canada's Alberta Province are frequently transported in excess of 600 miles to be slaughtered in Greeley, Colorado. United States meatpackers may well be slaughtering these imported cattle at a considerable financial loss in order to satisfy their weekly demands for live cattle, thereby enabling them to avoid bidding more aggressively for domestic cattle. If this is, in fact, occurring, then meatpackers are likely more than making up their losses from the procurement of the relatively few imported cattle by generating greater savings from holding prices below what a competitive market would otherwise dictate for the much greater volume of domestic cattle. An investigation is sorely needed to assess more fully the impacts on domestic cattle prices arising from the meatpackers' procurement practices for imported cattle. …