AFF Sentinel Vol.2, #17

Keeping Up With Demand

This is the third and final part of an edited version of an economic study of beef imports and the American cattle industry. Thomas E. Elam, Ph.D., Adjunct Fellow, with the Center for Global Food Issues, Hudson Institute, first published the full study in 2003. It has been updated for 2005.

In Part II, Elam noted that while cull cow prices are important to cow/calf producers' income, it is much less important than demand for, and price of, calves. Shifting production from more valuable grain- fed beef to lean beef would reduce total revenue. Increasing costs of ground beef would drive more consumer demand to pork and chicken.

Long-term outlook
The long-term trend is for the U.S. to import more of its lean beef (low value) for the ground beef market and export more of its grain fed (high value) beef. There is no reason to expect that this will change in the future.

On the domestic demand side, an increasing U.S. population and economic growth argue for a slow, but steady, increase in the demand for all beef products.

On the export front, the U.S., prior to December 2003, had been very successful in increasing volume to Japan and Korea. Now, as China joins the WTO, it is dropping its tariff and state-trading barriers to beef imports. With very low Chinese beef production, very small beef imports, a rapidly increasing middle-income population, and rapid economic growth, China appears to be another Asian market with very significant volume potential for high value U.S. beef. Japan and Korea will, hopefully sooner rather than later, also re-open to U.S. fed beef imports.

On the domestic supply side, the beef cattle cycle in the U.S. is entering a phase in which a slow beef herd rebuilding will occur. One effect of this rebuilding will be that over the next 3-5 years beef cow numbers will increase. To make this happen, beef producers will keep cows longer, place more heifers into the cow herd, and send fewer heifers to feedlots. All three trends will reduce the domestic supply of both 50/50 trim and 90 percent lean. However, as the beef industry starts to grow again this will boost the 50/50 trim supply significantly. The 90 percent lean supply from beef cows may also increase slightly, but not by as much as the 50/50 trim from fed beef.

Dairy cow numbers in the U.S. have been declining for over 75 years. Although the trend flattened out in recent years, there is no reason to expect that the basic forces calling for a smaller herd have changed. In fact, the failure to reduce cow numbers in the recent past led to a crisis in milk prices and a surge in dairy cow slaughter in the first half of 2003. Over time, as the dairy cow herd continues to decrease slowly, our ability to supply the 90 percent lean market from domestically produced cattle will decline.

We should be in much better shape on the 50/50 trim supply once we get past the next 2-3 years and the U.S. beef herd starts to grow again. Even so, the next few years will see a tight 50/50 trim market and higher, more volatile, pricing.

Importing more profitable
Normally, restricting the supply of a product causes an increase in price and a reduction in amount consumed. In the cattle industry, reducing 90 percent lean imports would cause an increase in the 90 percent lean price and would also cause an increase in cull cow prices. However, the effects don't stop there.

If we restrict the import of 90 percent lean, and their price increases, the following would be implied:

• A lower 90 percent lean supply to mix with 50/50 trim
• A decrease in the supply of, and overall consumption of, lean, ground beef
• A decrease in the amount of 50/50 trim needed to mix with 90 percent lean
• A decline in the demand for 50/50 trim, the 50/50 trim price, and, ultimately, fed cattle prices
• A lower incentive to produce our competitive advantage, fed beef, and a higher incentive to produce lean beef, even though we do not have a competitive advantage
• An increase in the market share of chicken and pork products that can be substituted for lean ground beef in the U.S. market
• A smaller, less profitable, less efficient, U.S. cattle industry
• Larger, more profitable, U.S. pork and chicken industries

In other words, attempts on the part of the cattle industry to restrict the imports of lean ground beef into the U.S. would very likely prove to be counterproductive for U.S cattle producer profitability. Increased imports of 90 percent lean over the foreseeable future will be required to maintain or improve the value of the domestic 50/50 trim supply, and the fed cattle prices upon which the industry is so highly dependent.

Our final conclusion: When we look at the total picture, including the value of all the U.S. beef that goes into the ground beef supply; imports of lean beef actually enhance the value of the U.S. beef market and overall cattle prices. In addition, importing lean beef allows U.S. cattlemen to maximize their comparative advantage of fed beef production, their revenue from beef sales, and industry-wide profitability. Finally, importing lean beef is the only way we can provide consumers with the lean beef they want and use up our 50/50 trim at the same time.

For the full text of Elam's report, click here.

Next time: Border Wars: Hairsplitting or Doubletalk?

Major portions of the above were first published in the Dec. 2003 issue of CALF News Cattle Feeder.

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