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Foreign Animal Disease Impacts Domestic Prices and Production

Foreign Animal Disease Impacts Domestic Prices and Production
Cattle behind fenceline.

This article was first published in the Nebraska Cattleman magazine.

Two statements commonly spoken by market analysts and producers are: 1) beef is a differentiated product and 2) global beef supply impacts domestic prices. These are so frequently quoted that we might forget how these two statements imply modifications in risk management and production practices. The current situation playing out in Australia clearly illustrates these two statements.

The United States (US) relies on countries like Australia to meet consumer demand for ground beef. This allows the US to ship higher value grain finished cuts abroad to places like Japan and South Korea. The drought and subsequent fires in Australia have reduced the breeding herd and slaughter pass-through and thus reduced, in the short and longer term, availability of ground beef to be imported to the US. This shortage has incentivized packers to grind higher value cuts to meet domestic ground beef demand leading to a widening price gap between imported and domestic 90% lean trimmings. Towards the end of 2019 the price difference between imported and domestic prices averaged approximately $50 per cwt. For perspective, the average price gap over the last 7 years was negative implying domestic ground beef was more expensive than imported ground beef. Hence, the historical demand for imports and current trend in domestic grinding.

Foreign Animal Disease are Wicked Problems

Weather, such as the drought in Australia, are “kind” problems because they generally have a defined stop and start time which allows the industry to adjust and adapt gradually over time. On the other hand, foreign animal diseases are “wicked” problems. Wicked problems have no true stopping rule, no right or wrong solution rather just better or worse, and are novel and unique. The case of Bovine Spongiform Encephalopathy (BSE) is a classic example of how the two previous statements of differentiated products and global beef supply play out under a wicked problem.

In 2005 after the BSE incidence, the value of beef exports dropped $4 billion dollars. Once the US could show they were “BSE free” and taking preventive measures countries dropped Sanitary and Phytosanitary (SPS) measures imposed due to BSE and beef trade values gradually increased. Some of these SPS regulations took a considerable amount of time to be removed. For example, in January 2020 China finally agreed to lift age restrictions on beef imports that were placed in 2004 after BSE occurred – 16 years after the incident. The US did not recover to pre-2004 trade levels till 2010, 6 years after the incident. Market analysts have largely agreed that if traceability systems were in place prior to BSE, beef market recovery could have been accelerated.

Implications of Foot and Mouth Disease in the United States

Foot and mouth disease (FMD) is a Tier 1 foreign animal disease that has not entered the US but could disrupt the US beef production system if ever found. Once FMD-positive animals have been detected, the World Trade Organization (WTO) in conjunction with The World Organization for Animal Health (OIE) restricts the movement of animal products originating from “FMD-endemic” countries to “FMD-free” countries. The “stop movement” concern partially stems from that vaccinated animals can be carriers even if they manifest no clinical symptoms. The rules and regulations for the “stop movement” of animal products from FMD-endemic countries to FMD-free countries to be lifted varies from country to county but generally follows after a country has proved to be FMD-free either with or without vaccination.

So what would happen if there were a hypothetical FMD outbreak in the US? Agricultural Economists have estimated different impacts which depend on the vaccine strategy, vaccination capacity, number of herds infected before vaccination occurs, and the vaccination range. Under a situation where the US chooses not to vaccinate, long term producer loses to capital and management would be $93 billion dollars. Under a “best case” scenario where cattle are vaccinated to live, 50 herds are vaccinated after 22 days, 10 herd infected before vaccination occurs, and a 25-mile vaccination radius, producers would still lose $33 billion dollars (Schroeder et al. 2015). 

FMD Implications for US Beef Supply

Let’s go back to the two statements we have been talking about which are 1) beef is a differentiated product and 2) global beef supply impacts domestic prices. How do these statements apply to a hypothetical FMD situation in the US? In this case beef differentiation comes in two forms. First, beef in the US would be classified as “FMD-endemic” whereas other countries where FMD is not found would remain “FMD-free”. This classification for US beef implies exports could only go to places that were also FMD-endemic bypassing the current most profitable markets of Japan, South Korea, Mexico, and Canada. Since the US is a large beef producer, the sudden increase in supply of beef on the FMD-endemic market would lower “FMD-endemic” beef prices. Further complicating the matter is US beef quality. In other words, producers would lose more since FMD-endemic countries would not be willing to pay premiums for grain finished US products, further suppressing price. Given the amount of time some countries took to remove SPS regulations placed on after BSE, one might suspect that the length could be similar for a hypothetical FMD incidence in the United States.

Traceability and Secure Beef Supply Plans

This leads to a very important feature of SPS agreements, a principle known as regionalization. This principle states that if a foreign animal disease is found to be contained in a specific region and other regions can prove they have not been contaminated then “FMD-free regions” within a “FMD-endemic country” can continue to export beef products. The United States already applies this regionalization principle to several major beef producing countries. For example, the state of Santa Caterina in Brazil is FMD-free and can ship fresh, chilled, and frozen beef to the United States even though the US classifies Brazil as “FMD-endemic”. The United States requires beef originating from other Brazilian states to be heated prior to shipment to ensure the virus has been neutralized.

The SPS regionalization principle has strong implications and incentives for local adoption of traceability and secure beef supply plans. Under a hypothetical FMD outbreak, regions that had adopted traceability measures and secure beef supply plans would be able to quickly stamp out FMD or prove FMD-free status quicker than regions without traceability and secure beef supply plans. Thus, while the damages due to FMD enter the US would not be equally distributed across regions/states impacting the profitability, and in some cases the viability of production, in both the short and long term. Going back to the two statements I began with, differentiated beef products and global supply impacts domestic prices, implies there are large incentives for regions/states to adopt traceability and secure beef supply plans as a production practice and risk management tool. However, the broader effectiveness of these tools will vary greatly by the adoption of these tools by neighbors.

References

Schroeder, Ted C., Dustin L. Pendell, Michael W. Sanderson, and Sara McReynolds. 2015.  "Economic impact of alternative FMD emergency vaccination strategies in the midwestern United States." Journal of Agricultural and Applied Economics 47(1): 47-76.