The Future of Animal Agriculture in North America - Farm Foundation

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With NAFTA, and indeed before, several of the impediments to market integration were removed. Most livestock and meat products move across borders duty-free or near duty-free, suggesting that there should be no monetary reason for lack of integration (ignore for the moment the current BSE trade restrictions). The issue of sanitary impacts is discussed in more detail below. Feeding technologies, breeding stock (with some minor exceptions) and feed components are similar or move relatively freely across borders, as well, so quality of end product is similar. Transport costs are not trivial, and increasing energy costs may have a greater impact in years to come, yet these costs appear to be well accommodated by the current marketing channel system and do not serve as an impediment to the movement of products within North America. This information suggests that North American meat market prices are integrated. Work by the USDA’s Economic Research Service (ERS) suggests the U.S. and Canadian meat markets show a high degree of price integration, but the United States tends to be the price leader in the causal relationship. This relationship is visualized in Figure 15, which shows the U.S. price for live fed steers (Nebraska basis) and the U.S. dollar price (adjusted by the US$/CN$ exchange rate) for live fed Alberta steers, and imports of live cattle from Canada between 1993 and 2003. Figure 16 shows a similar relationship for U.S. and Canadian farm-level pork prices. Two important conclusions can be drawn from Figures 15 and 16. U.S. and Canadian prices appear to move together quite well, and the Canadian case of BSE and subsequent border closing between the United States and Canada drove a wedge between U.S. and Canadian prices for beef (Figure 15), destroying the price integration that had prevailed until that point (Rosson, 2005). Figure 15 highlights the impact changes in trade rules can have on market price integration. Poultry price relationships are not as strongly integrated due to Canadian supply management programs and import quotas. The relative lack of price integration in North American poultry markets is illustrative of the impacts of government policy on market integration. Although not discussed in great detail here, the issue of exchange rates is important. The relatively strong U.S. dollar during the past decade has put significant downward pressure on U.S. exports. Exchange rates have a significant impact on exports. However, vertically integrated supply chains across North America may mitigate the impact of exchange rates, particularly rapid and large changes, within NAFTA operations. A lack of market integration, per se, is neither a good or bad phenomenon. There are many logical reasons why markets would not be integrated. A high degree of market price integration in the North American meat complex, however, suggests that price signals are being efficiently transferred across Global Competitiveness and Trade 67 national boundaries, leading to the most rational allocation of resources (e.g., location of production and processing and consumption), and to the most efficient operation of the industry as a whole. This efficiency results in lower overall meat prices to consumers in Canada, Mexico and the United States. A troubling issue from an economic perspective is that trade disruptions impede market integration to the detriment of producers and consumers in all three countries. The BSE case serves as an example. The impact to date has been an increase in the Canadian cattle herd, a decrease in Canadian prices and an increase in Canadian slaughter capacity. In 2003, the United States halted imports of Canadian live cattle due to the identification of a BSE case in Canada, leading to the price wedge observed in Figure 15. The U.S. border reopened to Canadian boneless beef from cattle under 30 months (UTM) in August 2003, and to live cattle UTM (except breeding stock) in July 2005. While the U.S. border was closed to imports of Canadian cattle (from May 2003 to July 2005), the value of processed beef exports increased substantially, as shown in Figure 17. Avian influenza could create similar disruptions. A simple logical analysis suggests that if Canada had a comparative advantage in slaughtering and processing, it would have enjoyed it under NAFTA when trade restrictions were essentially non-existent. So, it can be surmised that the rapid increases in beef slaughtering capacity now occurring in Canada are a direct result of the differential treatment of live cattle and processed beef products resulting from the BSE case. Some have argued that the magnitude of this impact may be small; however, one should not discount potential longer-term impacts on trade disruptions in terms of lost reputation and the costs of disrupted supply chains. The crux of the issue is that the live cattle restrictions may have permanently altered the level of integration between these markets, and these alterations are likely to be detrimental to the overall efficiency of the North American beef complex. Similar examples exist in other sectors. Russian bans on dark meat poultry imports from the United States had significant impacts on the efficient operation of the U.S. poultry industry. The North American meat complex appears to exhibit a high degree of price integration, which suggests that price signals are being efficiently transferred across national boundaries. However, differential government policies and trade disruptions have direct and consequential impacts on price integration, which may permanently and irreparably alter the ability of the market channels to efficiently allocate resources and provide the lowest cost products to consumers. Financing and Capital Acquisition The North American livestock industry has benefited from access to efficient, low-cost debt and capital financing. This advantage probably was enhanced by integration of the value
68 chain in recent years. However, this advantage is deteriorating with the advent of multinational lending institutions, and the development of production/marketing systems that are similar in most countries among efficient producers. There remains country risk—associated with political instability, high inflation, rapidly depreciating currency values, adverse public policies that do not support the development of efficient infrastructure, or corruption—that still affords a risk-related cost advantage for the U.S. and Canadian livestock industries. For example, Rabobank found that capital costs per kilo of hog slaughter were twice as high (20 Euro cents/kilo) in Brazil as in the United States and Canada. Reduction in country risk around the world would eliminate or drastically reduce this advantage. Paradoxically, reduction in the dangers of the factors associated with country risk are exactly the conditions associated with rising incomes and economic growth needed to increase livestock and poultry demand on a worldwide basis. Summary Animal agriculture in North America has undergone dramatic changes during the past two decades. Economic forces driving increased market integration and trade are complex and interrelated. Prices and trade flows are increasingly impacted by events, policies and forces outside of North America. Global animal product markets are consumer driven, with product safety, wholesomeness, quality and price key determinants of international competitiveness. Processors, retailers and food service corporations are expanding and integrating this global market, bringing efficiency and affordable food to both developed and developing countries around the world. North America is both a leading exporter and importer of animal products. The European Union is often a larger exporter, but the bulk of the trade is within the EU. While Canada and the United States are essential markets for each other, they also compete for export customers. Brazil is a rapidly growing competitor, particularly in poultry exports, but continues to be limited in pork and beef exports by FMD. China and Russia have significant potential as export customers, but have challenges that may slow the development of these markets. Two primary factors will shape the future of North American exports of animal products: income of developing economies and trade agreements. The growth of consumer income in the United States and Canada has slowed, as has the growth rate for animal product consumption. However, there is a successful track record of increased demand for animal proteins as economies grow and consumer spending increases. The rate of technical transfer and potential economic development is accelerating. During the past 10 years, retail groceries in many developing countries have adopted scanner and inventory Global Competitiveness and Trade control technology that required the previous 50 years to implement in developed economies. Trade agreements that lower protection on domestic agriculture in developed countries and reduce sanitary and phytosanitary trade barriers will also facilitate trade. FAO estimates suggest North American countries will benefit from fully implemented trade liberalization measures at the expense of the EU. However, the benefits from trade agreements can be derailed by animal disease issues. The livestock, meat and poultry markets in North America are increasingly integrated. Live hog trade between Canada and the United States is a good example. Canadian producers have increased farrowing and pig exports to the Midwest region of the United States. U.S. producers have invested in finishing facilities, have lower feed costs and are in close proximity to several large, efficient pork packers. The recent closure of the U.S.-Canadian border to live cattle due to BSE encouraged Canada to invest more heavily in slaughter facilities; coupled with cyclically low U.S. cow slaughter, this has caused some U.S. slaughter plants to close. Animal health and food safety considerations will continue to impact border decisions, even within the NAFTA trade agreement. Worldwide, demand for North American-produced animal products is likely to continue to grow. Meanwhile, both governments and the private sector are facing greater requirements and responsibilities for assuring consumers of product safety and quality. In the future, private-sector decisions will play an increasing role if other countries follow China’s role and approve individual plants for import rather than entire countries. Market institutions that help to harmonize agricultural programs and SPS regulations may lessen the confusion about trading rules and facilitate more trade opportunities. Policy Options and Implications • Consumer income growth in developing countries may be the single most important factor in increasing North American meat exports during the next decade. The longterm payoff to policies aimed at growing the economies of developing countries is likely to be quite high. Such policies will be highly controversial. They go beyond potential concessions in the WTO, FTAA and/or CAFTA-DR to renew food aid, and to economic and technical development through organizations like the United Nations and World Bank. Most controversial, some of these programs may be aimed at improving agriculture in the developing world as a first step in raising income levels. This strategy worked with three large customers for North American animal products—Japan, Korea and Taiwan. However, improving agriculture in developing countries will be viewed by some industry participants as creating
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The Future of Animal Agriculture in
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Consumer Demand Working Group Helen
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Foreword Farm Foundation is a catal
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Executive Summary The Future of Ani
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Page 23 and 24: 16 growth in the number of Canadian
Page 25 and 26: 18 Consumer Demand The demand for m
Page 27 and 28: 20 Nutrient loading on farmland fro
Page 30 and 31: Chapter 2 Economics of Production,
Page 32 and 33: Economics of Production, Processing
Page 38 and 39: The Future Economics of Production,
Page 44 and 45: References Economics of Production,
Page 46 and 47: Chapter 3 Consumer Demand Issues Co
Page 48 and 49: The consumer food demand pyramid, i
Page 50 and 51: devote less time and effort to food
Page 52 and 53: dollar. Many of the retail environm
Page 54 and 55: economies will increase demand for
Page 56 and 57: Information Needs Long term, how wi
Page 58 and 59: Table 1. 2005 Population and Recent
Page 60 and 61: Figure 3. U.S. Meat Consumption Pou
Page 62 and 63: Consumer Demand Issues 55 Figure 7.
Page 64 and 65: Chapter 4 Global Competitiveness an
Page 66 and 67: tariff-rate quota (TRQ) in place on
Page 68 and 69: 2004 EU enlargement is expected to
Page 70 and 71: provide guidelines for animal healt
Page 72 and 73: affordable foods to many developing
Page 76 and 77: competitors. Economic logic, howeve
Page 78 and 79: Global Competitiveness and Trade 71
Page 80 and 81: Figure 4. World Beef Consumption So
Page 82 and 83: Figure 8. World Poultry Meat Produc
Page 84 and 85: Figure 12. Major Dairy Exporters So
Page 86: Global Competitiveness and Trade 79
Page 89 and 90: 82 and medical professions. This in
Page 91 and 92: 84 produced under specific contract
Page 93 and 94: 86 establishing food safety system
Page 95 and 96: 88 In the United States, FDA, under
Page 97 and 98: 90 Policy Options and Implications
Page 99 and 100: 92 A national structure coordinated
Page 101 and 102: 94 Food Safety and Animal Health Pr
Page 104 and 105: Chapter 6 Environmental Issues The
Page 106 and 107: positive and negative externalities
Page 108 and 109: environmental damage. Climate, soil
Page 110 and 111: Managing or changing the components
Page 112 and 113: transportation access and costs; in
Page 114 and 115: could also be integrated air and wa
Page 116 and 117: and services. The success of the lo
Page 118 and 119: Environmental Issues 111 Metcalfe,
Page 120 and 121: Figure 2. Environmental Issues 113
Page 122 and 123: Chapter 7 Community and Labor Anima
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Slow economic growth in recent year
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informational hearing, at which com
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An aspect that should not be overlo
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States, FSIR would consider the no-
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• compensate parties harmed by an
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Community and Labor 127 Flora, C.B.
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Community and Labor 129 Senthilselv
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Community and Labor 131 Table 3. Un
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Chapter 8 Animal Welfare Animal agr
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In 2005, the Canadian Pork Council
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voluntary codes of practice are bei
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eak the rules; discipline is far mo
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In the final analysis, economic for
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References Animal Welfare 143 Agra
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Box 1. Animal Welfare Legislation i
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Animal Welfare 147 Box 3. Animal We
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Source: Agra CEAS Consulting Ltd. (
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Chapter 9 A Look to the Future Ther
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safety, animal welfare, process ass
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The Future of Animal Agriculture in North America - Farm Foundation

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