Subject: The Economic Impact of B.S.E. on the U.S. Beef Industry: BY NOT
TESTING TO FIND
Date: May 6, 2007 at 3:05 pm PST
The Economic Impact of B.S.E. on the U.S. Beef Industry:
Product Value Losses, Regulatory Costs, and Consumer Reactions
Background
For nearly 2 decades the U.S. beef
industry has been impacted by bovine spongiform
encephalopathy (BSE). Since the
emergence of the disease in the United
Kingdom and the subsequent discovery of
a possible link between BSE and fatal new
variant Creutzfeld-Jacob Disease (vCJD) in
humans, various agencies of the United States
government have implemented measures
to prevent BSE from entering the country,
prevent its spread if it were to be discovered
here, and safeguard human health. These
measures included restrictions on imports of
live animals, meat products and feedstuffs,
restrictions on feeding certain ruminant
derived tissues back to ruminant animals, a
disease surveillance program, and restrictions
on blood donations from individuals who
previously resided in BSE affected countries.
As the disease spread outside Europe to
Japan and, in mid-2003, to Canada, USDA
enhanced its surveillance efforts and increased
funding for BSE related research. Regulatory
efforts to counter the disease were further
strengthened when, on December 23, 2003, it
was reported that a dairy cow in Washington
state had tested positive for BSE.
Regulatory Response to the December 23
Case
To enhance protection of human health
and reassure export markets about the safety
of U.S. beef, the Food Safety Inspection
Service (FSIS) of USDA issued rules designating
certain tissues (e.g., small intestine and
tonsils of all cattle; brains, eyes, spinal cord
of cattle over 30 months of age) as specified
risk materials (SRM) not allowed in human
food. FSIS also banned entry of material from
downer cattle into the human food chain.
To further reduce the risk of BSE spreading,
the Food and Drug Administration (FDA)
proposed enhancing the existing ruminant
feed ban by removing the exemption for
blood products and banning plate waste and
poultry litter. The Animal and Plant Health
Inspection Service (APHIS) stepped up BSE
surveillance efforts and announced that they
would conduct BSE tests on "as many cattle
as possible" from the population of high-risk
cattle in a 12- to 18-month period beginning
in June 2004. This represented more than a
tenfold increase in testing relative to previous
surveillance levels.
Costs Associated with BSE Regulations
The regulations introduced in 2004 led
to changes in cattle procurement, employment,
employee training requirements, food
safety plans, capital investments, and marketing
opportunities for the beef industry. To
assess the impact on industry, we interviewed
seven firms to gather data on costs associated
with the new regulations. The seven firms
represented more than 60 percent of 2003
beef slaughter and were sufficiently diverse to
represent a reasonable cross section of the beef
packing industry.
On average, firms incurred additional
labor costs of $0.45 per head of daily capacity.
These costs arose primarily as a result of
regulations requiring the creation of positions
to age animals using postmortem dentition,
to deal with non-ambulatory animals, and
to segregate SRM material. One-time costs
of training existing employees to comply
with new FSIS rules varied from $13,800
to $100,000 across firms. Altering HACCP
plans and record keeping procedures resulted
in relatively small cost increases - a combination
of nominal initial investments plus
ongoing labor costs of approximately $0.01
per head. Changes in capital investments
varied across firms. Some were able to achieve
compliance without any new investments,
whereas others invested up to $84,000 in
long-term assets. All firms had investments in
certain assets that they now consider obsolete.
On average, the loss resulting from investments
being made obsolete was more than
$700,000 per firm.
The new regulations also resulted in
revenue losses due to products being banned
from the food supply. In particular, the condemnation
of small intestines from all cattle
has been a hotly debated topic. We estimate
that, on average, firms that previously sold
small intestines are foregoing an average of
$3.68 per head in potential revenue. That loss
however, is contingent on the availability of
export markets for the product. For non-fed
Executive Summary
4
slaughter (animals over 30 months of age),
condemnation of bone-in cuts containing
vertebral column and restrictions on the use
of advanced meat recovery (AMR) systems
reduce per-head revenues by approximately
$8.50 and $9.36, respectively. These decreases
only apply to firms engaged in these respective
activities. Also prohibited from the food
supply are non-ambulatory cattle. In 2004,
this regulation resulted in an estimated loss of
$64.6 million to the beef packing sector. Considering
all these areas of change, and ignoring
one-time expenses, we estimate the net economic
cost to the beef industry in 2004 from
FSIS Interim Final Rules to be approximately
$200 million.
We also considered the potential impacts
of additional BSE measures that have been
proposed, but not yet implemented. One such
policy being considered is a ban on SRM in
animal feed. We estimate that if this proposal
is implemented, the associated costs would be
$2.16 per head for fed slaughter and $6.77 per
head for non-fed slaughter. We estimate that a
complete ban on feeding of ruminant derived
proteins would cost $14.01 per fed animal
and $12.35 per non-fed, in addition to adding
$4.50 per head to feed costs for a fed animal.
Market Response to the December 2003 Case
Export Markets
Within days of the Washington state BSE
announcement, 53 countries, including major
markets such as Japan, Mexico, South Korea
and Canada, banned imports of U.S. cattle
and beef products. In 2003, U.S. beef exports
were valued at $3.95 billion and accounted for
9.6 percent of U.S. commercial beef production.
The import bans caused U.S. beef exports
to plummet, and although some important
markets, including Mexico and Canada did
reopen during 2004, export quantities for the
year declined 82 percent below 2003's level.
The loss of export markets increased the
quantities available on the domestic market
thereby depressing domestic prices below
levels they would have attained if exports were
possible. We developed a trade model to estimate
the impact of export losses on the beef
industry. The model incorporated assumptions
about the elasticity of domestic demand for
beef and offal in order to estimate the price
impact of additional supplies on the domestic
market. Because the resulting loss estimates
depend on the elasticity estimates, our report
includes results of a sensitivity analysis to
provide a range of probable loss estimates.
Results suggest that total U.S. beef industry
losses arising from the loss of beef and offal
exports during 2004 ranged from $3.2 billion
to $4.7 billion.
The United States has yet to regain access
to the Japanese and South Korean beef export
markets, the second and third largest markets
for U.S. beef during 2003. If the United States
regained access to these two key markets, and
exported the same percentage of U.S. production
to these two countries in 2004 as in
2003, wholesale revenue per head would have
increased between $45 and $66 per head for
every head slaughtered in the United States. If
exports to Japan and South Korea were only
one-half the 2003 level, as a percentage of
U.S. production, wholesale revenue per head
slaughtered would have increased $22 to $32.
Domestic Market
In the week following the December
2003 announcement, cattle prices fell by about
16 percent. Consumer surveys at that time
suggested that U.S. domestic beef demand
could fall by as much as 15 percent. However,
prices recovered in early 2004 as it became
clear that U.S. consumer demand had been
impacted only minimally, if at all. In fact,
market data on beef disappearance and retail
prices suggest that consumer demand for
beef actually strengthened in the first half of
2004. However, given that the animal infected
with BSE in Washington state originated in
Canada and could plausibly be viewed as an
isolated case, the possibility remains that an
additional BSE discovery in an indigenous
animal could have a significant negative
impact on demand.
To investigate the potential impact of
additional U.S. BSE discoveries we used a
regionally targeted consumer survey. The
results suggest that most consumers (77
percent) did not change consumption habits
because of the first U.S. BSE case, but that
subsequent discoveries, particularly of multiple
cases, could have a significant impact on
demand. However, we cannot infer from our
results that an additional isolated case of BSE
5
in the United States would have a significant
impact on domestic beef demand.
Testing
Voluntary testing for BSE has been proposed
as a means of regaining access to lost
export markets, but USDA has turned down
a request from a private firm to conduct such
testing. The beef industry is sharply divided
on the issue. Proponents of voluntary testing
tend to view it in terms of a marketing decision
with expected benefits outweighing
costs, at least in the short run. Opponents see
testing as unnecessary and costly, as setting a
dangerous precedent in terms of acquiescing
to an unreasonable customer requirement, and
as a procedure with no scientific justification
in terms of risk reduction to consumers.
In our analysis we estimate costs and
potential benefits for a range of testing/
market-access scenarios. Voluntary testing
by a single, small firm would provide little or
no benefit to producers because the increase
in the derived demand for cattle generated
from such a small-scale increase in exports
would have an insignificant impact on domestic
cattle prices. The policy could, however,
result in significant profits for a firm engaged
in testing, at least in the short run, if testing
opened up additional markets for a firm's
beef products. If additional market access is
obtained through BSE testing, more firms
would be attracted to testing and domestic
cattle prices would increase. Our analysis suggests
that if all slaughter animals are tested,
but there is no increase in access to either the
Japanese or South Korean markets, the result
would be a net loss of $17.50 (the estimated
cost of testing) per head. Alternatively, if full
access to the Japanese and South Korean
markets is regained without implementing a
broad based BSE testing program, the potential
revenue gain ranges from about $45 to
$66 per head.
snip...full text ;
http://www.oznet.ksu.edu/library/agec2/MF2678.pdf
TSS
TESTING TO FIND
Date: May 6, 2007 at 3:05 pm PST
The Economic Impact of B.S.E. on the U.S. Beef Industry:
Product Value Losses, Regulatory Costs, and Consumer Reactions
Background
For nearly 2 decades the U.S. beef
industry has been impacted by bovine spongiform
encephalopathy (BSE). Since the
emergence of the disease in the United
Kingdom and the subsequent discovery of
a possible link between BSE and fatal new
variant Creutzfeld-Jacob Disease (vCJD) in
humans, various agencies of the United States
government have implemented measures
to prevent BSE from entering the country,
prevent its spread if it were to be discovered
here, and safeguard human health. These
measures included restrictions on imports of
live animals, meat products and feedstuffs,
restrictions on feeding certain ruminant
derived tissues back to ruminant animals, a
disease surveillance program, and restrictions
on blood donations from individuals who
previously resided in BSE affected countries.
As the disease spread outside Europe to
Japan and, in mid-2003, to Canada, USDA
enhanced its surveillance efforts and increased
funding for BSE related research. Regulatory
efforts to counter the disease were further
strengthened when, on December 23, 2003, it
was reported that a dairy cow in Washington
state had tested positive for BSE.
Regulatory Response to the December 23
Case
To enhance protection of human health
and reassure export markets about the safety
of U.S. beef, the Food Safety Inspection
Service (FSIS) of USDA issued rules designating
certain tissues (e.g., small intestine and
tonsils of all cattle; brains, eyes, spinal cord
of cattle over 30 months of age) as specified
risk materials (SRM) not allowed in human
food. FSIS also banned entry of material from
downer cattle into the human food chain.
To further reduce the risk of BSE spreading,
the Food and Drug Administration (FDA)
proposed enhancing the existing ruminant
feed ban by removing the exemption for
blood products and banning plate waste and
poultry litter. The Animal and Plant Health
Inspection Service (APHIS) stepped up BSE
surveillance efforts and announced that they
would conduct BSE tests on "as many cattle
as possible" from the population of high-risk
cattle in a 12- to 18-month period beginning
in June 2004. This represented more than a
tenfold increase in testing relative to previous
surveillance levels.
Costs Associated with BSE Regulations
The regulations introduced in 2004 led
to changes in cattle procurement, employment,
employee training requirements, food
safety plans, capital investments, and marketing
opportunities for the beef industry. To
assess the impact on industry, we interviewed
seven firms to gather data on costs associated
with the new regulations. The seven firms
represented more than 60 percent of 2003
beef slaughter and were sufficiently diverse to
represent a reasonable cross section of the beef
packing industry.
On average, firms incurred additional
labor costs of $0.45 per head of daily capacity.
These costs arose primarily as a result of
regulations requiring the creation of positions
to age animals using postmortem dentition,
to deal with non-ambulatory animals, and
to segregate SRM material. One-time costs
of training existing employees to comply
with new FSIS rules varied from $13,800
to $100,000 across firms. Altering HACCP
plans and record keeping procedures resulted
in relatively small cost increases - a combination
of nominal initial investments plus
ongoing labor costs of approximately $0.01
per head. Changes in capital investments
varied across firms. Some were able to achieve
compliance without any new investments,
whereas others invested up to $84,000 in
long-term assets. All firms had investments in
certain assets that they now consider obsolete.
On average, the loss resulting from investments
being made obsolete was more than
$700,000 per firm.
The new regulations also resulted in
revenue losses due to products being banned
from the food supply. In particular, the condemnation
of small intestines from all cattle
has been a hotly debated topic. We estimate
that, on average, firms that previously sold
small intestines are foregoing an average of
$3.68 per head in potential revenue. That loss
however, is contingent on the availability of
export markets for the product. For non-fed
Executive Summary
4
slaughter (animals over 30 months of age),
condemnation of bone-in cuts containing
vertebral column and restrictions on the use
of advanced meat recovery (AMR) systems
reduce per-head revenues by approximately
$8.50 and $9.36, respectively. These decreases
only apply to firms engaged in these respective
activities. Also prohibited from the food
supply are non-ambulatory cattle. In 2004,
this regulation resulted in an estimated loss of
$64.6 million to the beef packing sector. Considering
all these areas of change, and ignoring
one-time expenses, we estimate the net economic
cost to the beef industry in 2004 from
FSIS Interim Final Rules to be approximately
$200 million.
We also considered the potential impacts
of additional BSE measures that have been
proposed, but not yet implemented. One such
policy being considered is a ban on SRM in
animal feed. We estimate that if this proposal
is implemented, the associated costs would be
$2.16 per head for fed slaughter and $6.77 per
head for non-fed slaughter. We estimate that a
complete ban on feeding of ruminant derived
proteins would cost $14.01 per fed animal
and $12.35 per non-fed, in addition to adding
$4.50 per head to feed costs for a fed animal.
Market Response to the December 2003 Case
Export Markets
Within days of the Washington state BSE
announcement, 53 countries, including major
markets such as Japan, Mexico, South Korea
and Canada, banned imports of U.S. cattle
and beef products. In 2003, U.S. beef exports
were valued at $3.95 billion and accounted for
9.6 percent of U.S. commercial beef production.
The import bans caused U.S. beef exports
to plummet, and although some important
markets, including Mexico and Canada did
reopen during 2004, export quantities for the
year declined 82 percent below 2003's level.
The loss of export markets increased the
quantities available on the domestic market
thereby depressing domestic prices below
levels they would have attained if exports were
possible. We developed a trade model to estimate
the impact of export losses on the beef
industry. The model incorporated assumptions
about the elasticity of domestic demand for
beef and offal in order to estimate the price
impact of additional supplies on the domestic
market. Because the resulting loss estimates
depend on the elasticity estimates, our report
includes results of a sensitivity analysis to
provide a range of probable loss estimates.
Results suggest that total U.S. beef industry
losses arising from the loss of beef and offal
exports during 2004 ranged from $3.2 billion
to $4.7 billion.
The United States has yet to regain access
to the Japanese and South Korean beef export
markets, the second and third largest markets
for U.S. beef during 2003. If the United States
regained access to these two key markets, and
exported the same percentage of U.S. production
to these two countries in 2004 as in
2003, wholesale revenue per head would have
increased between $45 and $66 per head for
every head slaughtered in the United States. If
exports to Japan and South Korea were only
one-half the 2003 level, as a percentage of
U.S. production, wholesale revenue per head
slaughtered would have increased $22 to $32.
Domestic Market
In the week following the December
2003 announcement, cattle prices fell by about
16 percent. Consumer surveys at that time
suggested that U.S. domestic beef demand
could fall by as much as 15 percent. However,
prices recovered in early 2004 as it became
clear that U.S. consumer demand had been
impacted only minimally, if at all. In fact,
market data on beef disappearance and retail
prices suggest that consumer demand for
beef actually strengthened in the first half of
2004. However, given that the animal infected
with BSE in Washington state originated in
Canada and could plausibly be viewed as an
isolated case, the possibility remains that an
additional BSE discovery in an indigenous
animal could have a significant negative
impact on demand.
To investigate the potential impact of
additional U.S. BSE discoveries we used a
regionally targeted consumer survey. The
results suggest that most consumers (77
percent) did not change consumption habits
because of the first U.S. BSE case, but that
subsequent discoveries, particularly of multiple
cases, could have a significant impact on
demand. However, we cannot infer from our
results that an additional isolated case of BSE
5
in the United States would have a significant
impact on domestic beef demand.
Testing
Voluntary testing for BSE has been proposed
as a means of regaining access to lost
export markets, but USDA has turned down
a request from a private firm to conduct such
testing. The beef industry is sharply divided
on the issue. Proponents of voluntary testing
tend to view it in terms of a marketing decision
with expected benefits outweighing
costs, at least in the short run. Opponents see
testing as unnecessary and costly, as setting a
dangerous precedent in terms of acquiescing
to an unreasonable customer requirement, and
as a procedure with no scientific justification
in terms of risk reduction to consumers.
In our analysis we estimate costs and
potential benefits for a range of testing/
market-access scenarios. Voluntary testing
by a single, small firm would provide little or
no benefit to producers because the increase
in the derived demand for cattle generated
from such a small-scale increase in exports
would have an insignificant impact on domestic
cattle prices. The policy could, however,
result in significant profits for a firm engaged
in testing, at least in the short run, if testing
opened up additional markets for a firm's
beef products. If additional market access is
obtained through BSE testing, more firms
would be attracted to testing and domestic
cattle prices would increase. Our analysis suggests
that if all slaughter animals are tested,
but there is no increase in access to either the
Japanese or South Korean markets, the result
would be a net loss of $17.50 (the estimated
cost of testing) per head. Alternatively, if full
access to the Japanese and South Korean
markets is regained without implementing a
broad based BSE testing program, the potential
revenue gain ranges from about $45 to
$66 per head.
snip...full text ;
http://www.oznet.ksu.edu/library/agec2/MF2678.pdf
TSS
