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LIVESTOCK AND POULTRY
World Markets and Trade
March 1998
The Continuing Effects of BSE Beef Market, Trade, and Policy
Two years after the BSE crisis erupted in the European Union, the EU beef market continues to suffer due to low beef consumption and a ban on UK exports. With large intervention stocks piling up, the EU is grappling with a reduction of its beef intervention price as a means of holding down production, while also implementing new measures to boost consumer confidence in the beef supply.
Introduction
Since the March 1996 Bovine Spongiform Encephalopathy (BSE) crisis erupted in the United Kingdom, existing distortions in the European Union (EU) beef market have been exacerbated, with production far outstripping consumption and intervention buying becoming necessary to deal with excess supplies.
It is generally recognized that the problem of oversupply in the EU cannot be solved by slaughtering young calves a few days after birth or by strict supply management such as quotas on animal numbers. In an attempt to rebalance the EU beef market, a reduction in the EU beef intervention price is now being proposed in addition to demand-boosting efforts, such as promotions and consumer confidence building measures (a mandatory country-of-origin labeling scheme).
A reduction in the intervention price is being proposed not only to rebalance the internal EU beef market, but as a means to boost external shipments by making European exporters more competitive on the world market. Compromises in the intervention price cut proposal are likely to be made, however, as EU farmers become increasingly vocal in their opposition.
Efforts to restore consumer confidence in the beef supply through the mandatory country-of-origin labeling scheme are likely to cause some disruptions in trade flows due to both the burdensome approval process and the need to trace the beef back from the retail level to its source.
Slow Recovery for the EU Beef Market
Immediately following the announcement in March 1996 in Britain of a possible link between BSE and the human disease, new variant Creutzfeldt Jakob Disease (nvCJD), consumer reaction in the EU was one of drastically lower demand for beef. Overall in 1996, beef consumption in the EU fell by about 7 percent and it remained stagnant in 1997 at around 7 million tons.
The loss of consumer confidence in beef after the 1996 announcement played out differently across the EU, with the southern European markets the most volatile initially. Beef consumption in the major EU consuming countries remained down substantially in 1997 from the pre-BSE crisis levels of 1995. Consumption in France and Italy was down 5 percent over this period, and lower still in Germany and the United Kingdom, down 7 and 8 percent, respectively.
Substitution into other meats was evident almost immediately following the crisis, as British and French consumers began purchasing more lamb; EU consumers as a whole turned to poultry and, to a lesser extent, pork.
Some UK consumers switched from Scottish Aberdeen Angus beef to U.S. beef which is perceived to be a safe, high-quality product. (Very little U.S. beef has been imported into the EU since their 1989 ban on hormone-treated beef went into effect. Just 6,800 tons of non-hormone treated U.S. beef--mostly fresh chilled and frozen--entered the EU in 1997.) According to EU retailers, while food safety is a factor in the minds of EU consumers, price is also important in deciding whether or not to buy beef. In other words, if the price of beef is attractive enough to consumers, they will buy it despite any lingering concerns over BSE.
Despite supply control measures taken by the EU Commission aimed at controlling the spread of BSE, total beef production in the EU has fallen only slightly since the BSE crisis, standing at 7.8 million tons in 1997. However, in 1996, most EU countries (excluding the United Kingdom) experienced either growth in production or little change, reflecting both lower cattle prices and generous income support measures which distorted the market.
In France, the EU's largest beef producing country, production grew 2 percent in 1996 and declined slightly in 1997. Following growth in production in 1996, German beef production has been falling modestly; Italian production has remained somewhat flat since the crisis.
EU beef exports (not including intra-EU exports) dipped slightly in 1996, but rebounded in 1997 to 946,000 tons, assisted in part by export subsidies. Due to increasing requests for export licenses, the EU Commission cut export refunds for fresh and frozen beef by 50 percent in February 1998; this followed six previous cuts since August 1997. Despite the 1997 rebound in EU exports, shipments are still lower than those seen in the first half of the decade.
Following the March 1996 announcement, most importing countries moved swiftly to ban UK beef imports. Moreover, with BSE spreading to other EU countries, some traditional EU export markets were closed, such as France's traditional markets in North Africa. Nonetheless, new export opportunities developed for EU exporting countries in 1997. The primary export markets for European beef currently are Russia and Egypt. Egypt poses problems for exporters by demanding very strict labeling requirements, adding costs and imposing excessive documentation burdens.
EU exporters fear that when the export ban is eventually lifted, it will be very difficult to reestablish old export markets. In Britain, there is concern that former export markets have developed new trade relationships with emerging exporters such as Argentina, Uruguay, and Southern Africa. The French worry that former consumers in the Maghreb countries have switched to other, less expensive meats, especially poultry and seafood.
Overall, the EU beef market has experienced a slow recovery from the BSE crisis. The gap between total EU production and consumption doubled between 1995 and 1996 to 914,000 tons. Although the gap has been narrowing, there is concern that unless artificial incentives to production are changed, the gap could again widen as consumption resumes its long-term decline.
The imbalances of the EU beef market following the BSE crisis have resulted in large quantities of intervention stocks, which now stand at around 650,000 tons. Intervention buying by the EU Commission, which had become nonexistent at the time of the March 1996 announcement, became the primary mechanism for relieving the market of excess beef supplies.
The large volume of EU beef intervention stocks will be difficult to dispose of in international markets given the WTO limits on EU beef export subsidies. Moreover, international buyers will be hesitant to purchase these stocks, as they may be perceived as tainted, given that they built up since the BSE crisis. There are a few options under consideration to dispose of the stocks, but this will most likely be achieved by releasing them gradually on the internal EU market in such a way that will not cause major disruptions. Apparently, the EU feels no great pressure to dispose of the stocks immediately, as the EU Commission has an adequate budget for maintaining them in cold storage.
BSE Control Measures
Several measures have been introduced in the EU to control the spread of BSE among cattle and to minimize the risk of human exposure. BSE-related control measures include the Over Thirty Months Scheme (OTMS--the purchase and destruction of all UK cattle over thirty months of age), the Calf Processing Aid Scheme (CPAS--the destruction of EU calves less than 20 days old), the Selective Cull measure (the cull of cattle most at risk of BSE), and the cattle identification and traceability scheme.
So far, some 850,000 head have been disposed of in the UK under the OTMS. Calf slaughters in the UK under the CPAS are estimated at 595,000 head or about 60 percent of total EU calves disposed of under the scheme. There is concern in the United Kingdom that this enormous calf slaughter is seriously undermining the British beef industry's future production and export capability.
Another very effective measure in combating the spread of BSE has been the effort to control animal feed. The UK determined in the late 1980's that certain animal feed ingredients were the most probable cause of the disease, and banned the feeding of ruminant (and later mammalian) meat and bonemeal to ruminant animals. Still, scientists continue to investigate the possibility of infection by other means, i.e., by horizontal transmission or by genetic transmission.
Other measures to control the spread of BSE include new controls and regulations at slaughter facilities; there are still no common rules in the EU for removing and destroying suspect tissues. In the UK, controls involve such activities as ensuring the proper removal of certain offals and risk tissues from animal carcasses, staining and separating these from other tissues, and proper disposal of banned materials.
The EU's proposed specified risk material (SRM) ban would prohibit the use of SRMs (such as the brain, eyes and spinal chord of cattle, sheep and goats aged over 12 months) in food and feed products as well as cosmetics and pharmaceuticals sold in the EU. Six EU member states are asking for BSE-free status which would exempt them from having to remove and destroy SRMs, thus averting higher costs for their slaughter industry. The ban could be implemented as soon as April 1, 1998.
The original SRM ban proposal, which was to be implemented at the start of 1998, ran into international opposition as it threatened imports of U.S. pharmaceuticals and cosmetics, some of which contain materials covered under the proposed ban, such as cattle-derived tallow. On January 1, 1998, the UK unilaterally imposed an SRM ban on imports of and products derived from SRMs.
The EU Commission is considering recommendations that the risk of BSE-infected cattle entering the food chain be evaluated according to different factors, including the measures taken to monitor BSE in addition to the number of BSE cases in a given country. Specifically, the recommendation suggests that in order to evaluate the likelihood of a BSE-infected animal from entering the food chain and the probability of infection by means of the feed chain, several factors should be assessed. These include the structure of the cattle population, cattle trade, use of feed containing mammalian meat and bonemeal, SRM bans, surveillance of BSE, rendering and feed processing, and BSE-animal culling.
The export ban on British beef is only likely to be completely lifted once the cattle tracking system known as the Export Certified Herd Scheme is set in place in the UK. Under this scheme, a computerized cattle tracking system ensures that no animal or beef can be exported which was sourced from a BSE-infected farm. The animal must be identifiable throughout its life, and cannot be over 30 months of age at the time of slaughter. The UK expects to have a computerized tracking system operational as of late summer 1998.
The ban on UK beef exports was eased recently, as the EU voted in March to lift the ban on beef exports from Northern Ireland given this region's low incidence of BSE cases and its established computerized cattle tracking system.
The Push for CAP Reform Due to Growing Intervention Stocks
The growth in beef intervention stocks since the BSE crisis and the concern that production will again rise once the BSE epidemic in the UK is overcome has led to calls for reform of the Common Agricultural Policy (CAP) as it relates to beef. The most recent CAP reform was implemented in 1993. In the beef sector, reform involved a movement away from price support measures to a greater use of direct payments or cattle premiums. Preliminary proposals on beef under the new CAP reform promise to go even further in this direction.
The EU Commission will propose a new CAP reform on March 18, 1998. It is expected to propose a progressive limit on amounts individual farms can receive in aid and to allow member states more control over the CAP's annual $50 billion budget. As regards the EU beef regime, the proposal is expected to call for a reduction in the intervention price by 30 percent, to be partially offset by increases in direct payments to cattle producers.
This more market-oriented approach is being considered as the only viable long-term solution to the much distorted EU beef market in which production decisions are based on artificial incentives. The proposal is nonetheless meeting a great deal of resistance from certain farmers' organizations across the EU.
The aim of the minimum support price cut according to the EU Commission is to further liberalize the EU beef market and foster competitiveness in the export market. However, there is great skepticism among industry analysts about the ability of a 30 percent cut to make European beef competitive on the world market. The measure is also intended to place the EU in a better bargaining position when the next round of WTO negotiations begins in 1999. Moreover, it is hoped the measure will alleviate budgetary pressures when dealing with the enlargement of the EU to include eastern European countries.
France's cattle producers are firmly opposed to the reform and have become increasingly vocal in recent weeks against any such proposal. They feel the price support system is a justifiable expenditure given that the beef sector in France is comprised of many small producers who would not survive the cut and be forced off the land. (The French beef cattle sector is primarily located on marginal lands which have only limited use, e.g., extensive cattle production.) They are concerned that the proposal will disproportionately hit cattle breeders who raise cattle on natural pastures rather than processed feed.
In contrast, the UK's National Farmers Union favors the proposed price cut. This is because UK cattle farms are larger and more efficient and UK producers feel they can successfully compete with other EU member states in their domestic market and potentially outside the UK once concerns over BSE dissipate.
Moreover, British beef farmers, more open to a free-market environment, have witnessed that their government is reluctant to request aid from the EU Commission on their behalf. They see the trend toward a more market-oriented system as inevitable, made more urgent by the enlargement of the EU into eastern Europe.
The intervention price cut is intended to do away with intervention buying, or at least limit its use. According to the EU Commission's analysis, some 80 percent of the price cut will be compensated through direct payments to cattle producers. Specifically, increases are expected for the suckler cow premium and beef special premium (for steers and young bulls). A new dairy cow premium and new private storage aid scheme are also expected to be included.
COPA and COGECA (the Brussels-based agricultural producers' organizations) representatives have conducted their own analysis which suggests that the higher proposed direct payments will only compensate for about 60 percent of the price reduction, since certain producers would be excluded. For example, producers who specialize in finishing heifers would not be compensated since they are ineligible for direct payments. There may be other constraints as well, for example by headage limits, stocking density, and a national ceiling, set by historical levels.
It is difficult to know how the issue will finally be resolved, but there are likely to be compromises. Detailed proposals are expected in late March, but final decisions are not likely to be made until at least after the German national elections take place in September 1998. Germany and France are expected to stand firmly against any proposed intervention price cut, while Britain and Sweden are likely to stand in favor.
Rebuilding Consumer Confidence: The EU Beef Labeling Regulation
With mounting beef stocks and WTO limits on subsidized beef exports, the European Commission has looked for ways to regain consumer confidence in beef supplies and boost demand. In April 1997, the EU Commission issued Council Regulation 820/97, whose primary purpose is to provide EU consumers with reliable labeling information about beef purchased at the retail level--giving traceable information from the animal's birth to the retail shop. The intent of the regulation is to restore consumer confidence in beef.
The regulation covers all fresh, frozen, and minced beef and veal. Effective March 31, 1998, any voluntary claims on labels involving the country of origin of the beef or method of animal production will require approval by the EU Commission and member state authorities.
Beginning on January 1, 2000, all beef sold in the EU will be required to be labeled by country (or countries) of origin, that is, where the animal was born, raised and slaughtered. To achieve this, the EU Commission is requiring that all EU cattle be tracked from birth to slaughter by means of individual animal passports and eartags; the passports are to contain identification information which will be entered into a database system.
The regulation is seen by many third country exporters, including the United States, to act as a non-tariff barrier to international trade, as it imposes added costs and burdens on traders. EU importers buying beef from third countries will be required to seek approval for country-of-origin labels from the European Commission as well as the individual member state(s) that may be involved along the chain from port to retailer.
The Commission's role is to approve the actual label, while the member state(s) must be able to verify the truthfulness of the label in addition to approving it. Verification will be achieved through supporting documents, such as a legitimate export certificate. Once approved by one member state, a label cannot be refused by another.
When the BSE crisis really took hold in March 1996, the French already had a tracking system and a labeling scheme in place to allow country of origin labeling to be implemented on a full scale. Indeed, France was the first EU member state to initiate a voluntary beef labeling scheme, developed in response to calls from consumers for more information about the beef they were buying. France's cattle identification system has been in place since 1978, developed initially for commercial purposes.
Following the March 1996 announcement, the French government acted swiftly to adopt a mandatory labeling scheme, implemented in October 1997, in which all beef (excluding minced beef) sold at the retail level must contain a country of origin label, or be labeled "origin unknown" Retailers failing to label beef products by their country of origin risk being fined.
In the United Kingdom, traceability measures involving animal identification and paper passports were implemented for all native-born cattle born as of August 1996, that is, after the BSE crisis. Britain is now in the process of developing a computerized cattle tracing system, expected to be operational by late summer 1998. It is hoped that this identification and tracking system will help control the spread of BSE and rebuild consumer confidence in British beef.
UK retailers and government officials responsible for implementing the EU labeling regulation are fully confident that British consumers will prefer to purchase British beef once the labeling goes into effect. UK consumers are thought to be confident in the measures their government has taken to ensure the safety of the beef supply.
EU member states appear to have become more inward looking in their approach to rebuilding consumer confidence in the beef supply, shaken from the BSE crisis. EU businesses all along the chain from cattle producer to retailer are likewise banking on their own national labels to restore confidence and boost demand for beef. For example, the major French supermarkets have taken what they see as the most risk-averse approach to selling beef, offering only French beef to their customers. While there are no restrictions on selling imported beef, these major retailers fear their customers will not purchase imported beef.
There is cautious optimism among European farmers' groups, government officials, wholesalers and retailers about the ability of the EU labeling regulation to restore consumer confidence in beef. Many people acknowledge that additional measures will be necessary at the EU level to boost consumer confidence and demand, such as advertising and promotional programs. Others, more market-oriented in their outlook, are convinced that price will be the key determining factor in consumers' decisions whether to buy beef or not. Any positive impact of labeling on beef consumption in the EU is likely to be short-lived, as the long-term downward trend in consumption is expected to resume in the next century.
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