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A Look at Rising Cattle and Beef Trade in North America
The growing integration of the North American cattle and beef market has led to increased trade in these commodities between the United States, Canada, and Mexico. U.S.-Canada trade will increasingly reflect Canada's expanded slaughter capacity, while U.S.-Mexico trade will continue to reflect Mexican producers' inability to meet growing domestic demand for beef of consistent quality.
Introduction
North America is a major player in world cattle and beef production and trade. Beef production within the region has become increasingly integrated reflecting cross-border investments in slaughter facilities. Beef and cattle trade has grown within North America, as the industries have become more savvy about market opportunities and developing markets in commodities for which they have a relative comparative advantage. While U.S. and Canadian markets are mature in terms of beef consumption, Mexico represents a growing market for the consistent type of quality beef produced in the United States and Canada. Plagued by drought, credit difficulties, and other input constraints, Mexican cattlemen have been unable to meet rising domestic demand for beef.
Cattle and beef trade between the United States, Canada, and Mexico has largely been open, and the recent trade agreements ensure free access. The tariff eliminations for cattle and beef trade in North America, agreed to under the Canada-U.S. Free Trade Agreement (CUSTA) and North American Free Trade Agreement (NAFTA), have had a relatively minor effect on trade, with the exception of NAFTA's elimination of import duties on beef and cattle imports into Mexico. The removal of this trade barrier coupled with economic recovery in Mexico beginning in 1996 paved the way for expanded U.S. beef exports to that market. Canada's exemption from the U.S. Meat Import Act appears to be a factor in increased U.S. imports of beef and live cattle.
North American Free Trade Agreements and Cattle-Beef Trade
The most significant outcome of the NAFTA for the U.S. and Canadian cattle and beef industries was the elimination of tariffs on cattle and beef exports to Mexico, which became effective on January 1, 1994. NAFTA also precluded Mexico from making capricious changes to its import duties on U.S. and Canadian product. The United States has been able to benefit from the tariff eliminations to a far greater extent than Canada given its geographic proximity to Mexico and historical trade relationship. Following the 1995 peso crisis, annual U.S. beef export growth to Mexico between 1996 and 1998 averaged 72 percent.
Cattle and beef trade with Canada had been fully liberalized prior to NAFTA, a result of the accelerated duty elimination agreement negotiated under the CUSTA of 1989. The former import duties on beef and cattle were relatively low, and therefore not viewed as a significant impediment to trade between the United States and Canada.
Quantitative restrictions on beef imports into the United States under the Meat Import Act (MIA) of 1979 had been, however, a more significant deterrent to trade for Canadian beef exporters. Following the implementation of the CUSTA, Canadian beef became exempt from the formula-based quantity restrictions of the MIA. At the same time, U.S. beef exporters gained market access to Canada, since the CUSTA exempted the United States from Canada's quantitative import restrictions on beef.
Following Canada's exemption from the U.S. Meat Import Act, U.S. multinationals made large investments in Alberta, Canada to expand existing slaughter facilities. Alberta feedlot operators began expanding their feedlot capacity in anticipation of the increased demand for finished cattle. Moreover, herd buildup in western Canada was aided by the elimination of the Western Grain Transportation Act in 1995, a defacto export subsidy whose elimination lowered grain prices and encouraged cattle feeding in Canada.
Due to delays in the start-up of operations at two expanded Canadian slaughter facilities (later completed in 1996 and 1997), large numbers of market-ready cattle in Alberta were exported to the United States. This partially accounts for the peak in U.S. cattle imports from Canada in 1996 (1.5 million head). Other factors have also played a role in the large U.S. cattle and beef imports recently, including the liquidation of cattle herds in Canada and Mexico, short-term differences between Canadian and U.S. cattle prices, and soft beef import demand in Asia.
Trade on the Hoof
The North American cattle market is unique in the world both for the volume of cattle traded and because of the characteristic grain-fed production systems of the United States and Canada. With the increasing integration of this market, each of the three North American countries has had to adjust production to optimize its comparative advantage. Mexico, with its relatively cheaper land and grain deficit status, has long established itself as an important source of feeder calves to U.S. feedlot operations, while importing primarily slaughter-ready cattle from the United States.
Canada's even, dry climate and large, highly seasonal pasture-range acreage and grain supplies have allowed Canada to become a more prominent supplier of slaughter cattle to the United States. Canadian feedlot operators are able to receive a premium for finished cattle sold in the United States that are graded with U.S. quality grades such as Choice or Prime, providing an incentive to export their finished cattle to the U.S. market.
The United States primarily supplies Canada with cull cows for slaughter, and more recently has begun expanding its exports of feeder cattle to western Canadian feedlots. Virtually all U.S. cattle imports are sourced from Canada and Mexico, and these two countries are the destination of 97 percent of U.S. cattle exports.
At 98.5 million head on January 1, 1999, the U.S. herd represents the overwhelming majority of North American cattle inventories, thereby dictating supply conditions in the pricing of cattle in the market. (By comparison, Canadian cattle inventories were 12.8 million head, and Mexican cattle numbered 24.6 million head.) Inventories in all these countries have been declining in recent years.
According to an International Trade Commission study (Publication 3048, July 1997), long-term cattle prices are determined in the U.S. market, while the Canadian price is the U.S. price times the exchange rate, adjusted for transportation costs. However, short-term price differences (that is, daily or weekly margins) between the United States and Canada arise frequently, due to changes in supply and demand conditions on either side of the border.
In 1998, U.S. cattle and beef prices moved downward, reflecting record cattle weights at slaughter and near record beef production. Moreover, record supplies of pork and poultry meat and stagnating domestic beef consumption were also factors in lower prices.
The United States has long experienced a trade deficit in cattle with Canada and Mexico, which averaged 1.7 million head valued at $812 million per year between 1988 and 1993. Between 1994 and 1998, the U.S. cattle trade deficit with Canada and Mexico averaged nearly 2 million head valued at $1 billion per year, reflecting higher imports from Canada which more than offset lower imports from Mexico. The cattle trade deficit was highest in 1995, when imports actually rose from Mexico following the December 1994 devaluation of the peso and continuing drought conditions, which forced Mexican cattlemen to liquidate their herds.
The large volume of U.S. cattle imports from Canada recently is related to the western Canadian herd buildup in the early 1990s followed by liquidation which began in 1996, delays in the completion of expanded slaughter facilities, and short-term price differences between U.S. and Canadian cattle prices. In 1998, Canada exported 1.3 million head of cattle to the United States, while Mexico supplied 720,000 head.
It is important to put import volume into perspective. Live cattle imports from Canada and Mexico averaged only 2.1 percent of U.S. cattle inventories between 1994 and 1998. Even in 1995 when these imports peaked at nearly 2.8 million, they represented only 2.7 percent of U.S. cattle numbers. Slaughter cattle imports from Canada, which peaked in 1996, represented 3.5 percent of total U.S. slaughter that year.
U.S. cattle exports to Canada and Mexico have declined slightly over the past 10 years, during which time they averaged 207,000 head per year. However, the value of U.S. cattle exports has grown stronger in recent years, averaging $181 million annually between 1994 and 1998. Cattle exports to Canada and Mexico in 1998 were nearly unchanged from the 1997 level, as falling exports to Mexico were offset by sharp increases in exports to Canada. U.S. exports to Canada grew 183 percent in 1998 due to expanded feeder calf exports under the Northwest Cattle Project (NWCP).
Now in its second year, the NWCP allows U.S. feeder cattle from the states of Washington, Montana, and most recently Hawaii to be exported to Canada during the fall and winter months without testing for certain diseases. The program runs from October 15 to March 31 each year. As of March 12, 1999, the Canadian Food Inspection Agency reported that 43,609 head of U.S. feeder cattle had been imported into Canada under the current year of the NWCP. During the 1997/98 season, just 1,000 feeders were exported under the program.
Exports have increased due to strong demand for U.S. feeders and because of Canadian actions in August 1998 to ease the regulations governing the program. Among the actions taken was a regulation which allows feedlot operators to treat NWCP imports for anaplasmosis rather than testing for the disease as previously required. The total number of western Canadian feedlots approved for the program is now 86.
Beefing Up the Beef Trade
North American beef is a more internationally traded commodity than North American cattle. The United States and Canada are both world exporters and importers of beef, while Mexico is primarily an import market. Trade between the United States, Canada, and Mexico is dependent on world beef supply and demand conditions. An economic downturn in a major beef importing region such as Asia puts downward pressure on North American beef prices, affecting trade within the region.
Nonetheless, North American beef prices are primarily set in the United States, where local supply and demand conditions dominate. The United States is much less dependent on North America as an export market than is Canada; Canada and Mexico represent 32 percent of total U.S. beef exports while the United States alone represents 94 percent of Canadian beef exports.
Although the United States is the world's leading beef producer, it is also the top importer of beef. Canada surpassed Australia as the main beef supplier to the United States in 1996. Australia and New Zealand typically supply the United States with manufacturing grade beef for blending with U.S. trimmings. The growing Canadian share of U.S. imports has resulted in a greater proportion of higher value cuts in the import mix as the quality of Canada's exports increasingly reflects its expanded grain-fed production.
Unit values of U.S. beef imports from Canada have averaged higher in recent years, and in 1998 they were nearly one and a half times the Australian unit value, at $2,406/ton and $1,639/ton, respectively. Over 70 percent of U.S. imports from Canada are comprised of fresh-chilled boneless cuts, 10 percent are prepared and preserved beef or beef offal, 8 percent are frozen boneless cuts, with the remainder made up of various fresh-chilled, frozen, prepared and preserved cuts.
North American beef is unique because of its more marbled texture, owing to grain-fed production in the United States and Canada. The similar quality of U.S. and Canadian beef has meant that rather than focusing on marketing differentiated product in the other's market, U.S. and Canadian exporters have preferred to target specific geographic areas across the border where they might have a transportation cost advantage. Thus, the beef trade has tended to move northward from the United States to the populated eastern cities of Canada, and southward from western Canada to the United States.
However, U.S. exporters are currently facing fierce competition from western Canadian packers who have expanded their slaughter capacity; U.S. exports have also suffered due to a strengthening U.S. dollar. Nearly 90 percent of U.S. beef exports to Canada are fresh-chilled and frozen product. According to U.S. industry sources, chucks and rounds typically comprise 65 percent of the fresh-chilled and frozen cuts, with middle meats (such as ribeyes and tenderloins) and thin meats (such as briskets and short plates) representing 25 and 10 percent, respectively.
Following the peso crisis of 1995, beef imports into Mexico have been buoyed by healthy economic growth and renewed consumer confidence. Averaging about 6 percent per year between 1996 and 1998, economic growth in Mexico has spurred the development of supermarket chain stores, fast food restaurants, and the tourist industry. The United States has been quite successful in reestablishing its presence in that market, where domestic producers have been unable to meet growing domestic demand for a consistent type of quality beef due to drought and large outstanding debts.
Representing about 96 percent of total Mexican beef imports, U.S. beef is found in many segments of the Mexican market, from the high end hotel, restaurant, and institutional sector to lower end restaurants and retail markets that offer less expensive beef cuts and beef variety meats. According to U.S. industry sources, of the fresh-chilled and frozen U.S. exports to Mexico, chucks and rounds constitute 60 percent, middle meats 25 percent, and thin meats 15 percent. In 1998, U.S. beef exports grew to a record 142,000 tons valued at nearly $400 million.
U.S. beef trade with Canada and Mexico has experienced sharp growth in recent years. U.S. beef exports and imports to these countries have tracked closely on a volume basis over the past decade; however, the United States has run a trade deficit in beef with Canada and Mexico jointly each year beginning in 1993.
On a value basis, U.S. exports were substantially higher than imports between 1988 and 1994, after which exports and imports have remained much more in balance, growing at a similar pace. Since 1997, the United States has run a slight deficit in beef, as the value of imports from Canada has outpaced the value of U.S. exports to Canada and Mexico. This reflects declining unit values of U.S. beef exports to the region and rising unit values of Canadian beef exports in 1997 and 1998. In 1998, the U.S. beef trade deficit with these countries was 80,000 tons valued at $67 million.
Mexico accounts for the majority of the beef variety meat trade between the three countries, reflecting a wide variety of primarily frozen U.S. exports: livers, tongues, lips, hearts, and kidneys. The beef offal trade between the United States and its NAFTA partners generally grew in the first half of the decade, but plunged in 1995 as a result of the Mexican peso crisis. Following the crisis, U.S. exports to Mexico rebounded rapidly, and 1998 exports roughly matched 1994 exports.
The U.S. trade surplus in beef variety meats has, however, not recovered to pre-crisis levels; the 1998 surplus stood at 33,000 tons valued at $17 million. Beginning in 1995, rising U.S. beef variety meat imports, mainly from Canada, have dampened the surplus.
Looking Ahead
The current trend in U.S.-Canadian trade indicates declining cattle imports from Canada but rising beef imports. The downturn in the Canadian cattle cycle since 1996 has led to fewer cattle available for export. The modernization and increased capacity of Canadian slaughter plants are expected to make them more competitive in bidding Canadian fed cattle away from U.S. packers. With domestic Canadian consumption showing little change and continuing weakness in Asian beef imports, Canadian packers are expected to continue targeting the United States as a growth export market.
U.S. beef exports to Canada will come under increasing competition from Canadian beef producers; however, U.S. feeder cattle exports are expected to expand to Canada due to increased market access under the Northwest Cattle Project. Declining supplies of U.S. feeder cattle and rising prices are nonetheless expected to temper export growth in 1999.
The near-term outlook in Mexico is for modest economic growth which should continue to boost U.S. beef sales to that market, though export growth is expected to slow from its recent brisk pace. Mexican imports will increase gradually, reflecting the inability of domestic producers to offer beef of consistent quality, particularly beef from grain-fed cattle.
Mexican cattle imports will continue to depend on the availability of credit. As drought conditions improve, Mexican cattlemen are expected to moderately increase purchases of imported breeding stock to upgrade their herds. Strengthening U.S. feeder cattle prices in 1999 will likely attract higher imports of Mexican feeder calves.
The outlook for the cattle and beef sector in North America points toward continued integration and cross-border investment, leading to a further rationalization of the industries. The U.S. and Canadian cattle industries will increasingly be viewed as one entity specializing in grain-fed beef production; the United States will continue to dominate the market because of its much larger size in both cattle inventory and feed grain production. The market integration is, however, currently coinciding with the liquidation phase of the North American cattle cycle, characterized by reduced profitability.
Some North American cattle producers have taken actions against cattle imports. Legal action to stop the flow of cattle imports was taken on November 12, 1998, when the Ranchers-Cattlemen Action Legal Foundation (R-Calf) filed a petition with the U.S. International Trade Commission (ITC) alleging live cattle imports from Canada and Mexico were sold at less than fair value. They further claimed that the U.S. cattle industry had been materially injured by live cattle imports from Canada which allegedly are subsidized by the Canadian government.
The ITC found no evidence that the U.S. industry is materially injured by cattle imports from Mexico; however, it did find evidence of injury in the case of imports from Canada. Thus, the U.S. Department of Commerce is currently pursuing antidumping and countervailing duty investigations against cattle imports from Canada. Similar actions have been taken in Mexico, where the government officially announced on October 21, 1998 that it would pursue an antidumping investigation filed by Mexican cattlemen and several slaughterhouses against imports of U.S. slaughter cattle, beef, and variety meats.
The outcome of these antidumping investigations remains uncertain, but they are unlikely to materially alter the integration of the North American cattle and beef sectors over the long run. Past experience would suggest that as the cattle cycle begins its expansion phase again in the new millennium and prices strengthen, trade tensions will diminish between the three countries.
For further information, contact Monica Castillo, (202) 720-7285.
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