If you throw a stone in a pond, you know what happens – it disrupts the calm water, continuously rippling outward toward the shore.
If you identify one cow in Canada with bovine spongiform encephalopathy, you know what happens – well you do now.
In mid-May, the water was a bit murky in terms of how Canada’s lone BSE-positive cow would impact the United States’ meat industry. Today, you have a clearer perspective of the ripple affect it has had on the U.S. pork industry.
“Canada’s situation contributed to record high (U.S.) cattle prices and premiums over hog prices,” says Chris Hurt, Purdue University economist. The U.S. cattle industry and Canadian consumers have been the big winners. The Canadian cattle industry, U.S. beef consumers and U.S. pork producers have been the losers – some bigger than others.
As I write this, live-cattle futures set a record, and posted an extreme premium ($45 per hundredweight) over equivalent live-hog futures. Cash cattle prices also set records relative to cash hog prices. In the first eight months of the year, cash steer prices averaged $38 higher than cash hog prices. The previous record was $33 per hundredweight in 1992.
While these wide swings in cattle and hog price relationships are not new, multiple stones were cast into the pond this time.
The May 20 closing of the U.S. border to Canadian beef was clearly disruptive. In 2002, more than 8 percent of the U.S. beef supply had Canadian origins. More than half entered as live cattle, the rest as beef. Both options dried up this summer, creating tight U.S. beef supplies and high prices.
U.S. consumers stood by the higher priced beef even in the face of reasonable pork prices, and a waning U.S. economy. This has had many market-watchers scratching their heads. Perhaps it has something to do with the pork industry cutting product promotions. Perhaps the consumer is growing tired of the reliably consistent but flavorless, pumped, vacuum-packaged product. Perhaps it’s a reflection of beef’s grilling dominance, and consumers’ desire for a “treat” in an uncertain economy. Regardless, beef demand appears to be improving, while pork treads water.
Although the U.S. border was closed to Canadian beef, it remained open to the country’s hogs and pork. The only outlet for Canada’s beef supply has been the Canadian consumer, who dutifully replaced cheap beef with pork.
That pushed more live hogs and pork south, causing a 13 percent jump in Canadian pork imports from May to June.
As for market hogs, Canada made up 1.5 percent of U.S. slaughter in early May, but expanded to 3 percent by late August. Last year, Canadian feeder pigs and market hogs represented 5.7 percent of the U.S. slaughter. As of August, the rate exceeded 8 percent.
Another stone in the pond involves the changing beef production cycle, which runs 10 to 12 years. However, the current cycle is in its 14th year, and appears to be at a production low.
The pork production cycle has held pretty true to its 3-to-4-year span. Even though producers are in a mild liquidation phase, pork production has barely declined. “Cattle production is at ‘low tide’ and pork production is still fairly close to ‘high tide.’ Separate production cycles of widely different lengths cause large fluctuations in relative prices over time,” notes Hurt.
The pork industry’s consolidation has reduced costs, narrowed profit margins and resulted in an industry that is slow, unable or unwilling to make dramatic supply shifts.
Still, the biggest stone in this scenario has to be the BSE episode in Canada. For pork producers and cattleman in that country, it had a tidal wave effect. For U.S. producers the impact of its extending ripples benefited beef and hurt pork.
Without the BSE episode, the other stones thrown into the meat-supply-and-demand pond this summer would have had less impact.
The point to ponder is what would happen if one food-animal, regardless of the specie, caused the same kind of splash as in Canada?
A national livestock identification program has been a topic of discussion for decades, rarely moving off dead center. It’s now dramatically higher on the industries’ and government’s priority lists – and it’s about time. At least it’s an important start to a long-term strategy.