COUNTRY OF ORIGIN LABELING: IMPLICATIONS FOR THE MANITOBA HOG INDUSTRY

This project was undertaken at the request of the Manitoba Pork Council in order to assess the impact of the Country Of Origin Labeling (COL) provisions of the US Farm Bill. The Council needs to know the consequences (economic and otherwise) of COL upon Manitoba hog farmers. The Farm Security and Rural Investment Act of 2002 (the Farm Bill) contains a provision that requires the United States Department of Agriculture (USDA) to issue country of origin labeling guidelines for voluntary use by retailers who wish to notify their customers of the country of origin of beef (including veal), lamb, pork, fish, perishable agricultural commodities, and peanuts. The Farm Bill also requires that a mandatory country of origin labeling program be in place by September 30, 2004. Development of this mandatory program will begin in April 2003 and will likely be based on these voluntary program guidelines from the current interim period as well as related input the USDA receives. The covered commodities include: muscle cuts of beef(including veal), lamb, and pork; ground beef, ground lamb, and ground pork; farm-raised fish and shellfish; wild fish and shellfish; perishable agricultural commodities (fresh and frozen fruits and vegetables); and peanuts. The law excludes food items from country of origin labeling when a covered commodity is an "ingredient in a processed food item." The law does not apply to covered products sold at food service. In the case of beef, lamb, and pork products, the law states that a retailer may use a "United States Country of Origin" label only if the product is from an animal that was exclusively born, raised, and slaughtered in the United States. The country of origin for covered products produced in their final form outside of the United States is the exporting country. That is, fresh muscled pork from Canada would be considered "product of Canada", regardless of where the animal was born or raised. Products that were produced in both foreign markets and in the United States would be labeled to identify what production processes occurred in a foreign market and what production processes occurred in the United States. For example, a product could bear a label that states, "born in Canada, raised and processed in the United States". Another combination might be born and raised in Canada and processed in the United States. Permutations and combinations involving three countries are also possible. Retailers and their suppliers will have to maintain a verifiable audit trail on covered commodities to substantiate country of origin labeling claims. Records must be retained for two years. Retailers must ensure that a verifiable audit trail is maintained through contracts or other means, recognizing that suppliers throughout the production/marketing chain have a responsibility to maintain the necessary supporting records. The following are some of the key points derived from the George Morris Centre research into the issue: *The purpose of COL is to impede or restrict imports of the covered products or the live animal inputs. In that regard it is crucial to note that the Canadian pork industry depends on the US for 35-40% of the market for hogs. *Very little is definitely known about the costs of COL and what it will take to comply with a mandatory program. Most industry participants in the US remain uncertain or uninformed about the true ramifications. *Most US packers will not buy Canadian hogs if COL is mandatory because cost is seen as being too high compared to simply handling US hogs. *US packers may try to help increase the number of sows in the US to maintain plant utilization by investing in sow operations *US retailers believe consumers don't care, the information is of no value, and will buy from Canada if their cost does not increase substantially. Therefore: 1. At best, Canadian packers will benefit because pork will trade with the US, but hogs won't. Canadian pork may be able to command a premium in the US or export market because it is labeled, and conforms to specified quality characteristics or protocols. However, in every situation in the past like this when US and Canadian hog prices were disconnected (eg countervail, strikes), hog prices fell in Canada relative to the US. 2. At worst, Canada will either lose a substantial export market or retain it only at a significant price discount. Based on this research, we identified alternative scenarios and estimated their economic consequences. In the negative scenario (2 above), we estimate: * Canadian hog and pork industry could lose over 450 hog farms and farm income totaling over $350 million. * Feed mills would close * A market for 250,000 acres of cropland would be lost. * Including grain farms, losses could be up to $750 million in farm income could be lost along with over 3,000 farms. Strategic Implications At the most general level, the obvious strategic objectives in response to COL are to put a process in place that maximizes the opportunity for Canadian pork to benefit from labeling, while minimizing the risk of the negative scenario. What does this mean in a practical sense? Maximizing Opportunities The opportunities are to increase sales of Canadian labeled, (likely branded) product on US or Asian retail shelves. The former builds on the labeling requirement. The latter, especially, builds on the fact that the US will likely have a shortage of supply if COL becomes mandatory and, therefore, will need to short some customers, most likely the export market. Both build on the assumption that Canadian pigs will not be shipped to the US, and will need to be slaughtered in Canada. Moreover, the nature of the COL regulations should make transactions costs lower for the Canadian industry than for the US. This will give Canadian product a cost advantage. Increased sales can also result from higher prices if there is a basis for product differentiation. Some or all of the following are required to maximize the opportunities: *Product information that can be used to successfully brand Canadian product. If such information exists, Canada may be able to benefit from both volume and price. Is there supportable research information on food safety, carcass quality, environmental benefits, etc that can be used as a claim for pork from Canada, or from a set of Canadian farms and plants? What protocols need to be put in place to ensure that the benefits claimed are actually delivered? If there is no scientific basis for claims, is there a marketing approach that will allow successful branding. *Shelf space incentives. Increasingly it is important to pay retailers incentives to secure shelf space. If Canada has the basis to brand and differentiate fresh pork, especially in the US market, then we also need to have the financial resources to secure shelf space. This suggests an industry approach that would, perhaps, include processors, with partially or fully matching dollars from a fund set up with producer, federal and provincial money. This may take the form of some of the funds the US established for market development in the most recent farm bill. *Finishing and nursery spaces. If Canadian hogs can't be shipped to the US, then the equivalent number of nursery and finishing spaces need to be built in Canada. With the risk afforded by the COL, financial institutions will be reluctant to make funds available. NIMBY issues because of environmental concerns need to be overcome. Therefore, two aspects of public policy need to be instituted: o Provincial governments need to quickly ensure that environmental requirements rigorously protect a environment, while supporting responsible economic development o Most likely, loan guarantees that are specific to the hazard presented by COL should be put in place to ensure the availability of capital. o Alternative pricing and risk management mechanisms need to be explored to replace the links to US futures and cash markets. Minimizing the Risk of COL By far the best way to minimize the risk that COL will not have the devastating consequences that are outlined above is to help the US decide that COL is not good for them. This includes: *Providing analysis that indicates the economic cost to the US. To date, the analysis in US has focused on the costs of compliance by their packers and farmers - ie the cost of segregation and paper work. It has not measured the economic costs of lost capacity utilization of packing plants and/or finishing operations, the costs to consumers, or, conversely, the economic and environmental costs of increasing the US sow herd enough to offset the loss in Canadian hogs. This can be done based on the same scenarios we used in the current study to estimate the impacts on Canada. *Ensuring that the analysis gets appropriately provided into the US political system. This likely means coordinating efforts by Canadian producer associations, federal and provincial governments, and US trade associations to hire lobbyists who will develop a lobbying strategy and implement the flow of information into the congressional and executive branches most effectively. *Investigate all possible avenues to prosecute COL under either NAFTA or WTO rules. This includes, if possible, the possibility of prosecution before it is mandatory: if not, any reparations may be unable to offset the damage. This likely needs to be done as part of the lobby effort listed above. Concluding Comment This is a preliminary exploration of strategic responses. There may be additional steps and some of those discussed here may require further analysis. However, they seem logical given the situation. What is clear is that this is a time when commitment is needed by the industry and government. COL is a clear threat to one of the most vibrant aspects of Canada's Agri-food sector. It needs to be dealt with quickly and with determination.


Issue Date:
2002
Publication Type:
Working or Discussion Paper
PURL Identifier:
http://purl.umn.edu/18099
Total Pages:
57




 Record created 2017-04-01, last modified 2017-11-18

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