U.S. participation in trade liberalization agreements with Canada and Mexico through the Canada–U.S. Free Trade Agreement (CFTA) and the North American Free Trade Agreement (NAFTA) has generated intense debates in agricultural sectors about the benefits and costs of those agreements. The CFTA and NAFTA mandate that live cattle and beef trade among Canada, Mexico, and the United States be based upon competitive factors and include legal safeguards to deal with arbitrary trade restrictions. Nominal and real U.S. fed and feeder cattle prices declined throughout the 1990s. Over the same period, the total U.S. beef supply increased from 25 billion pounds to 28.5 billion pounds. Imports (both beef and beef obtained from live cattle) accounted for almost 0.5 billion pounds, about 14 percent, of this increase. Thus, most of the supply increase has resulted from increased domestic production. This supply increase has occurred even though total cattle inventories have steadily declined since the mid-1970s. Most of the increase is explained by increased productivity of the U.S. beef cow breeding herd—caused by factors such as improved genetics, management, and feeding programs. Consequently, actual U.S. beef production remains relatively large even as cattle and calf inventories have declined. U.S. cattle and beef imports from Canada have increased substantially since 1988. Expansion of Canadian slaughtering capacity has not kept pace with the expansion of the Canadian cattle finishing industry. Given that the United States has excess slaughtering capacity and a larger consumer demand for high-quality and ground beef compared to Canada, fed cattle imports from Canada have increased. While beef and cattle imports from Canada have expanded throughout the 1990s, total beef imports from all sources have increased only slightly. Canada's share of U.S. beef supplies increased by slightly over 3 percentage points during the 1990s. As a consequence, of the $8/cwt decline in slaughter price during this period, about $0.35/cwt was attributable to increased Canadian imports or about 4.4 percent of the price reduction. For a 1,200-pound fed steer, this amounts to about $4.20 per head. In addition, 1998 cattle and beef net imports from Canada were similar to 1997 levels. Although Canadian beef and cattle exports to the United States certainly put downward pressure on cattle prices, these exports were responsible for only a small portion of the 1998 decline in U.S. cattle prices. Rather, the combination of low feed prices, which encouraged unusually heavy average dressed weights, large supplies of competing meats, a flat market for high-quality U.S. beef exports, and a significant reduction in by-product values in Asian countries contributed to the 1998 price woes. Producers have recently expressed concerns regarding the method in which the U.S. Department of Agriculture (USDA) reports U.S. beef production levels. Prior to the mid-1980s almost all U.S. live cattle imports were feeder cattle. The USDA's definition of U.S. beef production was reasonable given that most of the meat being added to imported feeder cattle was actually being produced in U.S. feedlots. However, because of increased fed cattle imports from Canada, it is important that analysts continue to recognize and account for USDA's definitions of beef production and imports. Perhaps increased fed cattle imports provide a rationale for altering data reporting methods to more accurately account for imports. Nonetheless, the current reporting system does not prohibit appropriate analyses of the impacts of trade on U.S. cattle and beef prices. U.S. cattle producers operate in a commodity marketing system that is highly competitive. Increased prices cause increased production from both domestic and foreign sources—which, in turn, eventually depresses prices. Because of such supply responses, a competitive industry will not experience sustained price levels in excess of long-term average costs (which include a normal rate of return). Therefore, industry participants must continually work at expanding both domestic and foreign markets, developing new products, improving product quality, and lowering production and marketing costs.

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Policy Issues Paper 9

 Record created 2017-04-01, last modified 2018-01-22

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