Threat to NAFTA Scares Canadian Beef and Cattle

Counting cattle

The Canadian beef and cattle industry came to a standstill after mad cow disease was detected in an Alberta cow in May 2003. Canada’s cattle stock climbed from 13.5 to 16.9 million head between January 2003 and July 2005 as importers went elsewhere. Alberta feeder steer price plummeted from $163.84 per hundredweight (hwt)—equivalent to 112 pounds—in April 2003 to $89.97 per hwt in February 2004. Beginning-of-year calf population rose by 675,000 between 2003 and 2004, the largest one-year change on record. Live cattle exports to the US crashed from a record 1.68 million head in 2002 to 0 in 2004, according to Statistics Canada.

Once cattle were declared disease-free, Canada tried to make up for lost time, specifically with its top customer. By September 2003, the US resumed Canadian beef imports. US beef and veal imports from Canada hit 37,151 tonnes in May 2005, the second-highest total ever. Live cattle exports to the US rose to 1.05 million head in 2006. However, the Canadian beef and cattle industry may have overextended itself.

Beef and cattle exports began settling to a normal level in 2007, but drought in US cattle states between 2010 and 2013 forced US producers to sell large portions of their stock. In 2013 and 2014, the US imported more Canadian cattle to replace its losses, and prices for Alberta feeder cattle hit all-time highs. Canadian beef imports ramped up in early 2013 due to subsequent low US production.

By January 2017, Canadian beef cow headcount dropped to 3.49 million beef cows, the lowest total since 1992. Canada also recorded its lowest total cattle population since 1991, with 11.85 million cattle. Calf, slaughter heifer, and beef replacement heifer populations also declined in the last 10 years. Live cattle exports to the US through October 2017 were 549,349 head compared to 987,801 head for the same period in 2014. These exports are crucial to the industry, valued at $989 million in 2016. By comparison, frozen Canadian boneless beef exports to China, Hong Kong, and Japan totaled just $144 million in 2016.

NAFTA

The US relies on Canada and Mexico for access to fresh beef and live cattle. The US imports Canadian cattle near slaughter weight for feedlots, and they have imported at least 39,000 live Canadian cattle monthly since August 2005. Canada and Mexico have historically held relatively equal shares of live cattle exports to the US. However, since 2003, Canada’s annual US exports topped Mexico’s just five times. Mexico and Australia are also starting to eat into Canada’s fresh beef exports to the US.

The US has no incentive to back out of NAFTA with respect to beef and cattle. Then again, beef and cattle have not been the target of Trump’s NAFTA rhetoric. Even if the US withdraws from NAFTA, the Canada-US Trade Agreement (CUSTA) would likely come into play. CUSTA was the predecessor trade agreement to NAFTA, signed in 1988, and could take effect if the US backs out of NAFTA. It would introduce around 4 percent tariffs on Canadian exports of beef and cattle compared to no tariffs with NAFTA.

If CUSTA doesn’t take effect, each NAFTA member will face stiff tariffs on beef via the World Trade Organization (WTO). Canadian, Mexican, and US 2017 WTO tariffs on fresh or chilled, boneless bovine meat were 26.5, 20, and 13.5 percent, respectively. A lack of feasible importers outside of NAFTA for fresh Canadian beef could result in the industry facing hefty Mexico and US WTO duties.

Courting Japan, China

Japan consumed 1.26 million tonnes of beef and veal in 2017, but more importantly, they imported 780,000 tonnes. Japan imported 14,125 tonnes of frozen, boneless Canadian beef through October 2017, 3,000 tonnes greater than in all of 2016. However, Japan announced in August 2017 that it will raise Canadian frozen beef tariffs from 38.5 to 50 percent through March 2018. Between the tariff hike and the new Japan-Australian Economic Partnership (JAEPA), it appears Canada is being squeezed out of the market.

JAEPA gradually cuts Japanese tariffs on Australian chilled and frozen beef to 19.5 and 23.5 percent, respectively, over the next 18 years. The most recent tariffs for chilled and frozen beef were 29.9 and 27.2 percent. Australian beef constituted 52 percent of Japan’s 2016 beef imports, but Australian exports to Japan haven’t changed much since tariffs first fell in 2015. Exports finally began to increase slightly by late 2017. Japan also imports about the same amount of Canadian beef annually as it does from Australia monthly. Small changes in Japanese imports from Australia will be significant for Canada.

Trudeau returned from China in December 2017 without a roadmap for a free trade agreement between the two nations. The Canadian beef and cattle industry want progress on that front due to China’s growing beef demand. China first began to import Canadian beef in January 2013. By 2015, imports skyrocketed as the Chinese government reportedly began to crackdown on illegal meat markets. Canadian boneless, frozen beef exports to China hit 5,383 tonnes in November 2015. Prior to 2015, the monthly maximum and average were 1,182 tonnes and 491 tonnes, respectively.

Despite Trudeau returning empty handed, Alberta recently reached an agreement for bone-in, chilled beef with China that’s potentially worth $15.7 million for producers. This is just a pilot agreement and certainly not a firm foothold in the Chinese market. Other Asian importers—Taiwan, South Korea, and Vietnam—have consistently imported frozen Canadian beef over the last year-and-a-half.

Conclusion

The growing Asian market looks shiny and promising from Canadian shores. However, the beef and cattle industry must avoid distraction and stay focused on the cash cow sitting on its side of the Pacific. The uncertainty surrounding NAFTA dominates all other concerns because fresh beef and live cattle exports to the US are each billion-dollar exchanges.

Canada is not exempt from Trump’s NAFTA criticism. While Trump hasn’t focused on beef specifically, he has raised concerns over the Canadian government’s milk supply management system. Canadian milk’s declining producer prices and flattening retail prices since 2014 have hurt US dairy farmers. Canadian milk exports to the US have spiked from 285,956 to 1 million liters between February and May 2017. US exports of milk albumin, or whey protein, have trended downward since April 2016. The US slapping a tariff on dairy and the cattle industry is not hard to imagine following the retaliatory duty imposed on Canada’s lumber industry in 2017.

The Canadian beef industry may also want to consider the intangibles of pursuing Asian importers. The US already has staked its claim on beef exports to Japan, China, and other emerging markets. If Canada chases these deals, it could cut into US beef exports and further strain relations. Canada also needs to steady its cattle stock and assure its health for the sake of its current East Asian exports. Japan will quickly ban imports from countries with even the smallest health blip, and even the Chinese government is beginning to emphasize food safety. These new markets are tantalizing for Canadian beef and cattle, but securing US deals and rebuilding the depleted herd should presently trump all other pursuits.