How will BSE affect the market?

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SALEM, Ohio – Cattle prices will most certainly drop due to the recent case of bovine spongiform encephalopathy (BSE) found in the United States, however that drop comes on the heels of record cattle prices.

Export effect. Prices are expected to drop about $8 a hundredweight due to the loss of exports alone, estimates agricultural economist Brian Roe.

Shortly after the case of BSE was announced last week, Japan, South Korea and Mexico – top importers of the United States’ beef exports – closed their borders. Many other countries followed suit.

Exports account for about 10 percent of U.S. beef production.

The domestic market will have to absorb the extra beef not being exported. The good news is there’s already a shortage of cattle, Roe said.

Demand drop. The export effect isn’t the only reason prices may fall.

Domestic demand may also drop due to consumers being afraid, Roe said. The level of fear will depend on the specifics of the case, the testing results and the media’s coverage, he said.

People in Canada returned to their pre-BSE buying and consumption after about a month, he said, referring to the case of BSE found in a cow in Canada in May.

Price drop. Another agricultural economist, Chris Hurt, estimated if the result of BSE on cattle prices was a 12 percent to 16 percent drop, the beef industry would take a $2 billion hit at the farm level in 2004.

“The good news in all this, if there is good news, is that we’re talking about a drop in prices from record levels. Live cattle were trading for $93 a hundredweight (Dec. 23).

“If you subtract 12-16 percent from that, you’re looking at prices in the high $70s to low $80s a hundredweight – what we usually consider normal,” he said.

The beef sector is a major contributor to the total U.S. farm economy. This year alone, farm-level beef sales are projected to approach $37 billion, up $7 billion from 2002.

Total U.S. farm sales this year are expected to reach $210 billion.

Grain market. Another victim in market response may be the grain market.

Livestock is the largest consumer of grain and corn and the news of BSE may also hurt these markets, according to beef specialist Justin Lahmers.

On the flip side, soybean prices may increase if other proteins are not available for livestock, he said.

Lessons learned. The U.S. beef industry is in a better position to recover from BSE today, thanks to lessons learned from the previous BSE outbreaks in Europe and Canada, Hurt said.

Seven months after the Canadian case, the country’s beef industry is still reeling from export bans and an overabundance of beef supplies, he said.

“The news from Washington is not as tragic as it would have been had it happened in the United States first,” Hurt said.

Record price reasoning. The beef sector has seen record prices recently due to low cattle numbers and increasing demand, Lahmers said.

Part of this is due to the trading ban with Canada because of its BSE case, Roe said.

This was coupled with stronger U.S. exports and a smaller-than-normal herd, resulting in a price surge.

For example, the cattle market in eastern Pennsylvania, which caters to the eastern seaboard, recently traded at $117 a hundredweight.

“In previous years that figure would have been in the mid-$70s,” Roe said. “Producers have been trading at 50 percent above typical prices for months now.”

Analysts predicted market prices would gradually diminish by summer.

‘Normal’ numbers? Although there’s speculation the hit in the beef market will take cattle prices down to more “normal” numbers, Lahmers said any drop in prices will hurt producers and the support industry around them.

Recent high prices have finally allowed producers to make money, he said. For years, it’s been difficult to break even, let alone make a profit, he continued.

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