Will Verboven, Contributing Editor

Canadian Border
Some May Gain But Others Will Lose
Those in the U.S. cattle industry who have spent much time and coin trying to keep the border closed to Canadian cattle imports may take some comfort in the recent injunction against a re-opening. Those looking at the situation in the U.S. from a longer term perspective are probably feeling a lot more uncomfortable – particularly those further along the production chain.

The major unintended consequences of the border closure have been on the packing industries in both countries. But the consequences couldn’t be more different. In the U.S., packers are closing plants, and reducing production in others. New plant construction or expansion is sparse, if at all. But in Canada, major packers are spending millions on expanding production facilities. Construction of a new plant began in Alberta in February. To underscore the situation even more – a Washington State packing plant is being dismantled, moved and rebuilt in Manitoba. When those expanded and new facilities come on line, beef production could well increase by another 20 percent in Canada.

Even without that expansion, Canadian beef processing increased a whopping 22 percent in 2004, as packers worked flat out. Accordingly, boxed beef exports to the U.S. from Canada are booming and packers are enjoying u nprecedented profits in real U.S. dollars.

American packers watching all this activity north of the border must be wondering exactly what the border restriction was supposed to achieve since it hasn’t exactly done their economic health much good. Some were no doubt hoping to get their hands on cheaper Canadian cattle when the border re-opened, but that doesn’t seem likely soon. What drives them apoplectic is that, while they can’t buy live Canadian cattle, they must compete with the flood of Canadian boxed beef from those cattle.

American feedlot operators may also start to wonder about the wisdom of it all as packer demand for their cattle starts to weaken in the face of more Canadian beef product imports. Those who bought Canadian feeder cattle in the past may find that source drying up as more of those cattle stay in Canada to be fed to supply all that meatpacking expansion in Canada.

Ironically, rumor had it that the first 5,000 head of cattle scheduled to cross the border if it had opened on March 7 were all American-owned cattle. U.S. cattle dealers, feedlot owners and packers have been busy buying cheaper Canadian cattle on speculation that the border would open. This will make it the second time U.S. buyers have been burned as a result of border-opening politics. Canadian cattlemen were more cautious about the border re-opening. Perhaps they realized that when the same Montana judge who granted the August injunction was also going to decide the March injunction, the odds did not favor Canada.

It may well get worse in the long run for U.S. packers since the Canada Beef Export Federation has recently begun to develop markets in parts of Europe, Russia and elsewhere; markets it intends to serve at the expense of U.S. beef exports. In the short term, Canadian beef has returned to markets in Hong Kong – U.S. beef has not yet been allowed back into that market.

If the U.S. border continues to be closed to live Canadian cattle, it may well embolden the Canadian industry and government to offer the Japanese BSE-tested beef – something they have requested for the past 22 months.

The North American cattle market, when left alone, evolved into something that worked for those who were efficient and market savvy on both sides of the border. Time and time again it’s been shown that once the free market is restricted by government or politically motivated trade barriers, two things happen: 1) there will be unintended repercussions, and 2) the market will adjust itself. Unless common sense returns to the BSE and border issues – certain sections of the U.S. beef industry will continue to be impacted and it’s only going to get worse.