Kay's Korner

Jan 31, 2014

Beef prices won’t be COOL

Supporters and opponents of country of origin labeling (COOL) have been deeply divided ever since the idea of COOL emerged in the late 1990s. That divide continues to play out not just in the country but in the corridors of Congress. As I write this, it appears that supporters have “won” the fight over whether to include a provision in the new farm bill to amend the new COOL regulation that took effect last year.

The new bill contains no mention of COOL, despite the fact that a growing number of legislators recognized the wider issue at stake. That issue is retaliation by Canada and Mexico that could cause $2 billion annually in economic damage to U.S. agriculture and other industries. It is mind boggling that some of those charged with crafting the farm bill ignored this threat, seemingly because COOL supporters convinced them that COOL has a greater value to American consumers.

I can’t fathom how one can compare the economic damage of retaliation with the perceived benefits of COOL. Even USDA, who crafted the new rule, admits that its economic benefits are slight and hard to quantify. So emotion has once again trumped common sense and the facts, and the beef industry will continue to suffer from the impact of COOL, be it at the feedlot or processing plant level, and in the retail meat case.

COOL still has to be fixed. Canada and Mexico say the new rule, which USDA began enforcing Nov. 23 last year, is even more discriminatory against its livestock industries than the rule it replaced.

So its case to the World Trade Organization proceeds. A WTO disputes panel will meet Feb. 18 and 19 to hear continuing arguments.

This process will continue the rest of the year, because one side or the other will appeal a final panel decision.

Should Canada and Mexico prevail, which is likely, they will then receive permission to apply punitive tariffs on a wide range of U.S. exports to both countries, including meat products. That’s when people other than COOL opponents will start screaming at their members of Congress to do something. Congress might then find a way to amend the COOL rule to bring the U.S. into compliance with its WTO obligations. But this won’t occur for at least a year.

How short-sighted that the architects of the new farm bill couldn’t see they have merely put off an action that will have to take place in the future.

Compounding their inaction is the fact that the vast majority of consumers have shown no inclination to know where their beef comes from. Many don’t read the labels. Besides, the new labels are in such fine print that one almost needs a microscope to read them. The far more important factor affecting beef purchases going forward is whether consumers can afford to buy beef.

January’s unprecedented (for this time of year) rally in live cattle and wholesale beef prices means consumers will face higher beef prices in the grocery store starting midmonth and in restaurants sometime later. The rally saw cash live cattle prices increase $17.74 per cwt in five weeks, breaking records each week. Prices (based on USDA’s 5-area Choice steer) averaged $148.22 live the week before last and the dressed price averaged $238.70, up $31.02 in the five weeks. Cattle began trading last Tuesday a little below these average prices. So it appears this rally might be over for now.

Boxed beef prices had their own rally into the stratosphere. USDA’s weekly comprehensive boxed beef cutout advanced $32.51 per cwt in four weeks, also setting new records each week. The comprehensive includes cuts, grinds and trim, so is the most accurate reflection of wholesale prices. The comprehensive first exceeded $200 in May last year but struggled to pass this price ceiling after that. Now it seems it will remain well above $200 for the foreseeable future.

This has profound consequences for beef sales. Retailers normally wait four to six weeks to raise their everyday prices in response to big increases in wholesale prices.

But they are starting to raise prices already because of the magnitude of the increase. They featured beef solidly this past weekend but that’s because ads were set at much lower wholesale prices in November-early December. February and March will see very few beef ads. They are already the two weakest beef demand months of the years and might be even weaker this year if consumers start suffering sticker shock. One thing’s for sure: price, not where the beef comes from, will be the only thing on consumers’ minds. — Steve Kay