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February 13, 2003

The Honorable Marilyn R. Abbott
Secretary
U.S. International Trade Commission
500 E Street, S.W.
Washington , DC   20436

Dear Ms. Abbott: 

            The Ranchers-Cattlemen Action Legal Fund -- United Stockgrowers of America ( R-CALF USA ) is pleased to have the opportunity to submit answers to questions posed to R-CALF USA during the U.S. International Trade Commission’s (ITC) hearing of February 6, 2003 , regarding the investigation on the Probable Economic Effect of a U.S.-Australia Free Trade Agreement (Inv. No. TA-131-24 and TA-2104-04). 

            R-CALF USA ’s replies are as follows:

1.         Respond to Ambassador Thawley’s comments on the Australian Beef Industry fact sheet.  Respond to the accuracy of the U.S. numbers.

            a.         Response to Comments

            R-CALF USA respectfully disagrees with some of the comments made in the Australian Beef Industry fact sheet. 

            The sheet states that “[a]n open market with Australia promotes the complementarity of product uses in the US market . . .”  In its comments of January 23, 2003 , R-CALF USA noted that Australian and U.S. production is increasingly becoming more similar.  Namely, at page 4 of its comments, R-CALF USA explains how the use of feedlots in Australia has grown markedly in recent years with Meat and Livestock Australia (MLA) describing investments in Australian feedlots as “explosive.”[1]  This development occurred to appeal to export markets in Asia .[2]  According to MLA, some 26 percent of Australian beef produced in 2001 came from feedlot cattle.[3]  Thus, high quality grain-fed U.S. and Australian beef is increasingly competing in the world’s major export markets, especially Japan and Korea .  Moreover, with growth in grain-fed production in Australia , that country might in the future start shipping large quantities of high quality beef to the U.S. market. 

            The sheet states that “Australian beef receives no production or export subsidies, nor subsidized feedstuffs.  Australian beef is priced purely on supply and demand.”  In its comments of January 23, R-CALF USA from pages 7 to 11 outlined at length artificial advantages provided to Australian producers.  Namely, Australian state trading enterprises, both at the national and state levels, likely reduce the costs of feeds used by Australian producers.  In addition, subsidies are provided by the national and state governments of Australia for use by cattle producers.  R-CALF USA urges the ITC to review closely R-CALF USA ’s January submission with regard to artificial advantages provided to Australian producers. 

            The sheet also states that “by world standards, Australia is a small producer that represents no threat to US domestic interests.”  While is true that the Australian cattle herd (28 million head) is not as large as that of the United States (96.1 million head)[4], the size of Australia ’s population (19.5 million) is only approximately the size of that of New York state (19.1 million).  Accordingly, the Australian domestic market for beef is much smaller than that of the United States with its population of 280 million.  Moreover, it is important to emphasize that Australia is the world’s largest exporter of beef.[5]  In addition, Australia is the largest exporter of beef to the United States .[6]  Thus, with its large cattle herd and small domestic market, as well as its status as the world’s largest beef exporter and largest exporter to the United States , it is clearly not the case that Australia represents no threat to the U.S. cattle and beef industry.   

            b.         Response to Accuracy of U.S. Numbers

            Per the request of the ITC, R-CALF USA examined the accuracy of the numbers provided in the fact sheet.  R-CALF USA compared the statistics in the fact sheet with those of the U.S. Department of Agriculture (USDA).  Overall, the data reported by MLA is consistent with that reported by USDA.  R-CALF USA notes that a full analysis of the U.S. numbers provided in the fact sheet is attached as Annex 1. 

R-CALF USA did find, however, discrepancies in the following (sources for the numbers reported below are found in Annex 1):

·        With respect to the U.S. herd, MLA reported that the U.S. manages a herd of 105 million head, or 10 percent of the world cattle population.  By comparison, USDA reports that the U.S. herd in 2002 totaled 96.1million, or 7 percent of the world cattle population.

·         In terms of the average U.S. carcass weight, USDA reported that in recent years, the average dressed weight for U.S. cattle was approximately 740 pounds, which is consistent with MLA's figure of 744 pounds.  It should be noted that USDA defines "dressed weight" as chilled beef carcass with kidney knob in, which is most likely analogous to "carcase weight" as reported by MLA, but may be best further verified through MLA.

·         With respect to the U.S. percentage of World Beef Trade, MLA reported that the U.S. share is 19 percent and the Australian share is 25 percent.  USDA statistics for 2002 show that the U.S. share is actually 17.9 percent and the Australian share is 22.8 percent.

·         While MLA correctly reported U.S. beef export statistics, for both volume and value, through 2000, [7] it fails to report that the U.S. export situation changed in 2001and 2002.  Notably, in terms of volume, U.S. beef exports declined in 2001 and 2002, a change from the previous five years of growth.  Further, although the U.S. value of exports exceeded that of imports from 1995-2000, in 2001 and 2002 the U.S. became a net value importer, which was not reported by MLA. 

·         USDA reported that for the first eleven months of 2002, Korean imports of beef totaled 287,762MT, while MLA's data only showed 258,582MT through November.  Although MLA's data is slightly lower than that reported by USDA, the corresponding percentages of U.S. and Australian market share for 2002 were consistent with USDA data.

2.         R-CALF USA’s comments at page 4, paragraph 1, of its submission state that “expansion of the Australian herd will continue through 2005.”  What evidence backs this up? 

            In its comments submitted to the ITC on January 23, 2003 , R-CALF USA noted that:

Despite the record size of Australia ’s herd and record slaughter numbers, USDA reports that Australia is still in the herd expansion phase of a cattle cycle.[8]  According to the Australian cattle industry, expansion of the Australian herd will continue through at least 2005.[9]      

R-CALF USA cited to documents of USDA’s attaché in Australia and Environinvest Ltd, an Australian entity, in making these claims.  Moreover, both USDA and MLA agreed that the Australian cattle herd was continuing to expand.[10]

            Since R-CALF USA submitted its comments last month, the USDA’s attaché in Australia has revised his estimates regarding the expansion of Australia ’s cattle herd.  In a report released just last week, the USDA writes:

In the Livestock Annual Report [of 2002 – the report relied upon by R-CALF USA in its comments], cattle inventories were forecast to increase to record levels . . . However, severe drought and rapid depletion of fodder reserves has effectively reversed this trend.[11]  See Attachment 3.   

USDA estimates, however, that the drop in Australia ’s cattle herd will be small -- and temporary.  In its annual report on Australia for 2002, USDA predicted that the size of Australia ’s herd in 2002 would be 29.7 million head.[12]  In its revised report issued last week, USDA estimates that the size of the 2002 herd actually fell “slightly” to 28.83 million head.[13]  In this same report, USDA writes that “[p]ost forecasts cattle inventory to close slightly higher in CY 2003, at 28.89 million head, with an anticipated return to more normal weather conditions.”[14]  Thus, the current drop in the herd size does not necessarily spell an end to an expansion of the Australian herd, but possibly just a blip in continued expansion.    

            While growth in the size of the Australian herd might abate at least temporarily, the USDA forecasts increased beef production in Australia on account partly of the drought.  In its February 2003 report, USDA’s agricultural attaché predicts that Australian beef production will grow by 5 percent for 2002 to a record level.[15]  USDA estimates that Australian exports of beef and veal will increase by 4 percent in 2003, thus exceeding the estimated record production of the prior year.[16] 

            MLA in a press release issued last week predicts that the drought will “leave the cattle herd 2.5 million head or 7% lower than otherwise . . .”[17]  Moreover, the same press release estimates that beef production in Australia will fall by 4 to 14 percent in 2003 on account of the drought.[18]  Given that the drought will likely lead to increased slaughter, R-CALF USA is uncertain as to why Australian beef production would drop during the drought, and R-CALF USA is unable to reconcile the differing estimates of USDA’s attaché based in Australia and those of MLA.  R-CALF USA was unable to obtain further views of MLA on this subject as MLA’s Cattle and Sheep Industry Projections, which was released in January 2003, must be purchased, and is then mailed to purchasers.[19]  Due to the deadline for the current comments, R-CALF USA was unable to order this publication and instead must base its comments upon MLA’s press release. 

Regardless, MLA writes in its press release that “[a]ssuming a break to the drought in 2003, the Australian herd is projected to build to almost 30 million by 2007, allowing for renewed growth in beef production from 2005 onwards.”  Thus, MLA predicts future growth in the size of the Australian herd.    

3.         Referring to the charts on page 6 of R-CALF USA’s comments which detail beef imports into the United States from Australia, what evidence exists that Australia will fill its TRQ for 2003?  

            The USDA predicts that Australia will fill its TRQ for beef in 2003.[20]  As demonstrated by the charts provided on page 6 of R-CALF USA ’s comments of January 23, imports of Australian beef into the United States have been growing dramatically in recent years. USDA’s attaché in Australia in his 2003 report estimates that Australian beef production will match record beef production levels for 2002 (“[p]roduction for CY 2003 is forecast to remain at the record high level of 2,205 TMT, driven by forecast record slaughter levels”).[21]  Overall exports of Australian beef are also expected to hit record levels in 2003, thus making it more likely that Australia will fill its TRQ allotment in 2003 (“[e]xports of beef and veal are forecast to increase around four percent in CY 2003, reaching 1,551 TMT (CWE) and surpassing the estimated record for the previous year.”)[22] 

            Besides projected growth in Australian beef production in 2003, a possible tightening of the Japanese market caused by higher tariffs will increase the likelihood of strong exports of Australian beef into the United States .  Japan is Australia ’s second largest export market after the United States .[23]  According to both Australian and U.S. sources, Japan will likely increase its tariff on beef from 38.5 to 50 percent this year as part of a safeguard action.[24]  Higher tariffs in Japan could result in increased Australian beef exports to the United States , and thus make it more likely that Australia will fill its TRQ for 2003.     

4.         Additional comments on the GAO report on the ITC economic models are welcomed.

As noted in its comments of January 23 at pages1 to 3, R-CALF USA strongly recommends that the ITC, per suggestions of the General Accounting Office (GAO), develop new economic models to evaluate the effects of trade liberalization on the live cattle industry.  The current ITC models do not address the effects of relatively recent structural changes in the cattle and beef market, including market concentration, marketing agreements, and forward contracts. 

R-CALF USA along with congressional staff is currently working with the Economic Research Service (ERS) of the USDA in connection with new USDA economic models.  On February 11, 2003 , a meeting on possible new USDA models was held between ERS economists and senior staff members of the offices of Senator Tom Daschle, Senator Max Baucus, and Senator Tim Johnson and well as an R-CALF USA representative.

The ERS is currently updating its models by assembling new data, re-estimating parameters, and reviewing methodology.  The ERS is also planning to analyze appropriate variables that will assist in creating new models for inputs in long-term projections, to create a meat demand model, and to include import and export data in clearing market prices.

ERS will incorporate the findings of the GAO expert panel in its research, and, further, will use cooperative agreements and in-house research to examine livestock and meat prices and price margins.  The ERS will be leading a task force of representatives of the Grain Inspection, Packers and Stockyards Administration, the Agricultural Marketing Service, and the National Agricultural Statistics Service to develop plans to address data issues for price reporting, price spread calculations, and market and industry structures.  R-CALF USA will continue to work with ERS to ensure that any new models take into account market concentration, marketing agreements, and forward contracts and other factors that cause distortions in the market. 

R-CALF USA would welcome the opportunity to interact with the ITC in the development of new models and will be contacting the ITC soon with suggestions. 

5.         Expand on why an Australian FTA would benefit packers vs. producers. 

Packers could capture benefits from an FTA with Australia as they are economically positioned to profit from both increased imports and increased exports.  Packers add value to live cattle and/or beef carcasses through processing and sell the resulting boxed beef and other beef products on a margin basis.  To the extent that packers have access to an expanded supply of inventories, i.e., a new source of imported inventories created by an FTA, packers are afforded new alternatives for sourcing their inventories.  Lower inventory costs mean higher profits for margin operators like packers and, therefore, packers have an economic incentive to seek new sources of lower cost inventories.

In addition, packers benefit from oversupply conditions inasmuch as oversupplies lower domestic live cattle prices, hence the cost of their inventories.  The live cattle industry is highly sensitive to changes in the available supply of both beef and live cattle, a function of the perishable nature of both beef and live cattle.  Even small increases in supply – as little as 2 to 3 percent – can have significant downward effects on price.[25] Thus, the very factors that benefit packers -- lower prices for live cattle and increased availability of beef supplies -- result in harm to cattle producers as cattle producers receive lower prices for their cattle, and their live cattle markets respond negatively to increased supplies.  

This situation helps to explain how there is a negative correlation between profit margins at the packing and feeding stage, with the feeding stage representing the final phase of the live cattle industry, as was found in the recent study by Sparks Companies, Inc.[26]  Although the packer is the customer of the live cattle producer, the packer is in direct competition with the producer over the price paid for live cattle.  Unfortunately, the structural changes that have occurred within the U.S. cattle market, e.g., the unprecedented concentration of the packing industry,[27] have afforded packers the ability to distort the outcome of that competition, and imports are a significant contributor to this distortion.

In their November 1999 final determination on Live Cattle from Canada, three of the six ITC commissioners found the impacts of beef industry concentration deserving of comment.  Commissioner Carol T. Crawford noted, “ . . .there is considerable concentration in the packing industry . . . which can and does exert significant influence over prices for cattle.”[28]  Commissioner Thelma J. Ashley noted, “ . . . the beef packing industry (the primary purchasers of live cattle fed for slaughter) is heavily concentrated . . . [which] leads to unequal bargaining positions between the two groups [packers versus feedlot operators].  This disparity in bargaining positions enables . . . beef packers to have a more significant influence on price levels . . .”[29]  Then Chairman Lynn M. Bragg noted, “[t]he concentration of packers increases the packers’ leverage relative to cattle producers.”[30] 

The potential for imports to restrain prices was addressed by the Republican Commissioners of the United States Trade Deficit Review Commission in their November 14, 2000 , report.  The Republican Commissioners stated, “[e]asy availability of imports can limit price increases either by expanding available supply or reducing the ability of businesses to raise prices in order to pass on increases in their costs.”[31]  In the case of live cattle producers, it is the “expanding available supply” that limits price increases.

On May 23, 2002 , Data Transmission Network (DTN) Livestock reported that the gross margins earned by beef packers had increased well above $190 per head, which was higher than at anytime recorded since 1993.[32]  The ERS of USDA reported that the 5-market price for fed cattle in May 2002 was $65.60 per cwt, a full $9.50 per cwt less than the previous year’s May price (based on a 1250 pound fed steer, this represents a loss to producers of $118.75 per head).[33]  This favorable margin gain for packers and unfavorable price reduction for producers corresponds with a 23 percent increase in Canadian cattle imports during the period of January through May 2002 when compared to the same period in 2001.[34]  Obviously, imports have a significant, negative impact on live cattle prices which, consequently, leads to higher packer margins.  

Some of the country’s largest packers are also among the country’s largest importers.  ConAgra, for example, a major importer and one of the largest U.S. packers, has extensive holdings in Australia .  Such holdings include four beef processing plants, four cattle feedlots, and one plant/distribution center.[35]  It is obvious that ConAgra would want to reduce and/or eliminate any restraints to the importation of Australian beef or cattle to the United States as the United States is the largest beef consuming market in the world.[36] 

In theory, expanded export markets could mitigate the damaging effect that increased imports have on domestic live cattle prices.  However, as discussed in R-CALF USA ’s written comments of January 23 at page 12, an FTA with Australia holds little to no promise for expansion of U.S. sales of beef or live cattle.  Moreover, under the existing trade regime, the U.S. beef trade deficit (total beef and cattle imports converted to carcass weight equivalent minus total beef and cattle exports) grew from 1.5 billion pounds in 1996 to 2.4 billion pounds in 2001.[37] 

Any new FTA with a cattle/beef exporting country that is implemented without first addressing the market concentration manifest in the U.S. beef packing industry will afford packers with additional economic benefits while further exacerbating the already stressed condition of the U.S. live cattle industry.  It is imperative that the ITC both recognize and address the issue of market dominance and market power vis-à-vis the packers’ ongoing practice of using both beef and cattle imports to depress U.S. live cattle prices. 

Conclusion

            If the ITC has any further questions for R-CALF USA regarding the proposed U.S.-Australia FTA, I may be reached at (406) 252-2516.

                                                                        Sincerely,

Leo R. McDonnell, Jr.
            President, R-CALF USA

ANNEX 1

In response to the ITC’s request to verify the accuracy of the U.S. beef and cattle statistics reported in Meat & Livestock Australia's Fact Sheet, the following verification information is provided with accompanying sources:

1.      U.S. Cattle Herd: The National Agricultural Statistics Service (NASS) reported that the U.S. cattle herd as of January 1, 2003 totaled 96.1 million head, approximately 9 million less head than reported by Meat & Livestock Australia (MLA).  See NASS: Report on Cattle at 1 ( January 31, 2003 ) available at www.nass.usda.gov.  The Foreign Agricultural Service (FAS) reports that the world total for cattle head in 2002 equaled 1.33 billion head.  See World Total Cattle Summary, reported by Production, Supply and Distribution Online ( Feb. 12, 2003 ) available at www.fas.usda.gov/psd.  Using MLA's data ( U.S. =105 million head), the U.S. would represent 10 percent of the world market share in cattle, however, using FAS data ( U.S. =96 million head), the U.S. would only represent 7 percent. 

2.      U.S. Beef Production: Beef production in 2001 totaled 26,108 million pounds, or 11.8 million MT.  In 2002, beef production totaled 27,090 million pounds, or 12.26 million MT.   See NASS: Livestock Slaughter Report at 2 ( Jan. 24, 2003 ) available at www.nass.usda.gov.  These numbers are consistent with those reported by MLA.

·         U.S. Percentage of World Beef Production: USDA's Foreign Agricultural Service (FAS) reported world beef production totaled 48.889 million MT in 2001, and projected 50.220 million MT in 2002.  This verifies that U.S. beef production has accounted for approximately 25 percent of the world beef supply in recent years.  See Beef and Veal Summary Selected Countries, reported by Production, Supply and Distribution Online ( Oct. 17, 2002 ) available at www.fas.usda.gov/psd.

3.      U.S. Average Cattle Carcass Weight:  NASS reports that the average dressed weight, defined as the weight of a chilled animal beef carcass with kidney knob in, has been approximately 740 pounds from 1999-2001, which coincides with MLA's reported data.  See Livestock Slaughter 2001 Summary at 94 (March 2002) available at www.nass.usda.gov. 

4.      Australian Beef Imports to the U.S. :  The U.S. currently has a TRQ on Australian beef imports in the amount of 378,214 MT.  In 2001 and 2002, Australia met this quota, thereby accounting for 3.1 percent of the total U.S. beef production (12 million MT).  See World Beef Trade Overview, FAS Online 2002 available at www.fas.usda.gov.  MLA's statistics match those reported by FAS.

5.      U.S. Percentage of World Beef Trade: FAS reported world beef trade in 2002 totaled 6.227 million MT.  U.S. beef exports accounted for 1.119 million MT, which is 17.9 percent of the total world beef trade (although MLA reported 19 percent).  Australian exports totaled 1.420 million MT or 22.8 percent of the world total (although MLA reported 25 percent).  Of the 50.2 million MT of total world beef production, 6.2 million MT or 12 percent of the supply is traded, which is the same percentage reported by MLA.  See Beef and Veal Summary Selected Countries, reported by Production, Supply and Distribution Online ( Oct. 17, 2002 ) available at www.fas.usda.gov/psd.

6.      U.S. Beef Exports:

·         Volume:  FAS reports that from 1995-2000, U.S. exports of beef grew from 595,449 to 834,916MT.  MLA reported similar findings, although its data went as far back as 1989.  Both FAS and MLA show growth each year from 1995 to 2000, however, with total U.S. beef exports in 2000 reaching approximately 835,000MT. 

·         MLA also reported that in 2000 the difference between product weight of imports over exports was less than 200,000 MT.  FAS data verifies that imports in 2000 totaled 1,012,765MT and exports totaled 835,000MT (approximately a 200,000MT difference).  See United States Commodity and Market Situation: Cattle and Beef, FAS Online (last updated Oct. 24, 2002 ) available at www.fas.usda.gov. 

·         MLA data does not report, however, that in 2001 and 2002 exports of beef actually declined.  In 2001, U.S. exports of beef totaled 780, 461MT, and in 2002 totaled 752,401MT, as compared to the 2000 total of 835,000MT.  See id.; see also USDA FATUS Export data, for Commodities: “Beef & Veal, FR/CH/FZ” and “Beef & Veal, Prep/Pres”.

·         Value:  FAS reports that in 2000, U.S. beef exports were valued at $2.98 billion dollars, which is consistent with MLA's data.  FAS statistics also show that from 1996-2000, the U.S. was a net beef exporter: Commodities: “Beef & Ve 

Source: USDA FAS Import and Export data, for Commodities: “Beef & Veal, Frs, Chil”, “Beef & Veal, FR/CH/FZ” and “Beef & Veal, Prep/Pres”.

·         The FAS statistics also illustrate that in 2001 and 2002 the value of imports exceeded the value of exports, which is not reported in MLA's fact sheet.

7.      Effect of BSE on U.S. Imports to Japan : ERS data verified that BSE outbreaks in Japan led to a sharp drop in domestic consumption, thereby affecting U.S. imports of beef in 2001 and 2002.  Reports indicate that U.S. exports to Japan will return to normal levels in late 2003.  See Agricultural Outlook Brief: U.S. Red Meat & Poultry Exports May Hit Record Levels in 2003 at 2 (Aug. 2002) available at www.ers.usda.gov.

8.      U.S. Share of Japanese Beef Market:  FAS data verified that in 2000, the Japanese import beef market was projected to reach approximately 715,000MT, of which U.S. imports would account for 48 percent and Australian imports would account for 46 percent.  See Japan Livestock and Products Semi-Annual 2001 at 1, FAS GAIN Report #JA1011 ( January 31, 2001 ).

9.      U.S. and Australian Beef Trade to Korea :  In 2001, FAS reported that the Korean import beef market totaled 180,630 MT, of which U.S. imports accounted for 103,197 MT or 57 percent.  Australian imports to Korea during 2001 totaled 57,543 MT or 32 percent.  See Republic of Korea Livestock and Products Semi-Annual 2003 at 8 ( February 11, 2003 ), FAS GAIN Report #KS3004.  FAS further reported that in the first eleven months of 2002, Korean imports totaled 287,762 MT and are projected to reach approximately 322,550 for the year-end total. Id.  These numbers are slightly higher than those cited by MLA, which reported that the import figures through November 2002 only totaled 258,582.  The percentage of U.S. market share for 2002, however, is reported at 205,000MT or 70 percent of the total Korean import market, which matches the percentage reported by MLA.  I

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