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January 21, 2003

Ms. Gloria Blue
Executive Secretary
Trade Policy Staff Committee
Office of the U.S. Trade Representative
1724 F Street, N.W.
Washington , D.C.   20508

Via E-Mail:       FR0058@ustr.gov

Re:      Proposed United States-Australia Free Trade Agreement:  Comments of the Ranchers-Cattlemen Action Legal Fund – United Stockgrowers of America ( R-CALF USA ) Regarding Live Cattle (USHTS 0102) and Beef (USHTS 0201)

Dear Ms. Blue:

            The Ranchers-Cattlemen Action Legal Fund – United Stockgrowers of America (R-CALF USA) is pleased to have the opportunity to submit comments to the U.S. Trade Representative regarding the proposed United States-Australia Free Trade Agreement (FTA).¹ R-CALF USA’s comments concern live cattle (USHTS 0102) and beef (USHTS 0201). 

        R-CALF USA is a non-profit association that represents thousands of U.S. cattle producers on issues concerning national and international trade and marketing.  R-CALF USA is dedicated to ensuring the continued profitability and viability of the U.S. cattle industry.  R-CALF USA ’s membership consists primarily of cow-calf operators, cattle backgrounders, and feedlot owners.  Its members are located in 42 states, and the organization has over 30 local and state cattle association affiliates.  Various main street businesses are associate members of R-CALF USA .

        R-CALF USA anticipates no major benefits for U.S. cattle producers in concluding an FTA with Australia .  Given Australia ’s relatively small population, its large cattle herd, and its position as the world’s largest beef exporter, the potential of Australia becoming a significant importer of U.S. beef is small.  R-CALF USA sees greater gains in expanding U.S. exports through World Trade Organization Doha Round negotiations.  Tariffs in major beef importing countries, such as Japan and Korea , remain high, and R-CALF USA believes that U.S. negotiators should focus on WTO negotiations that hold promise for reducing these tariffs and those of other countries as well as working to eliminate export subsidies on beef.  Nonetheless, R-CALF USA would welcome disciplines established through an FTA on Australian state-trading enterprises with respect to feedgrains.  R-CALF USA would also like to see the elimination of Australian subsidies that benefit cattle producers in that country.  

I.          State of the U.S. Cattle Industry

Cattle and beef production comprises the single largest sector of U.S. agriculture.  Cattle are raised in all fifty states.  Half of all U.S. farms have beef cattle as part of their operations.[2]  Given its size, the cattle and beef industry is of paramount importance to the rural economy of the country.            

            U.S. cattle producers, and by extension America ’s rural communities, are experiencing a historically difficult period.  The U.S. Department of Agriculture (USDA) forecasts that the U.S. cattle herd will undergo its seventh consecutive year of contraction in 2003.[3]  USDA predicts that as of January 1, 2003 , the U.S. cattle population fell to 95.6 million, its lowest number since 1959.[4]  USDA estimates that this decline will continue in 2003.[5]  The U.S. calf crop in 2003 is predicted to be the smallest since the mid-1950s.[6] 

Alarmingly, the average returns to U.S. cow/calf producers during the 1992-2001 decade fell to negative $30.40 per bred cow per year.[7]  Another sector of the cattle industry, cattle feeders, suffered markedly in 2002 with losses ranging from $50 to $75 per head and an estimated $2.5 billion loss in equity.[8]  According to USDA, the weak state of the U.S. livestock sector has had “a dramatic impact on U.S. net farm income,” which was forecast as $36.2 billion for 2002, a decrease of approximately $10 billion from 2001.[9]

The depressed state of the U.S. cattle sector can be attributed in large part to concentration in the U.S. beefpacking industry.  This industry is dominated by just four firms whose combined share of the market is 80 percent.[10]  Packers are able to use imported beef and cattle to drive down prices received in the U.S. cattle market. 

II.        State of Australian Cattle Industry

            Australian production is currently strong.  In 2003, Australia ’s cattle herd will likely be at its largest size since the 1970s, and beef production is predicted to reach a record 2.25 million tons.[11]  Australia ’s total slaughter for 2002 was the highest in 20 years.[12]  USDA predicts that Australia ’s slaughter will increase 8 percent in 2003, resulting in the largest slaughter since 1978.[13]  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.[14]  According to the Australian cattle industry, expansion of the Australian herd will continue through at least 2005.[15]

            In a major development in the Australian cattle industry, the number of grain-fed Australian cattle, as opposed to grass-fed, increased substantially during the 1990s.[16]  Grain-fed cattle, which result in higher quality beef, dominate the U.S. market.  Australia ’s increase was in response to demand for grain-fed beef in export markets, especially Japan .[17]  Moreover, the market for grain-fed beef has increased in recent years in Australia .[18]  Feedlots are located in all of Australia ’s states,[19] and some 680 accredited feedlots are operated in Australia with the ability to feed up to 920,000 cattle at any one time.[20]  In 2001, some 26 percent of beef produced in Australia was derived from feedlot cattle.[21]  Expansion of the feedlot sector continues, and Meat and Livestock Australia describes investment growth in feedlots as “explosive.”[22] 

III.       U.S. and Australian Tariffs

A.        U.S. Tariffs on Australian Beef and Live Cattle

The U.S. tariff rate quota (TRQ) on beef permits the importation of 378,214 metric tons of Australian beef into the United States at a tariff of 4.4¢/kilogram (2.2 U.S. cents per pound).[23]  The over-quota tariff is 26 U.S. cents per pound.[24]  The U.S. TRQ covers a wide variety of beef imports, including high quality beef.[25]  The United States has no tariff on imports of purebred breeding cattle and imposes a tariff of 1¢/kilogram on imports of all other beef cattle.[26] 

            B.        Australian Tariffs

Australia imposes zero tariffs on imports of beef and live cattle.[27]

IV.       U.S. Imports

            A.        Imports from All Countries

U.S. beef and live cattle imports have increased substantially in recent years.  Between 1998 and 2001, beef imports grew from 822 million to 987 kilograms.[28]  Live cattle imports grew during this same period by 20 percent, rising from 2 million head to 2.4 million head.[29]  The former U.S. value-based beef surplus has disappeared, and the country experienced a value-based deficit in 2002 (Jan.-Oct.) of $88 million.[30]  

B.        Imports from Australia

Australia is the world’s largest exporter of beef and sold an estimated 1.41 million metric tons in the world market in 2002.[31]  USDA predicts that Australia will export a record amount of beef to a number of countries, some 1.5 million tons, in 2003.[32]  These exports will likely constitute a 12 percent increase over 2002.[33] 

The United States is Australia’s largest market for exports.[34]  Over one-third of all beef imported into the United States originates in Australia, and Australian imports have been growing rapidly.[35]  The bulk of these imports consist of beef from grass-fed animals, beef which is commonly used in manufactured food products including beef patties.[36]  Beef imports into the United States from Australia by volume for the past six years (through 2001 -- the last full year for which data is available) were as follows: 

Beef Imports From Australia (Kilograms)

Source:  ITC DataWeb.

            Australian exports by value to the United States also increased dramatically: 

Beef Imports From Australia (U.S. Dollars)

Source:  ITC DataWeb.

In 2001, for the first time since 1995, Australia filled its TRQ of 378,214 tons.[37]  It did so again in 2002.[38]  USDA forecasts that Australia will again fill its quota in 2003.[39]  USDA predicts that Japan, a major market for Australian beef, will trigger a safeguard measure on beef during the summer of 2003, which will result in beef tariffs rising from 38.5 to 50 percent.[40]  Such action by Japan could result in even higher volumes of Australian beef entering the U.S. market. 

            C.        Cattle Imports

            Besides exporting beef, Australia is a major exporter of live cattle.  Australia exported some 815,000 live cattle worldwide in 2001-02, an increase of 13 percent over the prior period.[41]  For 2003, USDA predicts that total Australian live cattle exports will increase by 8 percent to 900,000 head.[42] 

At the present time, Australia is only a minor exporter of live cattle to the United States.  The possibility exists, however, that Australia could become a significant supplier to the U.S. market.  To those not familiar with the cattle industry, the shipment of live cattle long distances may seem far-fetched, but the practice is very common.  Ships designed especially for livestock can carry up to 25,000 head of cattle at any one time.[43]  Australia currently exports large volumes of cattle.  For example, Australia shipped approximately 100,000 live cattle to Egypt in 2001.[44]  R-CALF USA notes that Australian and Mexican government officials in 2000 signed a protocol that might result in up to 100,000 live cattle being shipped annually from Australia to Mexico, so Australian producers have the logistical ability to export large amounts of live cattle, as well as beef, to the United States.[45]  Meat and Livestock Australia indicates that Mexico is currently a destination for live Australian cattle.[46]

V.        Artificial Advantages Provided to Australian Producers

            A.        State Trading Enterprises

                        1.         Australian Wheat Board

                                    a.         Wheat, Including Wheat as Feed      

            The Australian Wheat Board (AWB) is one of the world’s only two explicit single-desk marketers of wheat, the other being the Canadian Wheat Board.[47]  AWB (International) Ltd is the only entity in Australia permitted to export Australia’s bulk wheat,[48] and the AWB describes itself as “a government backed export monopoly.”[49]  Australia’s domestic wheat market was deregulated in 1989.[50]  So while the AWB sells grains in the domestic market, it does not have the ability to set prices for sales within Australia, and it competes with other traders in the domestic market.[51]

            As noted above, Australia’s feedlot sector has expanded markedly in recent years, and this growth is predicted to continue.  Rations for Australian grain-fed cattle include wheat.[52]  In fact, of the approximately 5.5 million tons of wheat that enters the Australian market annually, approximately half (2-3 million tons) is used as stockfeed.[53]  Australian feed wheat is noted for its high protein and gluten content.[54]

                                    b.         Other Feedgrains

The AWB also trades and manages non-wheat grains, including barley and sorghum.[55]  These grains compete with wheat in the production of compound feeds in Australia.[56]  Domestic consumption of barley and sorghum has grown in recent years due to the expansion of Australia’s intensive livestock sector.[57]  Due to its scale and risk management abilities, the AWB’s Trading Division has the largest market share of any entity in the Australian grain market, including the market share of non-wheat grains.[58]

2.         State-Based Barley and Sorghum STEs

While the AWB does not have a monopoly on the export of barley and sorghum, STEs operated by Australian states do.  The Grain Pool of Western Australia is the single desk exporter of that state’s barley.[59]  Barley produced in South Australia is exported through the single desk operation of ABB Grain Ltd.[60]  GrainCo Australia is the single desk exporter of sorghum and barley for New South Wales.[61] 

3.         STEs Provide Australian Producers with Unfair Market Advantages

All in all, due to the AWB and state STEs, some 80 to 90 percent of all grains exported from Australia are regulated through single desk exporters or equivalent arrangements.[62]  By controlling the export of grains used as feeds – wheat, barley, and sorghum – these entities are able to influence the domestic prices of feed, and thus benefit Australian cattle producers.  In fact, it appears that the AWB takes specific decisions with regard to exports with the intent of lowering prices for Australian users of feedgrains.  For example, in October 2002, in response to concerns expressed by livestock producers about the high costs of feedgrains due to low supplies caused by drought, the AWB stated that “the AWB National Pool is currently tailoring its current wheat export program in order to preserve vital grain stocks in drought-affected regions of Australia.”[63]  While the AWB has “no legislated market power” to set grain prices in the domestic market,[64] such action as described above would lead to lower feed prices in the Australian market, thus benefiting cattle producers there. 

It should be noted too that the AWB actively discourages the importation of grain by Australian livestock producers and warns that “AWB is cautious of consumers importing grain, as it can be a costly exercise fraught with quality issues.”[65]  This view is likely shared by Australia’s state-based barley and sorghum STEs.  By ensuring low cost feedgrains in the Australian market, and thus obviating the need for imports, Australian STEs can protect their primary constituencies of grain producers from foreign competition.  At the same time, these STEs provide artificial cost advantages for Australian cattle producers.  This is made possible by the ability of the AWB, the Grain Pool of Western Australia, GrainCo Australia, and ABB Grain Ltd to control exports of feedgrains from Australia. 

Moreover, the AWB plays an active role in setting rail freight charges in Australia.[66]  While R-CALF USA is unaware as to whether such rail charges apply only to grains for export or also to grains sold in the domestic market, the ability of a monopoly exporter to establish freight charges gives it the power to influence, at least indirectly, prices in the domestic market.  

            B.        Subsidies Provided to Australian Producers

            Australian cattle producers receive a number of subsidies that put them at an unfair advantage in the international market.  Meat and Livestock Australia (MLA), an entity established under Australian law that is funded by government money and mandatory levies, promotes exports, conducts research projects, and markets products.[67]  The government-owned Export Finance and Insurance Corporation is available to provide export finance and insurance for Australian exporters of beef and cattle.[68]  Australian cattle producers are also able to benefit from numerous subsidies provided by state governments.  Such programs include the Business Incentive Scheme of the Australian Capital Territory, the Regional Business Development Scheme of New South Wales, the Industry and Business Assistance Scheme of the Northern Territory, and Queensland’s  Industry Incentives Scheme and Industry Development Scheme.[69] 

VI.       SPS Barriers

            Australia maintains restrictive SPS measures covering major U.S. commodities, including pork, chicken, citrus, corn, and various tree fruits.[70]  While U.S. live cattle and beef shipments are not, at least at this time, subject to such sanitary measures, R-CALF USA is concerned that, in line with its current SPS regulations, Australia might impose onerous sanitary measures if U.S. cattle and beef producers begin shipping large amounts of their products to Australia.  R-CALF USA urges the United States to negotiate for the removal of any scientifically unsubstantiated SPS measures of Australia, and thus reduce the likelihood that any such measures will impede exports of U.S. beef and live cattle to Australia in the future.    

VII.     R-CALF USA Suggestions for Negotiations

A.        Tariffs

1.         Background – Cattle Prices Affected by Volume of Beef in Market

The cattle industry is highly sensitive to changes in the volume of beef in the market due to the disproportionate impact of changes in supply on prices.  According to Chuck Lambert, formerly of the National Cattlemen’s Beef Association (NCBA) and currently Deputy Under Secretary for USDA's Marketing and Regulatory Programs, “[t]he rule of thumb is that a 10% increase in beef supply results in a 15% to 20% decrease in price.”[71]  Even small increases in supply – as little as 2 to 3 percent – can have significant downward effects on price.[72]

Thus, to the extent that negotiations to reduce U.S. tariffs on beef result in increases in imports of beef, such tariff reductions will have a direct impact on the prices that cow-calf operators and ranchers receive for their cattle.  One must bear in mind as well that the cattle industry has been through and is continuing to experience an extended period of contraction and liquidation, which means that domestically-produced beef supplies from domestic and imported cattle are high, putting pressure on cattle prices.

                        2.         Beef and Cattle Are “Import Sensitive”

Under the Trade Act of 2002, all agricultural products that are subject to TRQs are deemed “import sensitive agricultural products.”[73]  As fresh, chilled, and frozen beef are subject to a TRQ, these items are import sensitive.  Given the close connection between changes in the supply of beef and prices for live cattle, it is entirely appropriate for the U.S. Trade Representative also to consider cattle as import sensitive agricultural products.  As noted below, the designation of beef as import sensitive imposes certain obligations upon the U.S. Trade Representative in conducting trade negotiations, including U.S.-Australia negotiations, with respect to beef.

                        3.         Beef and Cattle Should Be Excepted from Tariff Reductions

Given that beef is import sensitive, and given the depressed state of the domestic cattle industry and the direct negative impact that increased imports would have upon cattle producers, U.S. tariffs on beef and cattle should be excepted from reductions in a U.S.-Australia FTA.  Such an exception is permitted under Article XXIV of the GATT 1994, which only requires that free trade agreements remove restrictions on “substantially all” trade in goods originating in the member states of a free trade area.  Excluding beef trade from FTA negotiations would not violate that obligation. 

Moreover, the United States is in the process of negotiating agricultural tariffs at the WTO as part of the Doha Development Agenda.  As mandated by the Trade Act of 2002, U.S. negotiators must recognize the effect that “simultaneous sets of negotiations” may have on import sensitive products.[74]  By eliminating U.S. tariffs on beef and cattle through a U.S.-Australia FTA, the United States risks losing possible advantages in WTO negotiations, e.g., Australia might lose an incentive to negotiate actively for lower tariffs in third markets. 

4.         Alternatively, An Extended Phase-Out Should Be Provided for U.S. Tariffs on Beef and Cattle

If the U.S. government does not exclude beef from liberalization obligations under a U.S.-Australia FTA, then the United States should eliminate tariffs over the longest period possible reflecting the import sensitivity of the product.  In NAFTA, fifteen years were used for import sensitive products, and R-CALF USA would urge that period for beef.  Such a phase-out would comply with the Trade Act of 2002, which provides that  “reasonable adjustment periods” should be made for U.S. import-sensitive products.[75]  Moreover, R-CALF USA urges the United States to maintain its TRQ on beef during the fifteen year phase-out period.  As such, the U.S. in- and above-quota tariffs on beef would be phased-out over a period of fifteen years.

            Regarding tariffs on live cattle, R-CALF USA also asks that U.S. tariffs be phased out over a period of fifteen years.  As noted above, Australia has the capability to export live cattle to the U.S. market.  The phase-out of U.S. tariffs on live cattle will provide a modicum of protection for U.S. cattle producers. 

            B.        Trade Remedy Laws

            R-CALF USA asks that U.S. negotiators for a U.S.-Australia FTA maintain the ability of U.S. producers to use strong and effective trade remedy laws with regard to Australian imports.  The antidumping and countervailing duty laws are vital in protecting U.S. cattlemen from unfair trade practices.  The safeguard laws, although they have been weakened by WTO decisions, remain important tools for U.S. agricultural industries.  To the extent possible in U.S.-Australian negotiations, and consistent with the Trade Act of 2002, the United States should support efforts that will indeed make the trade laws usable by production agriculture.

            C.        State Trading Enterprises

            As noted above, the AWB, the Grain Pool of Western Australia, GrainCo Australia, and ABB Grain Ltd provide artificial advantages for Australian cattle producers as these government-established entities have the ability to influence the amount, and thus the price, of feedgrains sold in the Australian market.  Given the large expansion of the Australian feedlot industry during the past decade and projections for higher feedlot growth, the market distortions caused by Australian STEs will become even greater in coming years.  It is imperative that U.S. negotiators focus on STEs during FTA negotiations.

            R-CALF USA advocates the elimination of the export monopolies on feedgrains of the AWB, the Grain Pool of Western Australia, GrainCo Australia, and ABB Grain Ltd.

            D.        Competition Issues

R-CALF USA asks that U.S. and Australian negotiators discuss market concentration issues in the cattle and beef sector.  In particular, the development of rules preventing abuse of dominant market positions should be examined.  It appears that the Australian packing industry, as is the case in the United States, is becoming increasingly concentrated with the second and fourth largest beef companies in Australia merging in 2002.[76]  Accordingly, Australian government officials might be cognizant of the problems of packer concentration.  Tariff liberalization, if any, should be dependent upon open market sales. 

E.         Special Rules for Cattle and Beef as Perishable and Cyclical Products

The Trade Act of 2002 directs the U.S. Trade Representative, in consultation with Congress, to seek to develop a position on the treatment of perishable and cyclical agricultural products to be employed in negotiations in order to develop an international consensus on the treatment of perishable and cyclical agricultural products in relevant areas.[77]  As is common knowledge in the industry, and as further explained on the Senate floor during debates on the trade promotion authority bill, cattle and beef are both perishable and cyclical agricultural products.[78]  R-CALF USA urges that the U.S. Trade Representative negotiate for special rules for cattle and beef as perishable and cyclical products in the context of a U.S.-Australia FTA.  Such special rules could include the ability of producers of perishable and cyclical products to work together to promote market stability through international marketing orders and international cooperatives.  In addition, U.S.-Australia FTA negotiators could develop special safeguard rights for perishable and cyclical products that would be imposed automatically to respond to movements in prices or volumes – similar to the current special safeguards found within the WTO’s Agreement on Agriculture – that would ensure that trade flows would be rational. 

VIII.    Conclusion

R-CALF USA appreciates the opportunity to provide comments to the U.S. Trade Representative regarding the proposed U.S.-Australia FTA.  For questions on R-CALF USA's positions concerning these negotiations, I may be reached at (406) 252-2516. 

                                                                        Sincerely,

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