PACER AWARDS 2006 • Stayer of the Year
Expanding drought may slow herd expansion, but beef production continues to a near-record pace.

LET THEM EAT BEEF

It ’s possible that drought could reduce the rate of cyclical herd  expansion, but cheap corn prices and  heavier carcass weights mean beef  production will continue to expand. The notion that herd expansion  might stall or even switch back into  liquidation gained speed with the  increased marketing of cows this  spring, especially in Texas, Oklahoma  and Missouri where about a third  of the nation ’s beef cow population  exists.

Cow slaughter was up through the first quarter, too. According to  the Livestock Marketing Information  Center (LMIC) total federally inspected  cow slaughter was up 2%over the  same period last year, but still 11%  below the five-year average. Looking  at beef cows, specifically, LMIC said  first-quarter slaughter was up 8%over  last year.

“Year-to-year increases in beef cow slaughter have mostly been due to dry  conditions in the Southern Plains and  southeastern regions of the U.S. …From  a national perspective, slaughter levels  do not yet indicate a reduction in the  national cowherd,” explain the folks at  LMIC.

Late spring rains in some drought-stricken areas brought some relief, but  as Derrell Peel, livestock extension  economist at Oklahoma State  University noted in April, “We ’re  getting rain, but the lack of subsoil  moisture means even if we get some  grass now we ’ll be about two weeks  away from running out of it all  summer.”

Keep in mind, too, increased cow slaughter doesn’t necessarily point to  a net reduction in the cow inventory.  It ’s likely the numbers include a fair  number of antique cows that had  already been kept a year or two longer  than folks had planned. Treading Water at Higher Levels However the inventory plays out  by the end of the year, the fact is the  industry is swimming in beef. Though not a huge jump, the beef  industry began the year with a total  cow inventory of 33.1 million head,1%  more than the year prior, according to  USDA ’s January 1 report. Moreover, when the drought took  a wide swath of fall forage and winter  wheat away from stocker operators,  lots more cattle moved to the feedlot at  lighter weights than planned. In fact, monthly Cattle on Feed  numbers were record large in April and  May (the last report available before  publication).

Specifically, the total cattle on feed inventory May 1 was 11.1 million  head,9%higher than the previous year  and 11%ahead of May 2004.Though  placements were 2%below 2005,they  were still 2%ahead of 2004. Moreover, carcass weights continue  to rise, meaning that beef production  continues at record pace. Through  April this year monthly average carcass  weights were significantly heavier  (~15-25 lb.) compared to the year  prior, and last year ’s average weights  for the same months were higher than  the five-year average.

The Weight of Corn
Of course, one reason cattle feeders keep packing on the pounds is because  that ’s exactly what the market tells  them to do. In simple terms, when calf  and feeder cattle prices push break- evens past profitable levels, cheap  feed and added pounds is the only  opportunity to dilute losses. Depending  on this year ’s corn crop, that could  change.

Basically, corn use —including increased export demand and domestic  ethanol demand —means that the U.S.  must produce a new record crop each  year to keep pace with demand at the  prices cattle producer have enjoyed the  past couple of years. That means there  is little cushion for a sub-par crop,  which in turn means the risk of higher  cattle feeding breakevens increases  with the potential for higher corn  prices.

Cattle-Fax figures a 50-cent increase in a bushel of corn (relative to the same  fed cattle price) lowers the price of a  550 lb. steer by $7.50/cwt. So, if corn  prices run north, calf prices will feel  some pressure. This fall, though, calf  supplies should still be tight enough  relative to the pen space chasing them,  that prices will likely remain profitable  for most cow-calf producers.

That Demand Thing
One other thing worth considering when evaluating anticipated beef  supplies. As year-to-year beef  production has increased, and as a  chunk of the U.S. beef export market  has remained closed, domestic beef  demand has also begun to waver.  Through the first quarter of 2006  retail beef demand was down 4.5%  according to preliminary Beef Demand  Index figures. Consumption was  actually up slightly, but a sharp decline  in inflation adjusted prices meant  that demand was down. At that level,  demand was still well ahead of 1998  when it finally turned the corner,  however.

The bottom line to all of this is that cattle inventory and beef production  is growing enough that supply side fundamentals can no longer save the  market to the degree it has the past  few years. 

PACER AWARDS 2006 • Breeders Cup
Whether or not the past decade is a harbinger of the climate to come, the near-term forecast looks a mite extreme.

HOTTER & WILDER

Next time you ’re sweating like a lard bucket in a Dutch oven, cursing the drought, the fires or the floods, think  of this: we ’re the first to witness this  kind of weather since reliable records  based on instrumental measurements  became the rule rather than the  exception 100 years ago or so. According to the National Oceanic  and Atmospheric Administration ’s  National Climatic Data Center  (NCDC):
• The last five 5-year periods (2001-2005,2000-2004,1999-2003,1998-2002,1997-2001),were the warmest  5-year periods in the last 111 years.  The next warmest five-year period  was in the 1930s (1930-34),when  the western U.S. was suffering from  an extended drought coupled with  anomalous warmth. The warmest  year on record for the U.S. was  1998,where the record warmth was  concentrated in the Northeast as  compared with the Northwest in  1934.

• The 1999-2004 drought in the western U.S. will go down in history as one of the most severe droughts of the last 100 years. For perspective, the most extensive national drought coverage during the past century  occurred in July 1934 when 80%of  the contiguous U.S. was in moderate  to extreme drought. Although the  current drought and others of the  20th century have been widespread  and of lengthy duration, tree ring  records indicate that the severity of  these droughts was likely surpassed  by other droughts including that  of the 1570s and 1580s over much  of the western U.S. and northern  Mexico.

• The Atlantic Basin had a record active season in 2005 with 27  named storms;15 of those were  hurricanes, including seven major  hurricanes. Of the seven major  hurricanes, four reached category  5 status (unprecedented in a single  season). The average (based on data  from 1944-1996)is approximately  10 named storms, of which 10 are  hurricanes, including two or three  major hurricanes.

• 19 billion-dollar weather-based disasters were reported for 2000- 2005.Since 1980 there have been 67.  That ’s in inflation-adjusted dollars,  too, so it ’s not like the nominal price  of plaster and fence posts are the  reason for the increase. By the same  token, the nation ’s population and  infrastructure are more concentrated  than they used to be.

• The most costly weather-based disaster in history —approximately  $100 billion and counting —was  Hurricane Katrina last fall.

• Annual U.S. weather extremes —as  measured by NCDC ’s Climate  Extremes Index —have been more  frequent. In fact, since 2001 every  year has been above average for  the index which accounts for such  things as high and low temperatures,  extreme precipitation events, and  the landfall force of hurricanes. The  only two periods when the index has  been above average for five or more  consecutive years have occurred  since 1989. These are just some U.S. highlights,  too; the rest of the world has hosted  similar extremes in recent years. 

Also, understand there is a difference between climate and weather. As Mike  Halpert explains, weather is what ’s  occurring in the atmosphere at any  given time. Climate is the average  conditions brought about by all  weather events during a certain period  of time. Halpert is the head of forecast  operations at the NOAA Climate  Prediction Center.

Global Warming and Whatnot So, depending on your faith and risk  tolerance, recent history can appear  as the front end of climatic chaos,  or it ’s just a blip amid the perpetual  undulations of global climate changes  that began when God made the world. “We do know that weather and  climate have changed,” explains  Richard Heim, meteorologist at  NCDC ’s Climate Monitoring  Branch. “We also know the chemical  composition of the earth ’s atmosphere  will affect the radiative process.”  That ’s the process by which the sun ’s  energy travels to the earth, then  back into the atmosphere. Clog up  the atmosphere with more junk and  less energy can make it back into the  atmosphere.

Primitively speaking, that ’s the fuss about Greenhouse gasses and global  warming. Greenhouse gasses (carbon  dioxide, methane, ozone, water vapor,  etc.) are necessary for human survival.  They help trap enough of the sun ’s  energy; if too much energy escapes,  we all become popsicles. On the other  hand, at least in theory if the blanket  of Greenhouse gasses gets too thick and  too heavy, too little of the sun ’s energy  can escape, the earth ’s temperature  increases, snowcaps melt, sea levels  rise, and on and on, little of it positive.  Greenhouse gasses occur naturally,  however mankind also contributes  through things like burning fossil fuel.  Consequently, some folks say mankind  is the cause of recent global warming  and consequently has become a key cog  in the wheel of global climate change. In fact, Heim says that 90-95%  of the world ’s climate community is  convinced that mankind is changing  the climate through global warming.  The rancorous disagreement is over  how much man is or isn ’t changing the  climate and what the impacts might be  ultimately.

Toward one side of the debate are folks and nations who simply dismiss  global warming as a fact of life that  will do whatever it chooses despite the  best or worst efforts of man.  A spectrum away are organizations  like the Intergovernmental Panel  of Climate Change (IPPC), which  has gained some notoriety since its  inception in 1991 as a proponent of a  reduction in global carbon emissions  as called for in the Kyoto Protocol. The  U.S. has yet to agree to this protocol  which aims at getting all countries to  cooperate in reducing carbon emissions  in the name of slowing or reducing the  increase in greenhouse gases attributed  to global warming.

According to NCDC, the IPCC is regarded internationally as the most  senior and authoritative source of  advice to global policy makers when  it comes to such things as global  warming and climate prediction.  The organization operates under the  auspices of the United Nations, the  World Meteorological Organization  and the United Nations Environment  Program.

“Pre-industrial levels of carbon dioxide (prior to the start of the  Industrial Revolution) were about 280  parts per million by volume (ppmv),  and current levels are about 370 ppmv.  The concentration of carbon dioxide  in our atmosphere today has not been  exceeded in the last 420,000 years,  and likely not in the last 20 million  years. According to the IPCC Special  Report on Emission Scenarios (SRES),  by the end of the 21st century, we  could expect to see carbon dioxide  concentrations of anywhere from  490 to 1,260 ppm (75-350%above  the pre-industrial concentration).”  That ’s from a summary prepared by  NCDC scientists, Tom Karl and David  Easterling, based on NCDC data, a  synopsis of IPCC ’s 2001 report (its  most recent) and the National Research  Council.

Likewise, Karl and Easterling explain, “Global surface temperatures  have increased about 0.6 °C (plus  or minus 0.2 °C) since the late-19th  century, and about 0.4 °F (0.2 to  0.3 °C) over the past 25 years (the  period with the most credible data).  The warming has not been globally  uniform. Some areas (including parts  of the southeastern U.S.) have, in  fact, cooled over the last century. The  recent warmth has been greatest over  North America and Eurasia …Warming,  assisted by the record El Niño of 1997- 1998,has continued right up to the  present, with 2001 being the second  warmest year on record after 1998.”  Intuitively, it makes sense then  that there should be less cold weather  and less snow and ice .And, that ’s just  what the records show.

“We just don ’t get as cold as we used to as frequently as we used to,” says  Heim. He also points to NCDC data  indicating that snow cover consistently  has remained below average since 1987,  and has decreased by about 10%since  1966.NCDC says this is mostly due  to a decrease in spring and summer  snowfall over both the Eurasian and  North American continents since the  mid-1980s.

Increased evaporation also accompanies the heat, fueling an  accelerated hydrologic cycle, says  Heim. This is borne by records  revealing more frequent extreme  precipitation events even though total  precipitation may decrease. In other  words, you can have a flood amidst the  drought.

Of Forbears and Mother Nature Based on paleoclimatic data, it ’s  a hot time in the ol ’ hemisphere,  too. This kind of data comes from  everything from ice cores to tree rings,  to fossils, which climate experts say  serve as an archive of climates past. Go back far enough, and the climate  has been lots hotter, colder, wetter and  drier.

But in recent times, our times, extreme climate conditions are  becoming more commonplace. For  instance, the Northern Hemisphere  average summer temperature in recent  decades appears to be the warmest  since at least about 1000AD,and the  warming since the late 19th century is  unprecedented over the last 1000 years,  explains the summary from Karl and  Easterling. “Based on the incomplete  evidence available, the projected  change of 3 to 7 °F (1.5 -4 °C) over the  next century would be unprecedented  in comparison with the best available  records from the last several thousand  years.”

As for drought, an NCDC summary from 1999 sums up: “Recent  investigation of longer term variability  over the past 2,000 years, using  paleoclimatic data indicates that large  droughts, such as those in the 1930 ’s  can be expected to occur once or twice each century in the central United  States. Multi-decadal mega-droughts  occurring over larger areas occur every  few hundred years.” All of that underscores the reality  that despite man, Mother Nature does  her own thing. For instance Karl and  Easterling point out radiation from the  sun varies over time, as does the earth ’s  orbit and its position relative to the  sun. Records and understanding of the  impacts from these forces are at the  nascent stages.

Moreover there are other natural climate-drivers such as variation in  ocean temperature and ocean current  circulation. The El Nino Southern  Oscillation (ENSO) cycle is perhaps  the most known and most reliable  example. El Niños —when warmer  than normal water usually pooled in  the Western Pacific moves further east,  affecting weather around the world — have typically occurred every three to  seven years this century, lasting for  a year or so. Even with these more  clearly understood climatic events,  however, there is still uncertainty  about how global warming affects  them.

Bottom line, there ’s plenty no one knows about how the climate works.  Just think of how tough it is to predict  the weather that determines climate. Halpert explains that the accuracy  of forecasts is measured by something  called a Skill Score. In the simplest of  terms he says this score tells how much  more accurate a particular forecast  was compared to random chance. The  most accurate forecasts provided by  the Climate Prediction Center are those  for the 6-10 day period. Temperature  predictions for this period are about  30%more accurate than chance and  about 15%for precipitation. Seasonal  forecasts for temperature come in at  20-25%,says Halpert; the accuracy for  precipitation in that period is about  half.

Interestingly, though monthly forecasts are based on a closer,  narrower window of time than  seasonal ones, their ultimate Skill  Score accuracy is worse —15-20%  for temperature and half that for  precipitation. This is so because a  single extreme weather event can make  a liar out of an otherwise accurate  forecast. It ’s kind of like having more  calf weight to spread costs over. In this  case spread the impact of one or two  extreme events across 90 days rather  than 30 and they have less average  impact.

Incidentally, when meteorologists refer to the averages that comprise  normal temperatures and normal  precipitation, Halpert explains they are  referring to the 30-year average. Of course, when you average it all  out, averages are kind of a sucker ’s bet  in all situations, anyway, even when  they ’re the best tool available.  Vaccinate calves based on an  average weight, for instance, even if  you actually weigh them, and most  are going to get too much or too little  because very few weigh the average.  The same goes for the weather; few  of us experience average or normal  weather, just the temperatures and  precipitation on either side of the  thermometer and rain gauge that leads  up to the average.

For whatever combination of  reasons, though, it appears that  on average we ’ll have plenty of  opportunity to sweat in the foreseeable  future. That ’s based on both the  climate and society ’s response to it. Heim points to a reality that often  gets lost in the international debate:  “Whether or not mankind is changing  the climate, the climate is changing and  we need to be focusing on the impacts  of those changes.”

PACER AWARDS 2006 • Biggest Equipment Change
More buyers are wanting more documentation to keep marketing options open.

PAPER PERFECT

“Demand for source and age verification has been very strong from large cattle buyers. We almost always see premiums for the calves,” says Dusty Markham, vice president of business management for IMI Global. “I can tell you the premium is between zero and $8 per hundredweight because that’s the range I’ve seen. I can also tell you that you can’t get that premium if you don’t source and age-verify your cattle.”

Therein lies both the allure and challenge of growing demand for process verification; so far age and source verification are the most common forms demanded. The Proof is in the Paper Source verification, and the demand for it has been around for a while, typically as part of the product specification and marketing components of some branded beef programs.

Most recently, burger giant, McDonalds, has shone the spotlight on it in order to offer consumers more assurance about where the cattle come from that end up in their ground beef. McDonald’s shocked plenty in the industry a couple of years ago when it came out publicly saying 10% of its ground beef supply would be from source-verified cattle that year. By the way, according to McDonald’s officials they exceeded the 10% goal, though they won’t say by how much. Since then, they say more than 10% of their product has source verification behind it. Ultimately, they’d like for it all to be sourceverified. Moreover, source-verification will be a key part of the National Animal Identification System (NAIS) if and when it ever gets off the ground (see NAIS Story). Keep in mind that for NAIS only state and federal animal health officials will be accessing the information, and only for the purposes of animal disease surveillance. When it comes to industry buzz about process verifications, though, age verification has been the clear winner ever since BSE oozed across the border in 2003. Between wonderments about cattle age relative to Specified Risk Materials (SRMs) in this country, and post-BSE export requirements imposed by some key trading partners, premiums have already been paid for age verification.

Though the science doesn’t support the notion (see page 36), the thinking by some of these countries is that they are limiting their risk of getting beef from cattle infected with Bovine Spongiform Encephalopathy (BSE) if they limit U.S. beef imports to 20 months of age or younger (what Japan wants) or 30 months of age or younger (what Korea wants).

In order to qualify, eligible exports must comply with USDA’s Beef Export Verification (BEV) programs for each country. This program requires that cattle age be traceable to live animal production records, via USDAapproved auditable systems.

“Just because producers have records to support age and source verification doesn’t mean their cattle will be eligible for export,” says Markham. He explains that BEV requires verification through a USDA- pproved program such as IMI Global’s USVerified Supplier Verification Program, which provides third- arty auditing. Between source verification and age verification, either separate or together, the most common premium range being paid on fed cattle has been around $25. As Markham mentioned earlier, the premium can be upwards of $8/cwt. for calves and feeder cattle. Or, there can be no premiums at all. It’s important to understand, too, premiums are being paid to a vast minority of cattle at this point.

Of PVPs and QSAs
IMI Global’s verification program is what’s termed a Process Verification Program (PVP). Both approved PVP and Quality Systems Assessment (QSA) programs are eligible to verify cattle age for BEV programs. Yes, that is a lot of acronyms without getting anywhere fast.

Suffice it to say that QSA programs—also certified by USDA— are a way of verifying that specific claims made about the cattle are true, in accordance with specific, internationally recognized standards. QSAs ensure specified product requirements are supported by a documented quality management system. It is a documented trail of verification that supports a product claim. In the case of verifying source and age, for example, a QSA program provides USDA-approved corroboration that the system used for verifying source and age is accurate enough to withstand periodic audits by a thirdparty source.

Basically, a company’s QSA describes how it will verify the product requirement, and how it will maintain the identity of the product throughout production. This includes how employees are trained to follow QSA protocols. So, for instance, a feedlot QSA might describe what records it uses and maintains to validate age and how it conducts internal audits to verify conformance to its unique QSA protocol.

Conversely, PVPs are the bigger, stronger brother of QSAs. They require more detail and cover more ground. Rather than just getting at age and source, for instance, PVPs can provide third-party verification of other process verification components such as feed management and genetics. “It’s like the difference between having a driver ’s license or a CDL,” explains Markham. Both allow you to drive, but the latter comes with more opportunity and responsibility. As complicated as all of this can sound, participating in these types of programs is fairly easy.

Consider IMI Global’s USVerified program. According to Markham, you agree to the terms, supply them with the records and supporting documents that verify age. In turn, they register program-compliant electronic ear tags to the customer and issue them. All of that comes after an auditor has evaluated the records supplied by the producer, to make sure they can pass muster.

On the other end, buyers can access verification of age and source documentation on the cattle via the electronic tag number and a query of the company’s database. Markham emphasizes, buyers can retrieve the necessary records, but they can’t access the identity of the seller.

Easy as it is, these programs are serious business. Again, using USVerified as a model, you must sign a limited liability document up front. And, you must take a supplier assessment quiz, indicating that you understand the program and what it is you’re agreeing, too.

Certainly, anyone can create their own QSA or PVP program if they’re willing to jump through the hoops. Most packers and large feedlots have developed their own. One key advantage of participating in a sort of umbrella program like USVerified, however, is that you can provide documentation on calves once, and chances are they will be accepted by any other QSA or PVP program. Otherwise, you may have to provide documentation to various buyers to meet the requirements of their programs.

Besides, it’s kind of like having someone doing your taxes and signing their name to it; push come to shove, misery loves company. Choosing When to Jump Whether or not you should worry with officially documenting source and age depends on your goals and the demands of your own markets. First, providing such verification comes at a cost. Unless you are able to market cattle to someone willing to pay a premium for such verification, the only other way to retrieve the cost is by utilizing the ID involved for management purposes.

For perspective, in programs that require electronic ID, figure those tags will cost in the neighborhood of $3- $5 each, usually with the option of getting a visual dangle tag along with it. There’s a cost for the service, too, which can range from a flat fee to a cost per head.

On the other hand, unless you have such documentation ready to hand, you won’t be able to take advantage of markets paying for the information when they come along.

It doesn’t have to cost anything to be prepared to participate in such programs, though. Take a look at the programs available, what they provide and how much they cost. Take stock of the records you have or need to have in order to verify cattle age.

In basic terms, eligible records can be anything from you’re calving book or calendar, to records for branding, weaning and vaccinating. You can find the BEV program requirements at www.ams.usda.gov/lsg/arc/qsap.htm. Also, consider whether participating in such a program would also make you compliant with the National Animal ID System (see NAIS story) when it comes into play.

Suffice it to say, the fact that interest in age and source verification has come along at the same time as NAIS is creating a fair bit of confusion. If NAIS is established as envisioned by the Cattle Industry Working Group— the group advising USDA about cattle producers’ wants and needs for the program—electronic ID tags will be required. These tags will only be issued once producers have registered their premises with NAIS and received a premises ID number. Ultimately, producers will report the movement of cattle as they enter commerce. Again, NAIS data will be used only by state and federal animal health officials for animal health monitoring and disease surveillance.

Programs like USVerified enable producers to comply with NAIS requirements and also make data available for non-NAIS purposes. In the mean time, Markham says, “Demand for the program has been strong. Interest is escalating as the resumption of trade with Japan and Korea draws closer.”

PACER AWARDS 2006 • Handicap
There’s no quick fix to high fuel prices, but there should be plenty of crude oil to last the world for a long while.

FILL 'ER UP

Though it doesn’t make it any easier to shell out $3 or so for a gallon of gas, if anyone can understand the perfect storm of supply and demand fundamentals that got us here, it should be beef producers.

Remember the summer of 2003? An extended liquidation phase in the cattle cycle, combined with suddenly steamy beef demand already had prices on a steady march. When Canada discovered its first case of BSE and the world shut its doors to their beef, the U.S. picked up a huge slice of unexpected increased export demand. Prices went through the roof. Even after a case of BSE was discovered here six months later, prices remained high because domestic demand continued rock solid and domestic supplies were as short relative to demand as anyone had ever seen. It’s the same way with crude oil supplies, refined petroleum products and prices.

As recently as last year, crude oil prices averaged $50.26 per barrel, the year before that it was around $40. Lots more demand than anticipated, especially from China, began to stretch the global cushion. Then with the hurricanes last fall, 25% of domestic oil production and 29% of refining capacity (at the peak) was shut down. Heading into this summer, refining and distribution took another hit as Texas and the Northeast switched to ethanol rather than MTBE to meet state regulations for summer clean- ir programs. Most states have gotten away from MTBE because of concerns over groundwater contamination. As for replacing MTBE with ethanol, the U.S. Energy Information Administration (EIA) explains, “The different properties between MTBE and ethanol affect not only production, but storage and distribution of gasoline as well. Ethanol-blended gasoline cannot be intermingled with other gasolines during the summer months, and ethanol, unlike MTBE, must be transported and stored separately from the base gasoline mixture to which it is added until the last step in the distribution chain.”

Oh yeah, implementation of the Environmental Protection Agency’s Ultra Low-Sulfur Diesel program began this summer, too.

The result: crude oil prices are hovering around $70 per barrel and petroleum product prices are 65- 5 cents per gallon more than they were a year ago.

Crude is Key
As much as some would like to find a culprit in the middle who has been gouging us consumers, the fact of the matter is that crude oil accounts for about half the cost of a gallon of gas. To be exact, it represented 53% in 2005, according to EIA. Federal and state taxes were at 19.7%, refining costs and profits were 18.1%, while marketing and distribution costs accounted for 9%.

Figure that a barrel of oil yields about 42 gallons of gas. At $70 per barrel, you’re talking $1.67 per gallon just for the raw cost of the crude. Federal excise tax is 18.4 cents per gallon and state taxes average about 28.1 cents. So, you’re talking $2.14 per gallon without accounting for other local taxes and surcharges that may be applied, and the cost to refine, distribute and retail gasoline.

Bottom line, after conducting an investigation, the Federal Trade Commission (FTC) concluded, “The post-hurricane gasoline price increases at the national and regional levels were approximately what would be predicted by the standard supply-anddemand model of a market performing competitively. The conduct of firms in response to the supply shocks from the hurricanes was consistent with competition.” As well, the FTC says for the past  two decades, 85% or more of the change in price of gasoline is closely related to a change in the price of crude oil.

Competition is King
In fact, global competition for crude oil is what promises to keep prices higher than they have been historically, at least for the foreseeable future. “There’s not a shortage of oil, but there is a razor thin line between supply and demand. The markets are allocating a scarce resource,” explains Rayola Dougher, manager for energy market issues at the American Petroleum Institute (API).

For perspective, according to a study from Lexecon, commissioned by API, the world consumes about 85 million barrels per day. The U.S. is the largest single consumer at about 20 million barrels per day. On the production side, the Organization of Petroleum Exporting Countries (OPEC) provide about 40% of the daily global oil consumption and represent about 65% of the global oil reserves.

Here in the U.S. we consume 20.7 million barrels of petroleum products per day. We import 10.1 million barrels of crude oil—12.1 million barrels of net petroleum products—to meet our needs. Since 2000 U.S. oil consumption has grown by 5.2%, according to EIA. World consumption has grown 7.7%. China’s consumption had grown 25% to 6.4 million barrels per day in 2004 (the most recent figure).

While global demand has climbed, however, refining capacity has struggled to keep up. “There is not a shortage of refining capacity, per se,” explains Dougher. “It’s a shortage of refining capacity for certain grades of oil…It’s a mismatch between refining capacity and crude oil supply.”

More specifically, the Lexecon study explains, “As the demand for petroleum products increased (200- 004), so too did the demand for conversion capacity (refining)…capacity capable of producing relatively more valuable products from heavier crude oils. These changes reflected not only the increasing demand for higher-value products, such as gasoline and diesel fuel, but ongoing changes in fuel specifications, as well, which increase demand for such conversion capacity.” In other words, as the price for lighter, sweeter crude oils has skyrocketed, there has been a need, and economic incentive, for refineries to make the modifications that allow them to handle heavier more sour crude oil varieties. The terms light and heavy refer to the oil’s viscosity. In simple terms, light oils require less processing than heavier ones to produce highvalue petroleum products. The terms sweet and sour refer to the amount of impurities in the oil. Sweeter varieties have fewer impurities, such as sulfur, which means less conversion is required to manufacture high-value products than with the more sour varieties that contain more impurities.

By the way, that Ultra Low-Sulfur Diesel (ULSD) program? It demands a 97% reduction in the sulfur content of highway diesel, from the current level of 500 parts per million (ppm) to 15 ppm. That means that some of the current distribution infrastructure will likely be dedicated to ULSD so that eligible fuel doesn’t pick up extra sulfur between the refinery and consumer rendering it ineligible. Common sense says such a move could impact the price of diesel fuel until the market sorts out these new requirements. According to Lexecon, World Spare Refining Capacity was over 5 million barrels per day as recently as 2002. Last year it stood at approximately 1 million barrels. That’s the razor thin line between supply and demand that Dougher referred to.

With that said, domestic oil refineries are maxed out, running at 96-97% capacity, says Dougher. And, while it’s true no new refineries have been built in recent years because of poor economics, she explains that the equivalent of 12 new state-of-the-art oil refineries have been built in the past decade via expansion of existing facilities. As well, she says based on the public announcements of building and expansion projects, another 1.3 million barrels per day of domestic refining capacity will be added by 2011. Market Transparency has Downsides, Too

Back in the day, oil traded mostly by way of long-term contracts, says Dougher. Since about the early 1980’s, most trades occur via the futures market or based upon it. As cattle producers know, this means that the price not only reflects expectations of supply and demand, but that prices can jump or plummet based on less than fundamental reasons.

For instance, depending on which oil guru you chat with, the fear premium on crude oil is generally pegged at $10- $15 per barrel today.

In a letter to Congress this April, Red Cavaney, API president and CEO, explained, “This year has been described as the worst political-risk year for energy supplies since the oil embargo year of 1973. Recent weeks have seen increasing concern about potential supply interruptions from geopolitical turmoil, conflicts and uncertainties in such countries as Chad, Iran, Iraq, Nigeria and Venezuela.”

It’s kind of like when feeder cattle futures jump after a damning corn report comes out, even though the corn isn’t even half-way through the growing season. In this case, the oil market has built in a cushion for the potential of supply disruptions, be it terrorists blowing up a pipeline, or the odds of another hurricane hitting the Gulf Coast.

Speaking of which, there’s a cottage industry of sorts that speculates on when the world’s oil production will plateau. You can find predictions that place it a few decades out and others that estimate the plateau coming a few centuries down the road.

“Most estimates say oil production will plateau by the middle of this century,” says Dougher. That’s based on proven reserves.

If you take into account what are termed unconventional reserves, which include the tar sands in Canada—the second largest estimated oil reserve in the world—and others that are now becoming economic to put into production, some estimates put the plateau beyond the lifetimes of our great grandchildren.

“I don’t think we’ll ever run out of oil, just use less of it,” says Dougher. Odds are that society will consume less gasoline in the future, either as economics ration the resource, or as new energy sources compete for consumer dollars.

In the meantime, Dougher emphasizes there are no quick fixes to high fuel prices. She suggests encouraging law makers to focus on allowing industry to develop domestic supplies of oil and natural gas in an environmentally responsible manner. She also mentions common sense conservation; things like making sure your tires are inflated correctly, resisting the urge to floor it because the jerk ahead just cut you off, etc. After all, being the world’s largest single consumer of crude oil is both a blessing and a curse. On one hand, we’re locked into dependency, meaning we have little choice but to pay higher prices until practical alternatives are available. On the other hand, if everyone did a few little things to conserve even a gallon or two of gas per week, collectively we could take a bite out of global consumption and enjoy the economic benefits.

PACER AWARDS 2006 • Major Wreck
After less than 30 days USDA ineptitude caused the Japanese ban on U.S. beef to resume for at least five more months.

GUT-SHOT AGAIN

Sure, you can blame the packing company—Atlantic Veal and Lamb of Brooklyn, NY—for shipping bone-in veal racks to Japan, prompting that country to resume its ban on U.S. beef January 20 (after partially opening December 12) . Ultimately, though, it was up to USDA personnel to inspect the shipment and make sure it complied with nascent regulations prohibiting bone-in products.

Said another way, whether the USDA inspector was at fault, or higher ups who failed to adequately train USDA personnel, the agency figured out yet one more way to blacken its own eye and hurt U.S. beef trade in the process.

More specifically, the investigation report issued by USDA in February explained, “The investigation revealed this incident was the result of a failure on the part of the exporter and USDA person nel to know which products were eligible for shipment to Japan.”

The report from the Office of Inspector General (OIG) says in part, “…We found that the enforcement of the compliance with Beef Export Verification (BEV) requirements broke down because the processes and documents used to communicate the specific plants and Japanese requirements for export to the field inspectors were insufficient and non-specific. In this case, neither the FSIS Consumer Safety Inspector nor the Supervisory Public Health Veterinarian were familiar with the Japan BEV program or understood their roles or responsibilities for signing and certifying export documents.”

In the months since, other nations have delisted specific packing plants when bone fragments were found in shipments. You’d be right in saying that there’s virtually no way to guarantee all beef shipments are 100% devoid of any bone fragments or chips. Which begs the question, why would USDA agree to international demands that are impossible to meet, or impossible to meet at a cost that makes them worth meeting?

If there were a silver lining to the agency’s failure—and there isn’t—it would be the fact that even if the Japanese market had been open to U.S. beef since January (at press time hopes were that the market could resume in June, but only hopes), the feeder and fed cattle markets likely wouldn’t have played out any different.

Fundamentally, beef production is increasing—estimates are for as much as a 5% increase this year—while demand is slipping some in the face of record large total meat supplies. Besides which, only beef from carcasses 21 months old or younger being allowed, and whole carcasses don’t go to Japan, just parts—meaning it takes lots of carcasses to provide the specific parts they covet.

At most, Derrell Peel says Japanese exports represented 5% of beef production. But he points out that was accomplished by aggregating pieces and parts from, say 15-20% of the carcasses. With age restrictions, that means the same amount of production will have to be pulled from a larger pool of carcasses. As it is, various estimates peg the percentage of fed cattle carcasses currently capable of complying at 10-20%. That’s based on the number of cattle flowing through the systems with birth records that could qualify for USDA’s Beef Export Verification program.

Packers can also qualify cattle for Japanese export through carcass maturity. Unfortunately, the score Japan finds acceptable is A-40 or less. In general terms, this score limits cattle to those 15-17 months old or younger. In December when the border opened, Tom Troxel, an extension beef cattle specialist at University of Arkansas noted that USDA research indicated only 3% of the nation’s fed cattle in 2006 would meet that requirement.

Consequently, there isn’t an overwhelming supply of carcasses eligible to be part of the program. While the pipeline would undoubtedly pick up steam with a growing number of Quality Systems Assurance (QSA) programs and Process Verified Programs aimed at documenting source and age, there haven’t been hefty enough premiums so far to entice cow-calf producers to participate. And, cow- alf producers will ultimately have to be willing to play the game if cattle are going to be sourced back to the birth ranch.

Never mind the fact that with the border fully open and more than enough cattle to flow that direction it will take time to recover the market share since acquired by other international beef exporters.

As for USDA, just before this summer ’s recess Congress demonstrated its mounting frustration with the agency via a bill was introduced to freeze all USDA funding for the National Animal Identification System (NAIS) until USDA provides more detail about program costs and specifics about how it intends to implement the program (see page 44).

PACER AWARDS 2006 • Best Decision by the Commission
The U.S. Supreme Court denied a final appeal in the Pickett vs. Tyson case, affirming a belief in free markets.

LET 'EM RUN

“While talk about the independence of cattle farmers has emotional appeal, the Packers and Stock Yards Act was not enacted to protect the independence of producers from market forces.”

That’s how the 11th Circuit Court of Appeals summed up its denial last year to plaintiffs requesting a do-over in the Pickett vs. Tyson case that began more than a decade ago.

The court of appeals also pointed out that all cattle producers are entitled to market preferences, but they are not entitled to force their preferences on other producers or on other segments of the marketplace.

You may remember that plaintiffs in the long-running legal dispute (Picket, et al versus IBP) accused Tyson—which purchased IBP after the suit had begun—of using marketing agreements to manipulate cattle prices.

“Thousands of producers prefer to sell cattle through marketing agreements rather than the cash market,” said John Tyson, then chairman and CEO of Tyson Foods. “This ruling (when the original jury verdict was set aside) allows them to continue this practice, which they believe is more efficient and rewards them for raising cattle that produce the beef consumers demand.” Finally, this spring, the U.S. Supreme Court ended the saga by also denying the appeal brought by plaintiffs.

If You Can’t Beat ‘Em—Legislate
That might be one reason that legislation introduced the past couple of years aimed at directing how producers can conduct their businesses have gained little traction.

For instance, last year Senator Tim Johnson (D) of South Dakota introduced the Captive Supply Reform Act (S. 960). It would amend the Packers and Stock Yards Act to, among other things, prohibit formula pricing and limit individual contract sizes to 40 head of cattle. Get this, the legislation would also mandate that a fixed-base price (arrived at through public bidding) be included in any packer contracts.

According to a legislative tracking system maintained by the U.S. Library of Congress—dubbed THOMAS for Thomas Jefferson), the bill was read twice and referred to the Senate Committee on Agriculture, Nutrition and Forestry. There’s been no official action since.

More recently, Senator Tom Harkin (D) Iowa introduced a bill called the Competitive and Fair Agricultural Markets Act of 2006. Basically it would create a new government agency to investigate uncompetitive practices and to prosecute if such skullduggery was found.

When you read through the bill (S. 2307) there’s also a fair bit of rule making aimed at preventing businesses from choosing who they do business with. It comes under the guise of such things as making it unlawful, “…to refuse to deal with any producer because of the exercise of the right to join and belong to, or to refrain from belonging to an association of producers…” So, you’ve got a business, but the government can dictate who you choose as customers? Perhaps most questionable is, “…making it easier for them (producers) to prove unfair actions by packers without additional burdens of having to prove adverse affects on competition.” In other words, you wouldn’t have to prove that you’d suffered any harm or that there had been any adverse affect on competition. Ludicrous.

This bill was also referred to the Senate Committee on Agriculture, Nutrition and Forestry in February. No other action has been taken. When the Alabama jury initially ruled against Tyson in early 2004—the judge subsequently set aside the verdict which led to the most recent round of appeals—the company said, “Our company can’t demand that cattlemen sell to us. Anyone who raises or feeds cattle can sell to whomever they want. So we compete with other packers for available market-ready cattle. A majority of the cattle we buy are purchased on a daily cash market basis.

Others are bought through various marketing arrangements that were initiated by cattle producers who came to us seeking a more efficient way of selling their livestock… We strongly believe livestock producers should continue to have the freedom to market their cattle the way they want and we will continue to convey this message in the federal courts.” Amen.

PACER AWARDS 2006 • Muddiest Track
Politics mean international trade issues will continue to be thorn in the cattle market.

FORGET SCIENCE

If you believe in science BSE is less of a risk in this country than being zapped with lightening while roller skating in a pig pen, or thereabouts. According to USDA, the prevalence rate is estimated to be less than 1 in a million adult cattle, based on a population of 42 million head. The incidence rate for 2005, according to the World Organization for Animal Health (OIE) was 0.024. By virtue of the Enhanced BSE Surveillance program, more than 700,000 animals—mostly high-risk—have been tested for BSE since June of 2004. Of those, two head have been diagnosed as having BSE, and both of those according to USDA statements fall under the heading of atypical cases.

In other words these could have been spontaneous in nature, unlinked to any avoidable cause such as feed adulterated with mammalian protein; both were born before the feeding ban, however. The third case was the import cow discovered in Washington in 2003. “We can now say, based on science, that the prevalence of BSE in the United States is extraordinarily low,” said Agriculture Secretary Mike Johanns, when the prevalence estimate was released in April. “The testing and analysis reinforce our confidence in the health of the U.S. cattle herd, while our interlocking safeguards, including the removal of specified risk materials and the feed ban, protect animal and human health.”

Earlier this year, James Hodges, president of the American Meat Institute Foundation summed it up this way: “Despite the miniscule level of risk for BSE in the live cattle population, the U.S. requires compliance with extraordinary measures in meatpacking plants to provide additional assurances that the beef supply is safe. More than 65 million head of cattle have been USDAinspected, passed and processed since the first case of BSE was diagnosed in the U.S. This strict, continuous government oversight, coupled with the extremely low occurrence of BSE in the U.S., ensures meat safety…”

By contrast, Japan has had 25 confirmed cased since 2001. According to OIE the BSE incidence rate in that country last year was 3.575. We’re not statisticians, and though it’s hard to come by official cattle population numbers for Japan, logic tells us the prevalence rate there has to be nearing the nosebleed section, compared to the U.S.

Yet, other than about a month beginning December 12 last year, U.S. beef has been banned from Japan for going on 31 months, based on BSE concerns.

Worse, when trade does resume again with Japan—discussions were still taking place when this article was written—odds are high that it’s just a matter of time before the border is shuttered yet again.

That’s because the issue is about politics rather than science, and because U.S. trade negotiators continue to get out-horse traded with Japan and other countries. In this case, it wasn’t enough that negotiators allowed Japan to ignore the science and set terms on only beef from cattle 20 months old or younger. They also agreed to shipping only boneless beef, and they failed to arrive at a definition of what boneless means.

In March when Hong Kong officials discovered some bone chips in a U.S. shipment they suspended imports. It’s virtually impossible to guarantee beef free of bone fragments because of the way it’s processed. Even if it could be accomplished, the cost would likely be so high that it wouldn’t be worth doing.

A think tank gathered at the International Livestock Congress in March to discuss the global prevention and management of Foreign Animal Disease, BSE being one of those. Of the 11 recommendations made by national and international experts, relative to BSE, only a couple were scientific in nature. For instance, the group believes there is a need for more research to adequately characterize atypical BSE cases.

All the rest of the recommendations were aimed at reducing needless costs and diluting the impact of politics and public perception that ignore science.

For instance, the group recommended the U.S. start decreasing the number of cattle tested within the Enhanced BSE Surveillance because the prevalence rate is so low, the program offers limited practical value. Another was the recommendation that government agencies should avoid making BSE test results public until they are confirmed.

In recommending that the global community carefully craft risk communication protocols and policies, the group explained: “Lessons can be learned from previously poor risk communications in other countries. For example, Japan initially assured its citizens that the disease didn’t exist there; then when BSE was first discovered there (in September, 2001) the Japanese media exaggerated ‘risk’ of BSE to its cattle and of vCJD (Variant Creutzfeldt-Jakob Disease) to its people. The Japanese government attempted to allay consumer fears and concerns by adopting a policy of BSE-testing for brain-stems from all harvest cattle—which, in essence, told consumers that beef tested for BSE, and found negative, was safe to eat, while beef not tested for BSE was suspect. Risk communication in Japan was misleading; the mass media exaggerated risk (of BSE and vCJD occurrence) and many Japanese consumers—to this day—demand ‘zero risk.’”

So, it’s not just politics between countries, it’s the politics within them, too.

PACER AWARDS 2006 • Darkest Cloud
The squawk surrounding Avian Influenza will be worse than its bite…hopefully.

FOUL PLAY

Best case scenario: Avian Influenza H5N1 either doesn’t make it to North America, or it does and it’s quickly contained.

Worst case: Avian Influenza H5N1 spawns a global human influenza pandemic that rivals or exceeds the one in 1918 which killed an estimated 40 million people around the world and left economic devastation in its wake. In between, there are infinite possibilities and questions.

A View from the Country Up front, you’d be hard-pressed to find many experts willing to bet against the highly pathogenic strain of Avian Influenza (AI) arriving in the United States, likely this fall. Finding folks who believe it can’t be quickly contained is just as difficult, at least if you’re talking about the infection of commercial poultry flocks.

Earlier this year at the International Livestock Congress a group of national and international experts discussed the status and potential movement of H5N1.

“If it invades commercial poultry systems, it will be quickly identified, contained and controlled at the local level,” concluded the group (see Events that will Probably Occur). “This will be accomplished with effective bio-security in production systems, through testing of commercial flocks, aggressive surveillance and rapid response.”

Their point is that the U.S. poultry industry is so meticulously organized that odds are high the disease will be identified early and appropriate measures will be taken to contain it. The biggest risk comes in the backyard flocks and recreational birds that fly outside of industry and governmental scrutiny.

Avian Influenza 101
• Avian influenza (AI) viruses can infect chickens, turkeys, pheasants, quail, ducks, geese and guinea fowl as well as a wide variety of other birds, including migratory waterfowl. Each year, there is a flu season for birds just as there is for humans and, as with people, some forms of the flu are worse than others.
• AI viruses can be classified into low pathogenicity and highly pathogenic forms based on the severity of the illness they cause in poultry. Most AI strains are classified as low pathogenicity avian influenza (LPAI) and cause few clinical signs in infected birds. In contrast, high pathogenicity avian influenza (HPAI) causes a severe and extremely contagious illness and death among infected birds.
• AI is primarily spread by direct contact between healthy birds and infected birds, and through indirect contact with contaminated equipment and materials. The virus is excreted through the feces of infected birds and through secretions from the nose, mouth and eyes. Contact with infected fecal material is the most common of bird-to-bird transmission. Wild ducks often introduce low pathogenicity into domestic flocks raised on range or in open flight pens through fecal contamination. Within a poultry house, transfer of the HPAI virus between birds can also occur via airborne secretions. The spread of avian influenza between poultry premises almost always follows the movement of contaminated people and equipment. AI also can be found on the outer surfaces of egg shells. Transfer of eggs is a potential means of AI transmission. Airborne transmission of virus from farm to farm is highly unlikely under usual circumstances.
• HPAI can be spread from birds to people as a result of extensive direct contact with infected birds. Broad concerns about public health relate to the potential for the virus to mutate, or change into a form that could spread from person to person.
• Some low pathogenic subtypes have the capacity to mutate into more virulent strains. While LPAI is considered lower risk, low pathogenic strains of the virus - the H5 and H7 strains - can mutate to highly pathogenic forms. Source: USDA

With that said, H5N1 has picked up steam with 20 new countries reporting cases since the first of the year. Avian influenza H5N1 has been reported in 51 countries since 2001 according to the World Organization of Animal Health.

Since 2003, according to the World Health Organization (WHO), “This virus has caused the largest and most severe outbreaks in poultry on record.” So far, the poultry industry has taken most of the economic lumps, though it can be argued that high poultry prices are supportive to stronger beef and pork process, and visa versa.

According to the most recent trade outlook from the Economic Research Service (ERS), “A sharp decline in broiler prices since last fall has spurred shipments to Russia and China. In addition, larger shipments to price sensitive markets like Mexico and some Caribbean countries, supports a $100 million dollar increase in the value of broiler meat exports. Concerns over avian influenza remain a major factor in Central Europe as evidenced by a sharp drop in sales to Turkey, a major transshipment point.”

More specifically, ERS says poultry prices decreased 0.9% in April, the fourth decrease in five months; poultry prices were down 2.0% from the same time a year earlier, due mostly to increases in domestic supplies as a result of decreased global poultry demand related to Avian Influenza trade issues.

Though U.S. poultry producers reportedly scaled back first-quarter production, if AI makes it here, domestic consumer reaction and the global response to U.S. poultry imports will determine price stability or volatility. If U.S. consumers overreact and U.S. exports are limited, prices could get ultra- heap. While that might be supportive to beef prices in the short-run as consumers opted for substitute sources of protein, it would likely drag the price of beef down in the long-run.

Potential For Worst-Case On the human side, WHO says so far this year, 81 human cases of AI from 8 countries have been reported to the organization (26 in Indonesia); of these, 52 have resulted in death. Since 2003, 10 countries have reported 225 cases, 128 of which have been fatal (49 in Indonesia). The H5NI strain of AI first infected humans in Hong Kong in 1997, infecting 18 people, killing six of them.

At a White House press briefing in May to discuss the President’s implementation plan for the National Strategy for Pandemic Influenza, former White House Secretary, Scott McClellan said, “I should make clear, from the outset, that we do not know whether the bird virus that we are seeing overseas will ever become a human virus. And we cannot predict whether a human virus will lead to a pandemic. Moreover, there is no way to predict how severe a pandemic would be. In the plan we describe a wide variety of severity and we are candid that we should understand and prepare for the worst-case scenario.”

There have been three pandemics over the past century or so. The “Spanish Influenza” in 1918 that was mentioned at the outset, one in 1957 that claimed an estimated 2 million lives, and one in 1968 that took about a million. Closer to home, The Hong Kong Flu of 1968 caused 33,800 U.S. deaths, according to the U.S. Department of Health and Human Services (HHS), which was less than half of the U.S. deaths inflicted by the Asian Flu in 1957.

At a press conference in June, HHS Secretary Mike Leavitt explained, “Pandemics are a biologic fact of life. They have been with us since the beginning of human history. Literally, every century since recorded history began, we have evidence that disease of this sort affects, in a profound way, humanity. You can start in Athens in 430 B.C, which may be the first known pandemic, and 25 percent of the population of Athens was wiped out very quickly, and it changed not just their health but also the politics and the prosperity of that area. Every century between now and then you can see two or three times during a century the effect of pandemics. We’ve had 10 pandemics in the last 300 years. We’ve had three pandemics in the last 100 years.”

In order for a pandemic to begin, the Center for Disease Control (CDC) says three conditions must be met: 1) a new influenza virus subtype must emerge for which there is little or no human immunity; 2) it must infect humans and causes illness; and 3) it must spread easily and sustainability (continue without interruption) among humans.

Further, CDC says those first two conditions have been met by H5N1. “However, the third condition, the establishment of efficient and sustained human-to-human transmission of the virus, has not occurred,” say officials there. “For this to take place, the H5N1 virus would need to improve its transmissibility among humans. This could occur either by reassortment or adaptive mutation.” They explain reassortment occurs when genetic material is exchanged between human and avian viruses during co-infection (infection with both viruses at the same time) of a human or another mammal.

“We have not seen sustained personto-person or efficient person-to-person transmission, which would be the makings of a pandemic. But this virus clearly shows the warning signs that require our attention. We are also concerned because this particular virus has the genetic and clinical manifestation that the 1918 virus had,” said Leavitt.

PACER AWARDS 2006 • Chronic
Even with USDA’s new implementation plan, national animal ID remains as sketchy as ever.

HERE'S GUESSING AT YOU

Perhaps all anyone needs to know about the current state of the National Animal Identification System (NAIS) is this: Many of the folks most intimately involved with the program and the U.S. Animal ID Plan (USAIP) that bore it are as befuddled as the rest of us about how USDA intends to get the program off the ground.

This head scratching certainly must include members of Congress. The House of Representatives passed an agriculture appropriations bill in May for 2007 that freezes NAIS funding until USDA provides more detail about how it plans to implement NAIS. Keep in mind, this vote came after USDA unveiled its NAIS implementation plan in April (see Benchmarks for Progress). That’s how convoluted USDA’s management of the process has become. This is the shambles the industry faces.

Need Versus Reality
Does the industry need a standardized national animal identification system for the purposes of animal disease surveillance and animal health monitoring? Of course. Based on various industry polls a majority of cattle producers believe so, too.D oes the industry need such a system to be predicated upon the primary NAIS components of premises registration and animal identification with both of these linked to the reported movement of livestock in commerce?

You bet, especially if you ultimately want the opportunity to trace animals back to all lifetime premises of occupation within 48 hours in order to rapidly contain virulent Foreign Animal Diseases like Foot and Mouth, or to ferret out the slow-festering ones line BSE.

All of this—the key elements, the ultimate goal and the road map in between—was detailed by the USAIP development team almost three years ago. Folks involved in that process from government, but by and large from industry, were appointed by USDA with guidance from industry. These folks were a cross-section of industry knowledge, expertise and talent. All were concerned that a national system be developed in a way that would not harm livestock producers. The USAIP this group developed was more than two years in the making. By the time the USAIP was presented to USDA, there was growing industry consensus that USAIP or something within a frog’s whisker of it should be the national system.

The USAIP is also the system former Agriculture Secretary Ann Veneman proclaimed was being instituted in January of 2004, back when the American public was demanding to know what was taking so long in finding the peers of the BSE import cow found in Washington. So, does the industry need NAIS?  Maybe. Forget for a moment that saying no to NAIS may not be much of option since USDA has the power and apparent will to make the program mandatory if need be; even though USDA continues to dance circles around the mandatory question in public forums.

All 50 states, two U.S. Territories and 5 Indian Nations have premises registration systems in place, meaning that all U.S. livestock producers can register their premises. By the end of May, according to USDA, 263,668 premises had been registered. That’s about 13% of the 2 million livestock premises that USDA estimates there are in this country.

That’s certainly necessary. The system for allocating official NAIS numbers to ID tag manufacturers is in place, plus there’s a method by which cattle producers using ISOcompliant Radio Frequency Control ID (RFID) tags can grandfather those tags into the NAIS system. That’s necessary, too. But last we knew USDA still hadn’t taken official action on the recommendations presented by the Cattle Industry Working Group (CIWG)—the species group relating the wants and needs of cattle producers to USDA, relative to NAIS. One of the CIWG recommendations is that NAIS ID in the cattle industry take place with electronic tags. Until USDA makes it official, though, producers still have no way to begin and know for sure what they’re using will comply with the program. That’s a problem.

Likewise, there is still no official repository for reporting animal movement using official NAIS numbers. USDA’s sudden about-face last fall from the central database administered and funded by USDA (as recommended by the USAIP)—to approving private data bases to make NAIS data accessible to state and animal health officials—means producers don’t yet know whether a data service provider they are using or considering will be NAIS-compliant. That’s a problem, too.

Given all of the above, USDA’s timeline and benchmarks for NAIS implementation is incredulous. That’s especially true given the industry acrimony and lost momentum bred by USDA’s herky-jerky approach. Perhaps the most vexing problem of all though is that USDA is asking the industry to embark on the NAIS journey even though they have yet to provide the industry with an estimate of what the journey will cost producers.

So, does the industry need NAIS?
Perhaps the more productive question is: Does USDA have to be involved?

PACER AWARDS 2006 • Horse to Watch
Soaring fuel costs hurt, but they shouldn’t level beef demand or production costs.

OUCH

Anyone who had their bottom line pinched by high energy prices back in the 1970’s may rightfully be wondering how similarly or differently the current run-up in fuel prices may affect them. The good news is that for agricultural producers, especially for cattle producers the impact should be less severe than it was then, at least on the production side of the fence. For one thing, a summary report from the Economic Research Service (ERS) this spring points out all economic sectors responded to those oil embargo days by working to become more energy efficient.

“Agricultural producers responded by making tradeoffs—replacing more expensive fuels with less expensive fuels, shifting to less energy intensivecrops and employing more energyconserving production practices where possible,” says the ERS report. “Energy intensity—defined as energy consumed per unit of total output—has steadily declined over time due to gains in energy efficiency in the agricultural sector.”

Moreover, cattle production, at least the cow-calf segment, is less energy intense than most other agricultural enterprises. According to ERS, direct energy costs accounted for 3-7% of the operating costs for hogs, dairy and cow-calf operations in 2004. They also point out, however, that higher energy costs also affect livestock operations indirectly through higher feed production costs. “Feed costs make up roughly 60% of total livestock production costs, so livestock producers can expect to see cost increases through either purchased feed or feed produced on the farm,” says ERS.

Finally, as much heartburn as paying more for fuel creates--$3.25 a loaded mile for cattle and going up—on an inflation-adjusted basis we’re still paying a fair bit less than the record inflation-adjusted levels of 1981. According to USDA’s Baseline Projections to 2015 released in February, nominal crude oil prices would have to get to $90 per barrel to be at the same level. And no, that isn’t a record many  want to see achieved.

Looking down the road to 2015 in those baseline projections USDA is calling for Manufactured farm production expenses (which include fuel and fertilizer) to grow at about the pace of annual inflation, which is projected at less than 3% for that period of time. Incidentally, when you look at Table 1 (page 46), farm origin accounts for such things as seed, feed and livestock; the Other portion includes labor, interest and other expenses.

Prices Squeeze rather than Squash
Perhaps surprisingly, rising energy costs also don’t appear likely to harm beef demand much, in the great scheme of things and over the longer haul. It’s uncertain how much rising consumer energy costs played in the 4.5% decline in the Consumer Beef Demand Index in the first quarter of this year— he first decline since beef ’s stellar rise from the demand doldrums in 1998.

Though it certainly didn’t help, historically high consumer beef prices probably have as much to do with it as anything. The second quarter ’s demand index was not available in time for publication. But, most market analysts don’t expect there to be huge increases in demand, rather the hope is that the industry can maintain the growth it achieved the past few years. Keep in mind, a slackening of demand isn’t the same as saying that beef demand is running south. It remains rock solid; if not, prices would have plunged.

Longer term, economists aren’t calling for a severe consumer belttightening due to energy costs, either. “Longrun developments for the U.S. farm sector reflect steady domestic and international economic growth, which support gains in consumption, trade, and prices. Although export competition is projected to continue, global economic growth, particularly in developing countries, provides a foundation for gains in world trade and U.S. agricultural exports. Combined with increases in domestic demand, particularly growth in corn used for ethanol production, the results are generally rising market prices and cash receipts,” explains USDA. “Rising production expenses and lower government payments offset the gains in cash receipts and other sources of farm income, holding net farm income relatively stable from 2006 to 2015, after declining from the historically high levels of 2004 and 2005.”

Globally, beef demand is expected to grow, as well as U.S. beef exports. Even by 2015 USDA doesn’t project beef exports to the Pacific Rim to be as high as they were prior to the current beef ban.

So, per capita income is expected to increase, inflation and interest rates are expected to remain in line. And, beef demand domestically and internationally is expected to remain strong.

Really, the primary force that will hold prices, production and everything else in check over the next decade is one of the most fundamental demand determinants there is: population. Global population growth was humming along at about 1.7% per year through the 1980’s. By 2015 USDA expects that rate to decline to 1.1%. Even the most densely populated parts of the world are slowing in population growth. According to the baseline projections, China and India together account for around one-third of the world’s population. China’s population growth is expected to slow from 1.5% per year in 1981-90 to 0.6% in 2006-15. The population growth rate in India, the world’s second most populous nation, is projected to decline from 2.1% to1.3% per year between the same periods.

Historically, about 70 percent of increases in food use have been related to population growth, leaving about 30 percent driven by increasing incomes and other factors. With population growth slowing in the projections, income growth will become a relatively more important factor underlying food and agricultural demand growth,” says USDA.

Likewise, increasing protein competition means that consumers will continue to spend a smaller percentage of their disposable incomes on red meat and poultry, even while they consume more of it. USDA estimates per capita domestic beef consumption to grow modestly by 11 lb. over the next decade to 231 lb. per capita. Most of that growth is projected to come in the form of increased poultry consumption.

According to the baseline projections, “Over the next 10 years, consumer meat expenditures decline from about 2 percent to 1.3 percent of disposable income. Poultry expenditures continue to increase as a share of consumer spending on meats (Table 2 page 46).” But consumers continue to spend the largest percentage of their meat dollar for beef. Obviously, there are a number of assumptions in these projections (http://www.ers.usda.gov/Briefing/ Baseline/sum.htm) . But, they do make some logical sense.

Depending on your societal leanings, higher fuel costs may actually have an upside, too. That ERS report goes on to say, “Because of higher transportation expenses, rural communities may see changes in settlement patterns, especially in more remote urban areas.” Over time if fuel prices remain higher than they have been the last decade or so, living in the country may not look so appealing to immigrants from the city.

PACER AWARDS 2006 • Jockeys of the Year
Cattle producers endured some of this century’s worst natural disasters, while others helped them begin the process of rebuilding.

TOUGH ENOUGH

Imagine losing a lifetime in one night. Your cattle, your pastures, your barns and equipment, your livelihood, all gone just like that. Now, imagine that happening to you and your neighbors at the same time.

That’s what too many cattle producers have faced this past year in the wake of Hurricanes Katrina and Rita, as well as raging grass fires in the Panhandle of Texas.

“You’ve seen a tornado go through a community; this was like the path of a thousand tornadoes laid side by side,” explains Sammy Blossom, executive vice president of the Mississippi Cattlemen’s Association (MCA). “You can’t imagine the size of it without being here.”

Virtually every cattle producer in Mississippi was affected by Hurricane Katrina, says LeAnne Peters, MCA Communications Director. Hurricaneforce winds raged as far north as Jackson, then carried the force of a tropical storm further north to the border. Barns gone, millions of trees— huge trees requiring special equipment to remove—scattered everywhere, fences demolished.

As one third-generation Mississippi producer told his kids, “I’ll work the rest of my life as hard as I can as long as I can but I won’t have this place back to where it was the day before the storm.”

For producers in Louisiana, the destruction was even worse. There was all of the damage from the winds and storm, but then there was the flooding afterward that simply carried cattle out into the Gulf, then left salt covering pastures to keep grass from coming back, salt in every nook and cranny of every piece of equipment.

“We’re estimating 35,000-40,000 head of cattle were lost due to Katrina and Rita. Not only did producers lose the cattle but the infrastructure and the pastures, too,” explains Bob Felknor, Executive Vice President of the Louisiana Cattlemen’s Association (LCA). “I can’t comprehend what some of these people have been through. How do you recover from losing a lifetime in one night?”

Since Mother Nature ignores addresses, there were obviously producers in portions of surrounding states who suffered as much. For folks in the Texas Panhandle, fire was the problem, but the results were the same, though not nearly as widespread as with the hurricanes. According to Burt Rutherford, Communications Director for the Texas Cattle Feeders Association (TCFA), the fires claimed an estimated 2,500 head of cattle and 2,000 miles of fence.

Taking Care of Their Own
“I don’t want to downplay the support from USDA and other government agencies, but the first response was from cattlemen in other areas of the country, responding by sending feed and hay and money to help get the cattle out,” says Felknor. “Without that kind of support, well, it really hit home the importance of people and an organization.” “Immediately after the fires, we were getting calls from other producers telling us they could come and build fence or bring a crew to help gather cattle, whatever was needed,” says Rutherford.

“NCBA members and cattlemen from all over the nation pitched in and helped out. That philosophy of cattlemen helping cattlemen was really brought home to us and was really heartwarming,” says Blossom.

Strange as it is to say, sometimes you’ve got to work awfully hard just to get the help you want to provide where it’s most needed. Using TCFA members as an example, Rutherford explains they wanted to do something to help the hurricane victims, so the organization donated $25,000 to Red Cross. “A week or two into the recovery efforts, the extent of the impact on cattlemen became more apparent,” says Rutherford. “So we decided our money could best be spent by helping cattle producers recover.”

At the same time, TCFA joined forces with Texas and Southwestern Cattle Raisers Association and the Livestock Marketing Association of Texas to gather help for producers in need. Believing that folks closest to the situation know best where resources are needed, TCFA distributed relief funds to state cattlemen’s associations to use as they saw fit. Likewise, in the case of the fires, TCFA set up an application process for county judges to evaluate needs on a local basis.

Through it all, Rutherford says the National Cattlemen’s Beef Association (NCBA) disaster relief program was key to coordinating the distribution of inkind contributions: hay, feed, fencing supplies, that type of thing. As Peters explains, NCBA coordinated the donation of supplies between those donating and the state cattlemen’s associations, enabling the state groups to coordinate distribution of those resources to their members.

As mentioned earlier, money, volunteers and supplies have come from every part of the country. And, money has come from every part of the world. Peters mentions a group from Japan that owns a beef company. They sent MCA a donation, telling them they appreciated the kindness Americans showed them when an earthquake wreaked havoc on them a decade ago.

Closer to home, Rutherford tells of a call he received from producers in Kansas wanting to donate hay: “We want to help while we can; it could be us next time.”

“With the hurricanes and the fires, a lot of people felt moved to help,” says Rutherford. “At least for Americans, I think our culture is made that way; we’re helpful people, particularly so in our (cattle) part of the economy.” Donations are still coming in, too. And, they’re needed.

Ironic as it is, those states ravaged by the hurricanes went from that right into a drought. “Just trying to keep the cattle fed is still a challenge,” says Felknor. Besides needing feed, he explains the challenge when it’s donated is finding the money for the transportation to get it there. Besides the money raised by the LCA Foundation—over $130,000—he says the Fellowship of Christian Farmers has provided over $400,000 in assistance. “When it comes down to it, there really isn’t any immediate disaster relief for agriculture,” says Felknor. “FEMA is for cities and urban areas. We don’t have a FEMA-type program for agriculture, and that’s something we’re asking for. If the government would take just a small portion of the FEMA dollars and let USDA administer them for immediate disaster assistance in agriculture it could be a big help.”

Certainly, there are programs like the Emergency Conservation Fund to help with fencing and debris removal, but it’s a cost-share program, meaning that you must have the money to do the work, complete the work, then gather and submit the receipts before you can be reimbursed for a portion of the total cost.

For perspective, Blossom says Mississippi producers applied for about $60 million worth of cost- haring help through the Farm Service Agency. So far, about $14 million of that has been distributed because producers haven’t been able to scrape together the money or time to match it with.

Worse, Rutherford explains TCFA learned it needed to be careful how quickly to provide assistance to producers because that assistance can take away from what they could otherwise receive from government programs.

There are indemnity programs for lost cattle, too, but Felknor says the cap is $80,000 per producer. That’s a lot of money, but it’s a pittance compared to the value of cattle many producers lost.

Fighting Onward
Make no mistake, plenty of the folks steamrolled by the disasters are still swinging, even in cases were the odds appear overwhelming.

For instance, Felknor talks about one producer in his 60’s that lost 1,500 head of cattle, his home, his pastures, everything. He’s trying to rebuild. “The resilience of these people is unbelievable,” says Felknor. “But we told our members as long as we’re here with a nickel in our pocket, we’ll do all we can to help.” And, they are.

In visiting with state extension personnel, Blossom says they are estimated 60% of the fences have been rebuilt so far. Some, especially those on rented ground, probably never will be, which means those pastures will be lost to cattle production.

Elsewhere, it’s much the same: progress, but still lots of debris to remove, lots of infrastructure in need not just of repairing but reconstructing.

To boot, when you haven’t lived through this wide-scale devastation before, it can be tough to know just how to go about recovering. In other words, specialized education has been a needed resource, too. As an example, MCA is using the last of its Katrina fund to host an educational seminar in the southern part of the state to provide producers with some perspective on everything from overall economics, to opportunities in this situation, to fence building.

For all of the help and producer tenacity, though, Blossom emphasizes it will be a long road back. “Our concern right now is what happens if something hits us this summer. We’re totally unprepared. We’re still trying to clean up from the last one,” says Felknor. “If another one hits, a lot of people will go out of business.”

But, as Blossom says, “Cow folks are tough and resilient and they’ll find a way to work with what they have.”