Want Fries With That Mad Cow Pink Slime Special?: Column

April 24, 2012 8:26 PM EDT | By Gavin Maguire
beef (Photo: Flickr)

It's been a bad couple of months for the U.S. cattle industry. First the outcry in March over pink slime -- ammonia-treated beef -- used in 70 percent of U.S. ground beef products. And now the country's fourth case of mad cow disease, or bovine spongiform encephalopathy (BSE), since 2003.

Judging by the steep slump in cattle prices on talk of a possible outbreak even before the U.S. Department of Agriculture's official announcement, it might be tempting to view the development as a devastating blow to the U.S. cattle and dairy sector. But considering the cow in question was not part of the food stream, was unearthed very early in the processing chain, and that top export destinations have stringent meat quality regulations designed to limit their exposure to tainted meat, it's unlikely that the latest news will have a lasting negative impact on U.S. beef and dairy trade.

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As cattle prices swooned at the CME late on Tuesday amid rumors of a mad cow outbreak in California, it was clear that some envisioned a repeat of the fallout from the first major U.S. mad cow outbreak in late 2003/2004. During that period, U.S. beef exports collapsed from more than 160 million pounds for December 2003 to less than 6 million pounds the following month.

The value of U.S. beef shipments fell off a precipice, dropping from more than $3 billion in 2003 to under $650 million in 2004. It took until 2008 for beef trade to return above the $3 billion mark, so the cost of the outbreak extended well beyond its immediate aftermath in terms of economic losses.

But drastic changes to the global meat trade business took place in the wake of the mad cow outbreaks to ensure that a tighter network of meat quality regulations and herd health alert mechanisms now prevail both in the U.S and abroad. As a result, importer nations have a much higher level of confidence that the latest incident of BSE is likely an isolated event and not indicative of a broader quality issue.

Furthermore, as the latest BSE outbreak was reported in a dairy cow rather than in beef cattle, more precise quality testing procedures can be conducted on dairy products than on meat cuts that can quickly confirm that nothing beyond the cow itself was tainted by the disease.


While the global beef and dairy export market should hold up much better than it did in the wake of the 2003 BSE outbreak, there's still plenty of fat on the U.S. cattle industry that could be trimmed in the near to medium term.

Cattle and beef prices recently scaled all-time highs on strong domestic and foreign demand coupled with restrained herd output by U.S. ranchers and dairymen. Even the retail price of U.S. ground beef hit record levels this year after climbing by more than 18 percent since the beginning of 2011 to more than $3 a pound.

Such frothy price levels give beef values ample downside room should consumers back away over the near term by switching to chicken, pork or fish products which can all be less expensive at the grocery store.

Relatively chunky large speculator long positions in the cattle markets also look primed for a diet over the coming weeks, as such traders rarely 'sit out' what they may anticipate to be rough periods for the markets they trade. Live cattle speculator long positions are well off their 2010 heights, but remain high by historical standards and thus have room to shrink should traders shed positions on the mad cow news and seek to move their market exposure to another arena until a clearer picture develops regarding the cattle industry's outlook.

All told, the news of another outbreak of BSE in the U.S. may not turn out to be quite as bad as the early price responses in the cattle market suggested. But record high retail beef prices and somewhat bloated speculative exposure to the cattle market suggest there is plenty of downside room to cattle and beef prices in the weeks ahead should consumers and traders alike scale back buy-side interest while the smoke clears from the latest event to beset the cattle industry.

Copyright 2012 Thomson Reuters. All rights reserved.

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