Effects Of Animal Identification On Cattle Market Structure

1. Effects Of Animal Identification On Cattle Market Structure Prepared by: Darrell R. Mark, Ph.D. Asst. Professor & Extension Livestock Marketing Specialist Department of Agricultural Economics University of Nebraska-Lincoln 402-472-1796 Email: dmark2@unl.edu Web: http://agecon.unl.edu/mark Western Extension Marketing Committee Western Center for Risk Management Education

2. Structural Change Is: • Change In Number Of Firms • Change In Size Of Those Firms • Change In Geographic Location Of The Firms • Because NAIS Continues To Be Developed & Implemented, Impacts On Beef Industry Structural Change Is Currently Uncertain

3. Cow-Calf Sector

4. U.S. Beef Cow Operations, 2003 • Average 41 Cows Per Operation • Large Number Of Small Operations • Over 40% Of Operations & 60% Of Cow Herd In Western States Source: USDA-NASS

5. Costs Will Vary For Operations • Some Will Not Participate Unless ID Becomes Mandatory • No Increase In Costs, But May Jeopardize Market Access • Some Will Only Obtain Premises ID Number, But Not Do Individual Head ID • Will Keep Costs Low • Potential Benefits Would Be Low

6. Group/Individual Head ID • Small Herd Sizes • Variable Costs (Tagging, Scanning): $2-5/head • Fixed Costs (Electronic Readers): $4-25/head • Costs Per Head Will Decrease With Increasing Herd Size Source: Blasi et al.

7. Third-Party Technology Provider • Collect Traceability Information Required By NAIS & Report It • Collect Production & Management Information • Birth Dates & Weights, Vaccination Records, etc. • Provide Summary Reports & Benchmark Information To Producer • Beneficial Only If Producers Use It To Make Better Production Management Or Marketing Decisions

8. Costs For Third-Party Providers • Depends On: • Amount & Type Of Hardware & Software • Individual Tags & Recordkeeping Charges • Decreases In Technology Costs Over Time

9. Small Sized Operations Three Alternatives • Contract With Third Party • Forgo ID As Long As It Is Voluntary & They Maintain Market Access • Cooperatively Own Hardware & Software With Other Producers • As Long As NAIS Is Voluntary & Technology Neutral, Costs Should Remain Low (<$5/head)

10. Medium & Large Sized Operations • Larger Herd Sizes Can Distribute Fixed Costs Over More Cattle • Medium Sized Operations Must Determine Whether To Use Third-Party Provider Or Invest Themselves

11. Structural Change • All Operations Will Adapt In Least-Cost Manner • Each Size Has Advantages & Disadvantages • Structural Change Will Be Led By How Producers Use The Individual Head Production Records • Not Required By NAIS • Better Tracking Of Productivity May Provide Comparative Advantage, This Return Could Be Reinvested In Operation To Increase Its Size

12. Market Access & Price Differentials • If Program Is: • Voluntary • Some Producers Don’t Participate • There Are Benefits To ID • Stocker Or Finishing Operations Or Packers Will Eventually Discount Cattle Without Tags Or ID Records Or Possibly Not Buy Them

13. Liability • If Improved Traceability Exposes Producers To Additional Liability For Quality Or Safety, Smaller Sized Operations Would Be More Impacted By This Risk • Geographic Differences May Exist Depending On State Laws To Provide Protection

14. Seed Stock Sector

15. Structural Changes • Likely Minimal Because Some Type Of Individual ID Is Already Used • Don’t Need Technology To Quickly Read Large Numbers Of Cattle • NAIS May Provide A Way To Verify Breeding & Genetics Of A Particular Line That Might Have A Valuable Attribute

16. Stocker Sector

17. Stocker Operators • NAIS Guidelines Would Have Cattle Tagged Before Being Sold, So Stockers Should Not Have These Costs, At Least After System Is Functioning • Buyers Of Cattle Have Responsibility To Report The New Location • Stocker Operators That Use Multiple Premises Sites May Have To Report Movements That Do Not Include Change Of Ownership

18. Sourcing Cattle From Multiple Locations • Results In Cattle With Different Types Of Tags & Different Technology • It Is Hard To Make The Different Technologies & Software Work Together Seamlessly • Will Stockers Have To Re-Tag Or Buy Cattle With Only One Type Of Tag? • Some Cattle Purchased Will Continue To Be Serviced Throughout Their Life By The Original Third-Party Provider

19. Feeding Sector

20. Feed Yard Operators • Have Same Issue With Multiple Sources Of Cattle & Different Technologies • To Get Useful Individual Head Data, They Need All Information Aggregated Into One System • More Difficult With Producers Retaining Ownership • Have Incentive To Build Relationship With Feeder Cattle Suppliers • Lower Costs, Consistent Technology, Liability Protection

21. Costs By Size • Small Yards Likely Need Only One Panel Reader & One Hand-Held Reader • Large Yards May Need Multiple Panel Readers & Hand-Held Readers • Can Spread Hardware, Software, & Technology Costs Across More Cattle & Pounds Gained To Create Economies Of Scale • If They Realize A Benefit From The Data Collected, They Will Likely Gain The Most

22. Implications

23. Vertical Coordination • Animal Identification Creates Strong Incentive For Linkages Between Cow-Calf, Stocker, & Finishing Sectors That Would Share Information • Easier Liability Transfer • Do Business With As Few Firms As Possible • May Reduce Liability & Improve Product Quality & Safety

24. Sales Method • Direct Sales/Private Treaty Will Be Easier To Transfer & Exchange Information • Fed Cattle Market Will Be Less Affected • Central Markets Present Numerous Issues For Traceback

25. Public vs. Private Benefit • Public Benefit From 48-Hour Trace back • Avoid Negative Demand Shock From Animal Disease Problem • Private Benefit From Using “Extra” Production Management Data • The Greater These Benefits, The More Disparity Between Producers Using Individual Animal ID Data & Those Who Do Not