AAEA Annual Meetings Montreal, Canada July 29, 2003 Parr Rosson and Flynn Adcock Texas A&M University

1. ‘Impacts of Country of Origin Labeling on North American Beef Trade’Prepared for the Organized Symposium:‘Impacts of Country-of-Origin Labeling on North American Trade in Livestock and Meats’ AAEA Annual Meetings Montreal, Canada July 29, 2003 Parr Rosson and Flynn Adcock Texas A&M University

2. Overview • Provisions of MCOOL • Issues • Impacts on Beef Trade

3. Mandatory Country-of-Origin Labeling • Retail Labeling of Imported Products • Voluntary October 11, 2002 • Mandatory September 30, 2004 • Retailer is Responsible for Label • Products Included in Regulations • Muscle Cuts & Ground Beef (??), Pork (??), Lamb (fresh, chilled, frozen) • Seafood and Aquaculture • Fresh/Frozen Fruits and Vegetables • Peanuts

4. Present Provisions • Animal Products Labeled as U.S. Only if Born, Raised, and Processed in the United States • Requires Label, Stamp, Placard on Package, Container, or Bin • Major Exemptions Are: • Exports • Hotel-Restaurant-Institutional Trade • Ingredients in Processed Foods • Retail Stores w/Sales < $230,000 & Meat/Fish Markets

5. Present Provisions (continued) • Specific Provisions: • Exclusively U.S. origin • Foreign Origin, Entirely Outside United States • Mixed Origin, including United States • Blended Products, raw materials-Order of Prominence by Weight, not Percent

6. Present Provisions (continued) • State & Regional Programs • State & Regional Labeling Claims Cannot be Accepted in lieu of labeling • Retention of Records • Two Year Records Retention Policy • ‘Maintain Auditable Records Documenting Origin’- Retailers & Down-line Suppliers

7. Issues • Consumer Preference is Unclear • Who Will Bear Start-Up Costs Looms Large • Contradiction: Secretary Prohibited from Implementing Mandatory ID System • BUTLaw Interpreted to Require Verifiable Audit Trail for 2 Years, Raising Concerns About Traceback of U.S. Cattle & Hogs • Higher Costs of U.S. Beef : Damage Competitiveness w/Poultry, Imported Products

8. Issues (continued) • USITC Found that U.S. Buyers view U.S. and Canadian Cattle As Interchangeable • 70% of Meat from Mexican Cattle Enters H-R-I Trade • Survey Results Inconclusive as to Consumer Preferences • Some Foreign Firms & Commodity Assns. May View MCOOL as an Opportunity • De-Funded for FY 2004 in Ag Appropriations Bill (U.S. House)

9. MCOOL Cost Estimates • USDA/AMS Estimates First Year Compliance Costs at $1.97 Billion • Other Estimates Up to $6 Billion • Who Bears Costs – Producers, Wholesalers/Feedlots/Packers, Retailers, Consumers?

10. MCOOL & Beef • Beef Product & Beef from Imported Cattle Represent 17.9% of Total Beef Consumption • Distribution of Beef Imports (5 Billion Pounds): • 53% HRI • 27% Processed or Re-exported • 20% Retail, 1 Billion Pounds (3.6% of Consumption) • 5.6 Billion Pounds of U.S. Beef Sold at Retail

11. Thousand Head

13. Potential Impacts‘U.S. Products Perceived as Having More Value’ • U.S. Product Differentiated from Imports • U.S. Product Would Sell at a Premium Relative to Imports • More Product Would Stay in the U.S., Exports Fall • Opportunties for Foreign Products Possible in 3rd Country Markets

14. Potential Impacts ‘Foreign Products Perceived as Having More Value’ • Imports Differentiated • Imports Sell at Premium in U.S. Market • U.S. Imports Would Increase • U.S. Exports Increase

15. Potential Impacts ‘U.S. Consumers Are Indifferent’ • Price Sensitive & Competitive Market • U.S. Product Would Have No Premium Relative to Imports • No Major Market Shifts • U.S. Producers Incur Increased Costs of Labeling

16. Potential Impacts(New Supply Chains) • U.S. Product Incurs Higher Costs Due to Tracking/Segregation/Labeling • Development of Specialized Export Oriented Supply Chain to Service U.S. Market-Replaces Mixed Origin Supply Chain: HRI and/or Retail • Likely to Occur in Canada, Maybe Mexico • Imports Replace Some U.S. Product at Retail-Exports to Canada/Mexico Fall

17. Potential Impacts(Disruption of North AmericanMarket Integration) • Some Retail Groceries Refuse to Market Beef Labeled as ‘Product of Mexico’ • Packing Plants Reduce Demand for Mexican Cattle • Feedlots Limit Purchases of Cattle from Mexico • Lower Imports of Mexican Feeders & Price Discounting • Increased Beef Supplies in Mexico & Lower U.S. Exports

19. Summary and Conclusions • Canadian Cattle Segregation in Feed Lots & Slaughter May Spur Specialization in Export Products • Mexican Cattle Likely Discounted • MCOOL May Spur Retaliation by Trading Partners • MCOOL Viewed by Some as Government Mandated Market Segmentation

20. Summary and Conclusions • Some Countries May Respond by Developing Market Differentiated Beef Products • All Natural, Grass Fed, Premium Beef • Potential to Serve U.S. Hispanic Oriented Supermarkets with Mexican Beef • U.S. Cattle Sector Facing Higher Costs & Loss of Competitiveness • North American Market Integration Disrupted, Reducing Efficiency

21. Implications • Record Keeping & Traceback, if Required, Will Be Major Cost Factors for U.S. Cattle & Hogs • Shelf Space at Premium & High Degree of Competition Among Retailers, So Cost Passed Back to Production Sector • U.S. Retailers & Packers May Reduce Number of Countries Supplying Products • Canadian Suppliers in Good Position to Respond to Market Opportunities • BSE Discovery in Canada Provides Support