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January 23, 2003

The Honorable Marilyn R. Abbott
Secretary
U.S. International Trade Commission
500 E Street, S.W.
Washington , DC   20436

Re:      Prehearing Brief of the Ranchers-Cattlemen Action Legal Fund – United Stockgrowers of America ( R-CALF USA ) on the Probable Economic Effect of a U.S.-Australia Free Trade Agreement (Inv. No. TA-131-24 and TA-2104-04)

Dear Secretary: 

The Ranchers-Cattlemen Action Legal Fund – United Stockgrowers of America ( R-CALF USA ) is pleased to have the opportunity to submit comments to the U.S. International Trade Commission (ITC) regarding the probable economic effects of the proposed U.S.-Australia Free Trade Agreement (FTA) on the U.S. cattle and beef industries.  (See U.S. International Trade Commission, ITC to Investigate the Probable Economic Effect of a U.S.-Australia Free Trade Agreement; Seeks Input from Trade Associations, Industry Officials, and Other Interested Parties, Press Release 02-119, Inv. No. TA-131-24 and TA-2104-04 ( December 23, 2002 )).  

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

I.          Use of ITC Models

A.        Current ITC Models for Evaluating the Cattle Sector Should Not Be Used in Investigation

          R-CALF USA contends that models currently employed by the ITC in conducting economic studies on the effects of trade liberalization on the cattle industry are flawed.  Thus, these models should not be used in this investigation. 

As the ITC is aware, the U.S. General Accounting Office (GAO) released a report in March 2002 titled Economic Models of Cattle Prices:  How USDA Can Act to Improve Models to Explain Cattle Prices (GAO-02-246).[2]  The GAO’s report criticizes the ITC’s models used in studies of the cattle industry.  The GAO notes:

ITC has . . . used computable general equilibrium (CGE) models to assess the likely effects on various sectors of the U.S. economy from major trade liberalization.  CGE models are generally not specific enough to predict cattle prices or to address structural changes associated with market concentration, marketing agreements, and forward contracts.[3] 

            The GAO further states that: 

ITC also maintains other models, including a multisector model to estimate the impact of broad trade initiatives such as the North American Free Trade Agreement (NAFTA).  While this model is designed to estimate effects of these initiatives on all sectors, it is not detailed enough to estimate the effects of cattle imports on U.S. cattle prices.  None of these models explicitly accounts for concentration, marketing agreements, and forward contracts.[4] 

            According to the GAO, the ITC generally agrees with the findings of the GAO report.[5]  Thus, as both the GAO and the ITC acknowledge that the ITC’s current economic models are flawed, these models should not be used in the current investigation.  Rather, the ITC should develop new models regarding cattle imports that take into consideration, at a minimum, the following market factors:  market concentration, marketing agreements, and forward contracts.  Further, the new economic models should factor in the perishable nature of live cattle -- smaller percentages of imports can have a greater impact on the prices of domestically produced perishable products than is the case with products that can be stored as producers of perishable products have very limited amounts of time in which to sell their products.  Use of the ITC’s current models would produce inaccurate results. 

            B.        New Economic Models Should Be Developed for Beef

            Likewise, the ITC should not use current models when evaluating the U.S. beef industry and a proposed U.S.-Australia FTA.  As with cattle, the U.S. beef market is impacted by market concentration, marketing agreements, and forward contracts, and by not examining these factors, the current models for beef are flawed.  Accordingly, the ITC’s investigation should take into account market concentration, marketing agreements, and forward contracts when looking at the impact of a U.S. Australia FTA on the U.S. beef sector.  As is the case with live cattle, the economic models should also factor in the perishability of beef.   

II.        State of the U.S. Cattle Industry  

Cattle and beef production comprises the single largest sector of U.S. agriculture.  Cattle are raised in all fifty states.  Half of all U.S. farms have beef cattle as part of their operations.[6]  Given its size, the cattle and beef industry is of paramount importance to the rural economy of the country.            

            U.S. cattle producers, and by extension America ’s rural communities, are experiencing a historically difficult period.  The U.S. Department of Agriculture (USDA) forecasts that the U.S. cattle herd will undergo its seventh consecutive year of contraction in 2003.[7]  USDA predicts that as of January 1, 2003 , the U.S. cattle population fell to 95.6 million, its lowest number since 1959.[8]  USDA estimates that this decline will continue in 2003.[9]  The U.S. calf crop in 2003 is predicted to be the smallest since the mid-1950s.[10] 

Alarmingly, the average returns to U.S. cow/calf producers during the 1992-2001 decade fell to negative $30.40 per bred cow per year.[11]  Another sector of the cattle industry, cattle feeders, suffered markedly in 2002 with losses ranging from $50 to $75 per head and an estimated $2.5 billion loss in equity.[12]  According to USDA, the weak state of the U.S. livestock sector has had “a dramatic impact on U.S. net farm income,” which was forecast as $36.2 billion for 2002, a decrease of approximately $10 billion from 2001.[13]

The depressed state of the U.S. cattle sector can be attributed in large part to concentration in the U.S. beefpacking industry.  This industry is dominated by just four firms whose combined share of the market is 80 percent.[14]  Packers are able to use imported beef and cattle to drive down prices received in the U.S. cattle market.

III.       State of Australian Cattle Industry

            Australian production is currently strong.  In 2003, Australia ’s cattle herd will likely be at its largest size since the 1970s, and beef production is predicted to reach a record 2.25 million tons.[15]  Australia ’s total slaughter for 2002 was the highest in 20 years.[16]  USDA predicts that Australia ’s slaughter will increase 8 percent in 2003, resulting in the largest slaughter since 1978.[17]  Despite the record size of Australia ’s herd and record slaughter numbers, USDA reports that Australia is still in the herd expansion phase of a cattle cycle.[18]  According to the Australian cattle industry, expansion of the Australian herd will continue through at least 2005.[19]

            In a major development in the Australian cattle industry, the number of grain-fed Australian cattle, as opposed to grass-fed, increased substantially during the 1990s.[20]  Grain-fed cattle, which result in higher quality beef, dominate the U.S. market.  Australia ’s increase was in response to demand for grain-fed beef in export markets, especially Japan .[21]  Moreover, the market for grain-fed beef has increased in recent years in Australia .[22]  Feedlots are located in all of Australia ’s states,[23] and some 680 accredited feedlots are operated in Australia with the ability to feed up to 920,000 cattle at any one time.[24]  In 2001, some 26 percent of beef produced in Australia was derived from feedlot cattle.[25]  Expansion of the feedlot sector continues, and Meat and Livestock Australia describes investment growth in feedlots as “explosive.”[26] 

It appears that the Australian packing industry, as is the case in the United States , is becoming increasingly concentrated.  In 2002, the second and fourth largest beef companies in Australia merged.[27]

IV.       U.S. and Australian Tariffs

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

The U.S. tariff rate quota (TRQ) on beef permits the importation of 378,214 metric tons of Australian beef into the United States at a tariff of 4.4¢/kilogram (2.2 U.S. cents per pound).[28]  The over-quota tariff is 26 U.S. cents per pound.[29]  The U.S. TRQ covers a wide variety of beef imports, including high quality beef.[30]  The United States has no tariff on imports of purebred breeding cattle and imposes a tariff of 1¢/kilogram on imports of all other beef cattle.[31] 

            B.        Australian Tariffs

Australia imposes zero tariffs on imports of beef and live cattle.[32]

V.        U.S. Imports

            A.        Imports from All Countries

U.S. beef and live cattle imports have increased substantially in recent years.  Between 1998 and 2001, beef imports grew from 822 million to 987 kilograms.[33]  Live cattle imports grew during this same period by 20 percent, rising from 2 million head to 2.4 million head.[34]  The former U.S. value-based beef surplus has disappeared, and the country experienced a value-based deficit in 2002 (Jan.-Oct.) of $88 million.[35]  

B.        Imports from Australia

Australia is the world’s largest exporter of beef and sold an estimated 1.41 million metric tons in the world market in 2002.[36]  USDA predicts that Australia will export a record amount of beef to a number of countries, some 1.5 million tons, in 2003.[37]  These exports will likely constitute a 12 percent increase over 2002.[38] 

The United States is Australia ’s largest market for exports.[39]  Over one-third of all beef imported into the United States originates in Australia , and Australian imports have been growing rapidly.[40]  The bulk of these imports consist of beef from grass-fed animals, beef which is commonly used in manufactured food products including beef patties.[41]  Beef imports into the United States from Australia by volume for the past six years (through 2001 -- the last full year for which data are available) were as follows: 

Beef Imports From Australia (Kilograms)

Source:  ITC DataWeb.

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

Beef Imports From Australia (U.S. Dollars)

Source:  ITC DataWeb.

In 2001, for the first time since 1995, Australia filled its TRQ of 378,214 tons.[42]  It did so again in 2002.[43]  USDA forecasts that Australia will again fill its quota in 2003.[44]  USDA predicts that Japan , a major market for Australian beef, will trigger a safeguard measure on beef during the summer of 2003, which will result in beef tariffs rising from 38.5 to 50 percent.[45]  Such action by Japan could result in even higher volumes of Australian beef entering the U.S. market.

            C.        Cattle Imports

            Besides exporting beef, Australia is a major exporter of live cattle.  Australia exported some 815,000 live cattle worldwide in 2001-02, an increase of 13 percent over the prior period.[46]  For 2003, USDA predicts that total Australian live cattle exports will increase by 8 percent to 900,000 head.[47] 

At the present time, Australia is only a minor exporter of live cattle to the United States .  The possibility exists, however, that Australia could become a significant supplier to the U.S. market.  To those not familiar with the cattle industry, the shipment of live cattle long distances may seem far-fetched, but the practice is very common.  Ships designed especially for livestock can carry up to 25,000 head of cattle at any one time.[48]  Australia currently exports large volumes of cattle.  For example, Australia shipped approximately 100,000 live cattle to Egypt in 2001.[49]  R-CALF USA notes that Australian and Mexican government officials in 2000 signed a protocol that might result in up to 100,000 live cattle being shipped annually from Australia to Mexico , so Australian producers have the logistical ability to export large amounts of live cattle, as well as beef, to the United States .[50]  Meat and Livestock Australia indicates that Mexico is currently a destination for live Australian cattle.[51] 

VI.       Investigation Should Examine Economic Effects of U.S.-Australia FTA in Light of Artificial Advantages Provided to Australian Producers

            Any study of the economic effects of a proposed U.S.-Australia FTA should examine the economic effects of removing tariffs combined with the artificial advantages provided to Australian cattle producers.  In any proposed FTA between the United States and one of its trading partners, the simple removal of U.S. tariffs could be expected to lead to increased imports into the United States .  In the case of a proposed U.S.-Australia FTA, the removal of tariffs – compounded with artificial advantages provided to Australian producers – could be expected to lead to higher imports than would be the case with FTAs with countries that provide less support, direct or indirect, to their producers. 

            A.        State Trading Enterprises

                        1.         Australian Wheat Board

                                    a.         Wheat, Including Wheat as Feed     

            The Australian Wheat Board (AWB) is one of the world’s only two explicit single-desk marketers of wheat, the other being the Canadian Wheat Board.[52]  AWB (International) Ltd is the only entity in Australia permitted to export Australia ’s bulk wheat,[53] and the AWB describes itself as “a government backed export monopoly.”[54]  Australia ’s domestic wheat market was deregulated in 1989.[55]  So while the AWB sells grains in the domestic market, it does not have the ability to set prices for sales within Australia , and it competes with other traders in the domestic market.[56]

            As noted above, Australia ’s feedlot sector has expanded markedly in recent years, and this growth is predicted to continue.  Rations for Australian grain-fed cattle include wheat.[57]  In fact, of the approximately 5.5 million tons of wheat that enters the Australian market annually, approximately half (2-3 million tons) is used as stockfeed.[58]  Australian feed wheat is noted for its high protein and gluten content.[59]

                                    b.         Other Feedgrains

The AWB also trades and manages non-wheat grains, including barley and sorghum.[60]  These grains compete with wheat in the production of compound feeds in Australia .[61]  Domestic consumption of barley and sorghum has grown in recent years due to the expansion of Australia ’s intensive livestock sector.[62]  Due to its scale and risk management abilities, the AWB’s Trading Division has the largest market share of any entity in the Australian grain market, including the market share of non-wheat grains.[63]

2.         State-Based Barley and Sorghum STEs

While the AWB does not have a monopoly on the export of barley and sorghum, STEs operated by Australian states do.  The Grain Pool of Western Australia is the single desk exporter of that state’s barley.[64]  Barley produced in South Australia is exported through the single desk operation of ABB Grain Ltd.[65]  GrainCo Australia is the single desk exporter of sorghum and barley for New South Wales .[66] 

3.         STEs Provide Australian Producers with Unfair Market Advantages

All in all, due to the AWB and state STEs, some 80 to 90 percent of all grains exported from Australia are regulated through single desk exporters or equivalent arrangements.[67]  By controlling the export of grains used as feeds – wheat, barley, and sorghum – these entities are able to influence the domestic prices of feed, and thus benefit Australian cattle producers.  In fact, it appears that the AWB takes specific decisions with regard to exports with the intent of lowering prices for Australian users of feedgrains.  For example, in October 2002, in response to concerns expressed by livestock producers about the high costs of feedgrains due to low supplies caused by drought, the AWB stated that “the AWB National Pool is currently tailoring its current wheat export program in order to preserve vital grain stocks in drought-affected regions of Australia .”[68]  While the AWB has “no legislated market power” to set grain prices in the domestic market,[69] such action as described above would lead to lower feed prices in the Australian market, thus benefiting cattle producers there. 

It should be noted too that the AWB actively discourages the importation of grain by Australian livestock producers and warns that “AWB is cautious of consumers importing grain, as it can be a costly exercise fraught with quality issues.”[70]  This view is likely shared by Australia ’s state-based barley and sorghum STEs.  By ensuring low cost feedgrains in the Australian market, and thus obviating the need for imports, Australian STEs can protect their primary constituencies of grain producers from foreign competition.  At the same time, these STEs provide artificial cost advantages for Australian cattle producers.  This is made possible by the ability of the AWB, the Grain Pool of Western Australia, GrainCo Australia , and ABB Grain Ltd to control exports of feedgrains from Australia . 

Moreover, the AWB plays an active role in setting rail freight charges in Australia .[71]  While R-CALF USA is unaware as to whether such rail charges apply only to grains for export or also to grains sold in the domestic market, the ability of a monopoly exporter to establish freight charges gives it the power to influence, at least indirectly, prices in the domestic market.  

            B.        Subsidies Provided to Australian Producers

            Australian cattle producers receive a number of subsidies that put them at an unfair advantage in the international market.  Meat and Livestock Australia (MLA), an entity established under Australian law that is funded by government money and mandatory levies, promotes exports, conducts research projects, and markets products.[72]  The government-owned Export Finance and Insurance Corporation is available to provide export finance and insurance for Australian exporters of beef and cattle.[73]  Australian cattle producers are also able to benefit from numerous subsidies provided by state governments.  Such programs include the Business Incentive Scheme of the Australian Capital Territory , the Regional Business Development Scheme of New South Wales , the Industry and Business Assistance Scheme of the Northern Territory , and Queensland ’s  Industry Incentives Scheme and Industry Development Scheme.[74] 

VII.     Economic Effects of a U.S.-Australia FTA Would Depend Upon the Outcome of Negotiations

            R-CALF USA notes that the probable economic effect of eliminating tariffs on live cattle and beef from Australia would depend upon the outcome of negotiations between the United States and Australia .  For example, if the United States is successful in negotiations in reducing or eliminating subsidies available to Australian producers as well as in providing further disciplines upon or eliminating Australian STEs, as advocated by R-CALF USA, the impact of an FTA would be less, i.e., artificial market advantages provided to Australian producers would be largely eliminated. 

R-CALF USA has suggested to the U.S. Trade Representative that as beef – and by extension cattle – are “import sensitive agricultural products” per the terms of the Trade Act of 2002,[75] these products should be excepted from tariff reductions under a U.S.-Australia FTA as permitted under Article XXIV of the GATT, which only requires that FTAs remove restrictions on “substantially all” trade in goods originating in the member states of an FTA.  Alternatively, if the U.S. government does not exclude beef from liberalization obligations under a U.S.-Australia FTA, R-CALF USA has suggested to the U.S. Trade Representative that the United States should eliminate tariffs over the longest period possible reflecting the import sensitivity of the product.  Such a phase-out would comply with the Trade Act of 2002, which provides that “reasonable adjustment periods” should be made for U.S. import-sensitive products.[76]  R-CALF USA has also urged the United States to phase-out its TRQ on beef over an extended period. 

The successful removal through negotiations of Australia’s restrictive SPS measures covering major U.S. commodities, including pork, chicken, citrus, corn, and various tree fruits[77] could indirectly affect the U.S. live cattle and beef industry.  While U.S. live cattle and beef shipments are not, at least at this time, subject to such sanitary measures, R-CALF USA is concerned that, in line with its current SPS regulations, Australia might impose onerous sanitary measures if U.S. cattle and beef producers begin shipping large amounts of their products to Australia.  R-CALF USA has urged the U.S. Trade Representative to negotiate for the removal of any scientifically unsubstantiated SPS measures of Australia , and thus reduce the likelihood that any such measures will impede exports of U.S. beef and live cattle to Australia in the future.    

Further, the development of special rules for perishable and cyclical agricultural products per the terms of the Trade Act of 2002, such as special safeguards for live cattle and beef in a U.S.-Australia FTA or the availability of international marketing orders for these products, would lead to the more orderly marketing of cattle and beef in an FTA, and thus affect the economies of both countries.  The establishment of competition rules to prevent abuse of dominant market positions in both countries through an FTA would also have economic effects.  R-CALF USA has suggested that the U.S. Trade Representative advance both of these objectives in U.S.-Australia negotiations. 

VIII.    Likely Economic Effects of a U.S.-Australia FTA

            While recognizing that the final terms of the proposed U.S.-Australia FTA are unknown, R-CALF USA predicts the following economic effects of such an agreement.

            A.        Would Lead to Little or No Increase in U.S. Exports

R-CALF USA anticipates no major export benefits for U.S. cattle and beef producers in concluding an FTA with Australia .  Given Australia ’s relatively small population, its large cattle herd, and its position as the world’s largest beef exporter, the potential of Australia becoming a significant importer of U.S. beef is small.

B.        Beef Imports into United States

1.         Would Increase

            A U.S.-Australia FTA would likely lead to an increase of beef imports into the United States from Australia .  Without the disciplines of the U.S. TRQ on beef, which was filled in 2001 and 2002 and will likely fill again this year, exports to the United States could be expected to expand significantly.  Indeed, as noted above, the Australian herd is large and is expanding, so Australian producers have the capacity to increase beef exports.  The likelihood of Japan triggering safeguard measures this year and in following years could result in the diversion of Australian beef to the U.S. market.  Moreover, as Australian cattle are increasingly grain-fed, Australia could conceivably in coming years become a major exporter of high quality beef cuts to the United States , an outcome that would become more likely with zero tariffs.  All the while, Australian cattle producers would be receiving artificial benefits provided by Australian subsidies and Australian STEs unless these issues are addressed successfully by U.S. negotiators.

2.         U.S. Live Cattle Prices Would Be Affected by Increased Australian Beef in U.S. Market           

The cattle industry is highly sensitive to changes in the volume of beef in the market due to the disproportionate impact of changes in supply on prices.  According to Chuck Lambert, formerly of the National Cattlemen’s Beef Association (NCBA) and currently Deputy Under Secretary for USDA's Marketing and Regulatory Programs, “[t]he rule of thumb is that a 10% increase in beef supply results in a 15% to 20% decrease in price.”[78]  Even small increases in supply – as little as 2 to 3 percent – can have significant downward effects on price.[79]

Thus, the zero duties on beef under a U.S.-Australia FTA would have a direct impact on the prices that cow-calf operators and ranchers receive for their cattle.  One must bear in mind as well that the cattle industry has been through and is continuing to experience an extended period of contraction and liquidation, which means that domestically-produced beef supplies from domestic and imported cattle are high, putting pressure on cattle prices.

            C.        Live Cattle Imports Could Increase

            Likewise, a U.S.-Australia FTA could result in increased U.S. imports of live cattle from Australia .  As noted above, Australia currently has the capacity to ship hundreds of thousands of cattle by sea.  As Australia has signed a protocol to expand shipments of live cattle to Mexico , Australia clearly has the ability to export large amounts of live cattle to the U.S. market.  Increased imports of live cattle into the United States could depress prices received by U.S. producers. 

            D.        Increased Imports Brought About By Lower Tariffs Would Depress Prices Received by U.S. Cattle Producers, But Would Not Necessarily Benefit U.S. Consumers

            Increased imports of live cattle and beef can be expected to lead to further saturation of the U.S. market, and thus lower prices received by producers.  At the same time, however, consumers purchasing beef will be unlikely to benefit from lower cattle prices.  Little connection exists between dollar returns to producers and prices paid by consumers for beef.  For example, in November 2001, average retail beef prices were 9 percent above those of the previous year.  In December 2001, however, fed cattle prices were $14.00 lower per hundredweight than the previous year.  R-CALF USA contends that this discrepancy is due to market concentration, marketing agreements, and forward contracts -- factors not taken into account in current ITC economic models.  Major U.S. packers can, and do, use imports to suppress prices received by domestic producers of live cattle and beef. 

            Thus, increased imports will harm U.S. cattle producers and not benefit U.S. consumers.  Instead, only the heavily concentrated U.S. beefpacking industry would profit from increased imports brought about by lower tariffs. 

IX.       Conclusion

R-CALF USA appreciates the opportunity to provide comments to the ITC regarding the proposed U.S.-Australia FTA.  If you have any questions regarding this submission, I may be reached at (406) 252-2516. 

                                                                        Sincerely,

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