The Competition Bureau's Examination into Cattle and Beef Pricing

Background

April 29, 2005

---

After the discovery of bovine spongiform encephalopathy (BSE) in Canada on May 20, 2003, the U.S. and 33 other countries banned all imports of Canadian cattle and beef. Since that time, the U.S. border reopened in September 2003 to boneless beef from cattle aged less than 30 months, but the border has remained closed to Canadian exports of live cattle and certain beef products. The economic effects of these trade actions have been devastating to the Canadian cattle industry, as well as in service sectors that support this industry. Parliamentarians and others have expressed concern about the significant decline in prices paid to Canadian cattle producers for cattle, relative to the smaller declines in retail prices for beef. In response to these widespread concerns, the Competition Bureau began an examination in February 2004 to determine if any conduct contrary to the Competition Act affected industry pricing.

How the Examination was Conducted¹

The Bureau thoroughly examined this matter under the conspiracy and abuse of dominance provisions of the Act. The Bureau gathered information from a wide variety of industry participants. This included Canadian industry associations of cattle and dairy producers, and cattle feedlot owners. In addition to detailed interviews with these organizations, their members were sent letters seeking any evidence of anti-competitive behaviour.  Information was also gathered from existing beef packers, new and potential entrants in the beef packing industry, auction houses, further processors of beef products and retail grocers. The Bureau also gathered a large volume of information from various federal and provincial government departments and agencies.

To better understand the cattle and beef industry pricing patterns before and since the onset of the BSE crisis, the Bureau retained Mr. Kevin Grier, an expert in the livestock, meat and grocery industries. Mr. Grier’s report, Analysis of the Cattle and Beef Markets Pre and Post BSE is available on the Bureau’s Web site.

To obtain independent empirical analyses of industry conduct and pricing, the Bureau also retained two economic experts, Dr. Alan Love and Dr. David Bessler, professors at Texas A&M University’s Department of Agricultural Economics. Dr. Love analysed industry data and employed a structural economic model to determine whether pricing patterns can be explained by the interruption of international trade flows due to BSE, or whether they reflect the ability of beef packers to profitably influence cattle prices downward. Dr. Bessler studied price and quantity data to infer relationships between Canadian and U.S. markets. Summaries of Dr. Love’s and Dr. Bessler’s reports, An Investigation of the Effects of BSE on the Canadian Cattle and Beef Markets and A Time Series Analysis of Canadian Cattle and Beef Prices and Quantities Prior To and Following the May 2003 Discovery of BSE in the Canadian Cattle Herd, are available on the Bureau’s Web site.

Industry Snapshot

The Bureau relied heavily on views and information provided by industry participants and was assisted by its industry expert to help identify the market players, products, structure and functioning of the cattle and beef industries.

• Market players include the following:
• Cattle producers who operate cow-calf, farming, ranching, or backgrounding operations, producing calves from breeding stock;
• Cattle feeders, or feedlots, who purchase feeder cattle from cattle producers, feed them until the cattle reach slaughter weight, and sell fed cattle to beef packers;
• Beef packers who slaughter, package and market beef products from two types of slaughter cattle - “fed cattle” under 30 months of age and “cull cattle” typically older than 30 months of age from dairy and breeding herds; and
• Grocery, food service, and further processing sectors who purchase beef products from packers and make these products available to consumers either on retail shelves as meat or further processed products, or at food service establishments.

The Bureau’s examination focussed on the slaughter of two types of cattle –  fed cattle and cull cattle. Due to current restrictions, slaughter of fed and cull cattle cannot occur at the same facility. Fed cattle yield higher value wholesale cuts of beef products, typically vacuum packed, sold as boxed beef and ultimately available on grocery shelves. Products from fed cattle include such cuts as rib, loin and chuck. Cull cattle generally produce lower value beef products and boneless lean beef, referred to as commercial grade beef. Products from cull cattle include hamburger and beef for further processing. In Canada, the slaughter of fed cattle is predominantly based in western Canada, where the largest proportion of Canadian slaughter capacity is operated by three major packers. In contrast, the slaughter of cull cattle is more balanced, with one major slaughter facility in the east and one in the west. The largest proportion of the dairy herd is in eastern Canada, which is more dependent on cull cattle exports.

What did the Bureau find?

The Bureau found no evidence of any communication among packers to coordinate reductions in cattle prices, which would be contrary to the conspiracy provision of the Act. Dr. Love’s overall findings also do not indicate market conduct and pricing that suggest collusion.

In addition, the Bureau found no evidence of a practice of anti-competitive acts undertaken by beef packers, or wholesale or retail grocers, contrary to the abuse of dominance provision of the Act. The Bureau received allegations against beef packers of refusal to deal, the use of captive supply to drive down cattle prices and margin squeezing. Other allegations included strategic bidding among packers to depress cattle prices, black listing or boycotting of auction houses, cattle producers or feedlots attempting to sell cattle, and reducing prices offered for cattle by an amount equivalent to government aid. The Bureau took these allegations very seriously and each complaint was thoroughly examined to gather and assess all relevant information. Evidence collected during the Bureau's examination did not support these allegations, except for an isolated incident of boycotting that the Bureau found did not have a harmful effect on competition and that ceased after the Bureau intervened.

With the U.S. border closed to Canadian cattle, the market for the purchasing of cattle is much more concentrated.  This is especially true for cull cattle, as also identified by Dr. Love and Mr. Grier. However, the size of a business, even one that dominates a particular market, does not in itself raise an issue under the Act unless the business engages in conduct to restrict competition. Furthermore, existing beef packers have expanded capacity and some new packers have entered in response to the oversupply of cattle in Canada. Industry sources confirmed that more capacity is expected to come, but these business decisions may be affected by uncertainty as to when the border may reopen. Nonetheless, within the current environment, the Bureau will continue to examine any complaints of anti-competitive behaviour and will not hesitate to take appropriate action.

Why were cattle prices so low?

With the border closed, Canadian farmers have lost access to U.S. beef packers, who would normally compete in the purchase of Canadian cattle. As a result, Canadian cattle supply has greatly outweighed Canadian slaughter capacity and this placed significant and continuing downward pressure on cattle prices. This situation will continue until the Canada/U.S. border reopens or until cattle supply and slaughter capacity in Canada are balanced.

Prior to BSE, cattle prices in Canada were determined by cattle prices in the U.S. In fact, trade of live cattle and beef products occurred on a North American basis. Expert reports and industry participants confirm this relationship. Mr. Grier reports that over 70% of beef exports were destined for the U.S., and Canada typically exported approximately 1.1 million head of cattle to the U.S. each year. Similarly, Dr. Bessler’s time series analysis shows that Canadian cattle and consumer beef prices are strongly led by cattle futures contracts from the Chicago Mercantile Exchange.

Dr. Love’s analysis indicates that pricing patterns resulted from the combined effect of shifts in demand and changes in concentration post-BSE. He notes that the decline in cull cattle prices may also be explained in part by packers being less inclined to slaughter cull cattle.

Why did the price for retail beef remain stable?

Unlike cattle pricing, retail beef pricing has remained stable for a number of reasons. First, Canadian demand at the retail level has remained strong for all beef products. Second, the U.S. border opened in September 2003 to boneless beef exports from cattle under 30 months of age, thereby reestablishing a North American market and price for these beef products. Canadian beef packers responded by increasing slaughter levels and selling into the U.S., where Canadian beef prices are determined.

In addition, lower cattle prices do not necessarily lead to lower consumer prices for beef. Beef prices are less volatile than cattle prices, which are generally set in auction markets, changing continuously. The final retail price of beef includes a number of fixed costs such as transportation and labour, in addition to the price of cattle. The time series analysis conducted by Dr. Bessler shows that a shock to one input, namely a reduction in cattle prices, will not impact the final retail price of beef to the same degree.

Footnote

¹ The purpose of this document is to summarize the main findings of the Competition Bureau's review of pricing patterns in the Canadian cattle and beef industries since the onset of BSE. The Bureau's examination has been highly fact-specific and legal requirements of section 29 limit the ability of the Bureau to disclose specific information obtained during the course of the examination. This statement does not bind the Bureau in any future enforcement action.