Jason Henderson

English

Research Papers in Economics

December 2003
The recent announcement of Mad Cow disease ignited
fears about the safety of U.S. beef, largely because the disease
is not well understood. Although scientific studies suggest the
risk to human health is extremely small, the outbreak of a sin-
gle cow with Mad Cow disease immediately triggered bans on
U.S. beef by nearly all our major beef trading partners. As a
result, cattle and beef markets were sent reeling. Market prices
have now rebounded, after a temporary collapse in cattle and
beef markets. Fortunately, as long as no other incidents of
Mad Cow disease occur, its impacts will probably be smaller
than initially feared.
This article discusses the frequently asked questions sur-
rounding the Mad Cow disease event and its economic
impacts. The FAQs focus on three areas: What happened,
what are the economic impacts, and what is the outlook for
the cattle and beef industries?
CENTER FOR THE STUDY OF RURAL AMERICA
Federal Reserve Bank of Kansas City
FAQs about Mad Cow
Disease and Its Impacts
Commentary on the rural economy
The Main Street 
Economist
Jason Henderson
Economist
Center for the Study of Rural America
Editor’s Note:  The Center’s quarterly reports, Survey of Agricultural Conditions and Summary of Economic
Conditions, which normally appear in the January Main Street, will appear in February in 2004.The Main Street Economist December 2003
The Recent BSE Incident
In December 2003, the U.S. Dept. of
Agriculture announced that a dairy cow
infected with Mad Cow disease had been
slaughtered in the state of Washington.
While Mad Cow disease is a cattle disease,
it has been linked to a degenerative neuro-
logical disease in humans. Despite the
extremely low risk the disease poses to
humans, the incident raised fresh-food
safety concerns. 
What is Mad Cow disease?
Mad Cow disease is the popular term
for bovine spongiform encephalopathy
(BSE), a degenerative neurological disease
in cattle caused by proteins (prions) that
create holes in the brains of cattle. BSE is in
the family of diseases that includes scrapie
in sheep and goats, chronic wasting disease
(CWD) in deer and elk, and Creutzfeldt-
Jakob disease (CJD) in humans. BSE is not
a communicable disease in that it does not
spread easily like viruses. Past research has
concluded that it is only transmitted among
cattle when the cow eats feed with bone
meal from another cow infected with BSE. 
How did Mad Cow disease enter 
the U.S. food chain?
The recent Mad Cow episode started
when a six-year-old downer dairy cow was
sent to slaughter. (A downer cow is a cow
that cannot move on its own.) Its nervous
tissues—brain, spinal cord, and other neuro-
logical tissue—were tested for BSE as
required for all downer animals. Initial assess-
ments indicated that the downer status was
caused by injury from the delivery of a calf,
so meat from the animal was processed for
hamburger. Since the announcement, meat
from the slaughter plant was recalled and
USDA traced the life history of the cow.
While the cow was born in Canada, there
has been no final determination as to how or
where the cow contracted BSE.
What is the risk to human health?
While humans cannot contract BSE,
researchers have linked a new variant form
of Creutzfeldt-Jakob disease (vCJD) to
BSE. Like BSE, vCJD results in a loss of
brain functions and death. Some researchers
have suggested that the consumption of
brain or spinal tissue from BSE-infected
cattle may increase the risk of vCJD.
The risk to human health from BSE is
extremely low. U.S. consumers do not typi-
cally eat the tissues that harbor prions, the
causal agents of BSE or vCJD. Prions are
found in nervous tissues (brain and spinal
cord) rather than in the muscle tissues that
are typically consumed in U.S. beef.
Moreover, most of the meat consumed in
the U.S. comes from animals that are less
than 30 months of age. Commonly
accepted science indicates that cattle this
young cannot contract BSE. 
The Economic Impacts of BSE
The BSE announcement immediately
triggered bans on U.S. beef exports across
the globe and sent U.S. cattle and beef
prices tumbling. The economic impacts
will vary widely by geographic area and by
food chain participants. Cattle owners will
bear the brunt of the economic impacts.
Given the heavy concentration of cattle
production in the seven states of the
Kansas City Federal Reserve district,
(Colorado, Kansas, Nebraska, Oklahoma,
Wyoming, western Missouri, and northern
New Mexico) the economic impacts will
be larger there than in the rest of the
nation. However, thanks to a quick recov-
ery in cattle and beef markets, the impacts
could be smaller than expected.
What is the beef sector?
The economic impacts will be spread
across four parts of the beef sector—two in
the farm economy and two outside the
farm economy: 
• Cattle ranchers, who breed cows and
raise feeder calves to place in feedlots. 
• Cattle feeders, who produce cattle for
slaughter by feeding feeder calves in
feedlots. 
• Beef processors, who slaughter live
cattle and produce wholesale
(boxed) beef.
• Retailers (grocery stores and restau-
rants), who further prepare beef for
consumers.
What was the reaction 
of our trading partners?
Most beef trading partners immedi-
ately banned the importation of U.S. beef.
Beef exports were expected to account for
10.4 percent of U.S. beef production in
2004. Japan is our largest export market
(more than a third of U.S. beef exports)
and appears very reluctant to renew U.S.
beef imports (Chart 1). After the
Canadian Mad Cow disease incident in
May, Japan and South Korea expressed
concern that U.S. exports contained beef
from animals born in Canada. Not with-
standing those concerns, U.S. beef repre-
sents a sizable portion (20 percent) of total
Japanese beef consumption, and beef
shortages may ultimately change Japan’s
perception of the situation.
- 2 -
Percent of U.S. exports
0
5
10
15
20
25
30
35
40
Japan Korea Mexico Canada Taiwan Hong Kong
Chart 1
U.S. Beef Export Destinations
Source: USDA
Dollars per hundredweight
50
60
70
80
90
100
110
120
Jan-01 Sept-01 May-02 Jan-03 Sept-03 Dec. 24 Jan. 8
Futures prices
(Jan. contract)
Feeder cattle
Cash prices
Live fed cattle
Mad Cow event
Chart 2
U.S. Cattle Prices
Source: USDA, Oklahoma Market News, and Wall St. JournalWhat was the initial market reaction?
The announcement of BSE and the
global bans on U.S. beef led to an instant col-
lapse in U.S. cattle markets. Cash and futures
prices plummeted for both live cattle (cattle
ready for slaughter) and feeder cattle (cattle
ready for placement into feedlots). After the
BSE announcement, cattle futures prices
dropped roughly 20 percent, moving down
the market limit on all trading days from Dec.
23 to Dec. 31 (Chart 2). The market limit is
the most cash or futures prices can fall or rise
in a day before trading is halted. In response
to plummeting prices, the Chicago Mercantile
Exchange raised the market limit from $1.50
to $7.50 per hundredweight. 
What is the economic impact 
to the cattle industry?
Assuming the price declines between
Dec. 23 and Dec. 30 hold, revenue losses to
the cattle industry could reach $2 billion in
the first quarter of 2004. Losses to the cattle
feeding industry could reach $1.3 billion,
with the cattle and calves (ranching) industry
losing an additional $600 million (Table 1).
What is the economic impact to the
wholesale and retail beef industry?
The economic cost to the beef industry
could reach $1 to $2 billion in the first
quarter of 2004. Retail and wholesale beef
prices dropped between 5 and 10 percent
after the BSE announcement. In 2003, beef
accounted for $70 billion dollars on a retail
basis (Table 1).
What is the impact on the
U.S. economy?
While the economic cost
of the BSE incident might be
large in value (between $3 and
$4 billion in the first quarter
of 2004), it is small relative to
the overall U.S. economy. The
cattle and beef industries
account for only 0.4 percent
of the U.S. economy (Table
2). The $3 to $4 billion com-
bined loss accounts for less
than 5 percent of the total
receipts of the beef sector.
What is the impact on the Kansas City
district economy?
The impacts of the BSE incident will be
borne heavily in the Kansas City Federal
Reserve District, which accounts for 43
percent of the U.S. cattle industry. Still, the
impacts will vary widely across the Kansas
City district economy. Based on farm and
food manufacturing cash receipts, the cattle
and beef sector accounts for roughly 1.8
percent of the district economy, suggesting
the impacts for the district as a whole could
be small. However, the impacts in Nebraska
and Kansas could be more significant as the
cattle and beef industries account for 5.5 and
3.2 percent of gross state product, respec-
tively (Table 2).
The BSE incident could deal a major
blow to the Kansas City district’s farm
economy. Cattle and calves account for
roughly half of the district’s gross farm cash
receipts. The $2 billion loss in the cattle
industry could translate into an $850 million
loss in the district. 
The district is also home to roughly a
third of U.S. beef packing activity. Assuming
that stock prices are capitalized income
streams, the initial 10 percent decline in
many beef packer stock prices suggests the
market expects future earnings to fall 10
percent. However, by the second week of
January, beef packer stock prices have
rebounded, suggesting a smaller impact on
future earnings. Moreover, the BSE incident
may not lead to dramatic changes in cattle
slaughter or factory employment. Once
cattle reach slaughter weight, they need to be
slaughtered regardless of the slaughter price.
By Jan. 16, less than 800 job losses had been
announced at beef packing plants in the
Kansas City district, and less than 1,000 jobs
were lost nationwide.
How far will cattle prices fall?
Market analysts expected cattle prices
ultimately to fall between 15 and 20
percent. Price elasticity studies indicate that
domestic cattle prices decline roughly 1.6
percent for every 1 percent increase in
supply. In the extreme scenario, all of the
beef earmarked for foreign markets would
have to be consumed domestically. Thus,
domestic supplies would increase by the
10.4 percent of U.S. beef production that
The Main Street Economist December 2003
- 3 -
Table 2
Cattle and Beef Industry Gross State Product Estimates
Cattle Industry (Farm Level) Beef Processing Industry
U.S. 19.1 1.26 0.24 8.5 1.50 0.13 0.24
Tenth District 48.2 2.55 1.23 24.7 2.14 0.53 1.23
Nebraska 51.3 7.72 3.96 42.2 3.63 1.53 3.96
Kansas 57.5 3.94 2.27 48.7 1.91 0.93 2.27
Wyoming 73.2 2.71 1.98 0.0 0.45 0.00 1.98
Oklahoma 50.2 2.40 1.20 0.2 1.16 0.00 1.20
Colorado 53.5 1.39 0.74 1.9 1.80 0.03 0.74
New Mexico 37.6 2.05 0.77 0.0 0.47 0.00 0.77
Missouri 19.0 1.39 0.26 1.2 3.24 0.04 0.26
1Calculations based on 1997 Census of Manufacturers for NAICS 3116111 and 311612a
2Calculations based on USDA farm cash receipts for cattle and calves industry
3Calculations based on BEA, Gross State Product Data
(Percent) (Percent) (Percent) (1997) (Percent) (Percent)
(Percent: Ave.
1997 to 2001)
Total Share
of GSP
Beef’s
Share of
GSP
Food
Processing
Share of GSP3
Beef’s Share of
Food Processing
Receipts1
Cattle’s Share
of GSP
Farms Share
of GSP3
Cattle’s Share
of Farm
Receipts2
Table 1
Economic Impacts on the Cattle and Beef Industry 
First Quarter 2004
Farm Level Impacts (Cattle Industry)
Cattle-feeding Industry
Estimated cattle slaughter 5,700,000
Estimated loss per hundredweight $18.35
(Dec. 23 futures price minus Dec. 31 futures price)
Total loss $1,302,207,750
Ranching industry
Estimated cattle placed in feedlots 5,700,000
Estimated loss per hundredweight $16.80 
(Dec. 23 futures price minus Dec. 31 futures price)
Total loss $622,440,000 
Wholesale and Retail Beef Industries
Estimated retail value for 2003 $70 billion
Estimated losses
Low: 5% (Boxed beef price declines as of Dec. 31) $ 875,000,000 
High: 10% (Beef carcass equivalent decline as of Dec. 31) $1,750,000,000
Slaughter cattle average weight of 1,245 lbs.
Placement cattle average weight of 650 lbs.On the Web: www.kc.frb.org
The Main Street Economist December 2003
was expected to be exported in 2004.
Under those assumptions, the increase in
supply would create an expected 16.6
percent decline in cattle prices (10.4 * -
1.6). On Dec. 31, 2003, cattle futures
prices bottomed at roughly 20 percent
below the pre-BSE levels. Since then cattle
futures prices have rebounded. On Jan.
16, cattle futures prices were 10 percent
below pre-BSE levels. 
Will U.S. beef prices fall?
U.S. beef prices have dropped, but the
declines were not as large as the drop in
cattle prices. The price of boxed beef (a
wholesale price) ended the year 7 percent
below its pre-BSE levels and ultimately fell
15 percent. By Jan. 16, wholesale beef
prices rebounded to 10 percent below pre-
BSE levels. 
What is the impact on demand?
Research indicates that the impact on
domestic demand could be small because
consumers respond differently to food safety
concerns than to long-run health concerns.
Research has shown that food safety con-
cerns create only short-run impacts on con-
sumption. After an initial reaction, people
tend to return to their eating habits.
Wholesale beef companies, fast food restau-
rants, and similar beef industry participants
have reported no measurable fall in U.S.
beef consumption. Moreover, the National
Cattlemen’s Beef Association reported that
89 percent of consumers expressed confi-
dence in the safety of U.S. beef after the
BSE incident, compared to 88 percent in
September 2003.
Will the impact of BSE in the U.S. be
similar to Canada?
The U.S. industry is not expected to
experience the losses suffered by the
Canadian industry because only 10
percent of U.S. production is targeted for
export markets, compared to 40 percent
in Canadian. At their bottom, Canadian
cattle prices were roughly 35 percent
below pre-BSE levels. In contrast, U.S.
cattle prices bottomed at a level 20
percent below the pre-BSE level.
What is the economic impact on various
food supply chain participants?
According to a variety of market indi-
cators, cattle owners have borne the brunt
of the BSE event. Feeder cattle and live
cattle prices fell 20 percent. Beef packers
experienced slightly smaller declines in
revenue. Boxed beef (wholesale) prices fell
roughly 15 percent. Beef packer stock
prices dropped 10 percent immediately
after the BSE announcement but have
rebounded. The 10 percent decline sug-
gests a 10 percent decline in income.
Restaurants and other retailers faced
smaller impacts. After falling 5 percent,
stock prices at various fast food restau-
rants rebounded.
How are producers, packers, 
and retailers responding?
Cattle producers that were thinking
about making investments in herd expan-
sion have taken a wait-and-see approach
before making any additional investments.
Packers and retailers have responded to the
increased uncertainty in the market by
using beef inventories held in cold storage.
They purchased smaller quantities of cattle
and beef. 
The Outlook for Cattle 
and Beef Markets
The outlook for cattle and beef market
depends on when our trading partners
resume importing U.S. beef. Various indica-
tors suggest that trade could resume as early
as this spring. However, various regulatory
changes may need to be enacted before
trade resumes.
What regulatory changes are being made
to re-open global markets to U.S. beef?
Several regulatory changes have been
implemented or are being discussed to help
renew U.S. beef exports. USDA has now
banned downed cattle from being processed
for human food products. Restrictions on
the scraping of meat from bones have been
put in place. Additional restrictions could
limit the processing of specific cattle parts
for human consumption. 
Some observers have called for increas-
ing the number of cattle randomly tested
for BSE. Current U.S. policy is to test
roughly 20,000 cattle each year for BSE
(one out of every 1,700 head slaughtered).
If the U.S. followed European standards,
all cattle over 30 months of age would
need to be tested. Japan is requesting that
every animal be tested for BSE.
New restrictions for the cattle feeding
industry are being discussed. Specifically,
the banning of poultry litter and cow
blood from cattle feed is being discussed.
Other restrictions could separate the feed
for ruminants, such as cattle, from other
animal feed.
When will the situation be resolved?
The situation will be resolved when
our key trading partners re-open their
borders to U.S. beef. Mexico, which
accounts for 20 percent of U.S. beef
exports, appears to be willing to resume
beef trade in the near future.
Expectations of renewed trade with
Mexico have helped to spur the rebound
in cattle and beef prices. 
Japan, the largest importer of U.S.
beef, appears less willing to resume U.S.
beef imports. Japan’s willingness to
resume trade may hinge on its ability to
find substitute supplies of grain-fed beef,
the type of beef favored by Japanese con-
sumers. This might be a challenge as
other major beef exporters (Brazil,
Argentina, and Australia) export prima-
rily grass-fed beef. 
Futures markets indicate that some
resolution to the BSE situation could
emerge this spring. On Dec. 30, February
futures contracts for live and feeder cattle
fell the market limit. On the other hand,
futures contracts for April, May, and June
did not fall the market limit. This diver-
gent pattern in prices was repeated in the
first few trading days of January and
could indicate a potential market change
sometime this spring. At this time, most
market analysts have projected losses only
for the first quarter of 2004; but, of
course, only time will tell.

FAQs about mad cow disease and its impacts

http://www.kansascityfed.org/Publicat/mse/MSE_1203.pdf

FAQs about mad cow disease and its impacts

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