The Hill – To help ranchers, US should change NAFTA’s rule of origin

To help ranchers, US should change NAFTA’s rule of origin

By Bill Bullard, Opinion Contributor — 12/05/17 08:45 AM EST

The views expressed by contributors are their own and not the view of The Hill

The renegotiation of the North American Free Trade Agreement (NAFTA) has quieted the mantra that all free trade agreements are good for America. Consequently, we now can analyze NAFTA’s impact on the largest segment of American agricultural, the U.S. cattle industry. A focus on the U.S.-Mexico portion of that agreement reveals President Trump should expand his NAFTA negotiating objectives.

American agriculture is divided into two distinct segments. The first consists of actual farmers and ranchers who grow and sell livestock and raw commodities, such as cattle and wheat. The second consists of industrial processors and meatpackers who buy those raw commodities and livestock and manufacture them into food products, such as a bag of flour or a beef roast.

America’s farmers and ranchers are, therefore, the domestic supply chains for America’s industrialized food processors and meatpackers. Unsurprisingly, there is often an inverse relationship between profits at the supply chain level and profits at the manufacturing level. Consistent with the World Trade Organization’s objective to create global supply chains so multinational manufacturers can declare their goods “Made in the World,” rather than assigned a country of origin, NAFTA, too, was designed to expand cattle supply chains beyond domestic borders, albeit regionally, and make them indistinguishable components of the final food product.

Four giant meatpackers control market access for 85 percent of the nation’s fed cattle sold by American ranchers. This level of concentration is among the highest of any industry in the U.S. and exceeds levels known to elicit noncompetitive conduct and poor economic performance.

This is the hand dealt to America’s 729,000 widely dispersed and mostly family-owned cattle ranchers who market about 24 million fed cattle annually, about 20 million of which are sold to meatpacking giants Tyson, JBS, Cargill and National Beef.

The interplay between these meatpackers’ market dominance replete with their NAFTA-expanded supply chains and America’s family-owned ranches is often hidden by the meatpacking lobby’s glib talking points in support of making no substantive changes to NAFTA.

Those talking points include: the cattle and beef industries in North America are highly integrated and must be considered as one; Canada and Mexico are among the United States’ four largest beef export customers; and, “beef is beef, whether the cattle were born in Montana, Manitoba or Mazatlán.”

However, in the trade of cattle and beef (including beef variety meats and processed beef), the U.S. has performed poorly under NAFTA, generating a cumulative deficit of nearly $30 billion. The average annual trade deficit is about $1.3 billion, though in recent years it has been north of $2 billion.

Until 2012, the U.S. generally maintained a surplus in cattle and beef trade with Mexico, which buffered the persistent deficit generated between the U.S. and Canada. Since 2012, however, the U.S.-Mexico deficit has burgeoned, reaching over $900 million in 2015.

Because NAFTA’s rule of origin essentially states the origin of beef is the country where the animal was slaughtered, meatpackers use their access to Mexico’s cattle supply chain to leverage down prices paid to American ranchers, even during years when the U.S.-Mexico trade balance was favorable.

Mexican cattle imports average over 1 million head annually under NAFTA. Prices paid to American ranchers are highly sensitive to changes in supplies, so these imports reduce domestic cattle prices. These imports are also cheaper; in 2016 they sold for about $70 per head less than domestic cattle. This further depresses domestic prices. The first negative impact on American ranchers is that this influx of cheaper-priced Mexican cattle effectively lowers the value of domestic cattle.

The second negative impact occurs when meatpackers slaughter those cheaper Mexican cattle in the U.S. and declare the resulting beef a product of the USA. This USA-labeled Mexican beef remains undifferentiated from genuine USA beef when sold to consumers. Yes, NAFTA allows meatpackers to buy cheaper Mexican cattle and then exploit the good name and reputation of the American rancher by selling the resulting beef to consumers as if it were produced exclusively in America.

The third negative impact occurs when the meatpackers export that USA-labeled Mexican beef. Because the Mexican supply chain is undifferentiated from the U.S. supply chain, the meatpacker does not have to share the increased export profits with American ranchers.

America has lost 177,000 ranches and 82,000 small cattle feeders since NAFTA. This is largely the result of the increased market power that NAFTA accords giant meatpackers by authorizing them to seamlessly access foreign supply chains and deceptively label foreign beef as an American product.

To reverse the harm NAFTA has wrought upon America’s cattle ranchers, President Trump should change NAFTA’s rule of origin to require the origin of beef to be the country(s) where the animal was born, raised and slaughtered and to require all beef to be labeled accordingly when sold to consumers both here and abroad.

Bill Bullard is CEO of R-CALF USA.

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