How Now, Mad Cow?

By Cathy Booth Thomas/Dallas

When Fiona Sigalla crossed back into the U.S. from Canada a few days after Christmas, she expected the usual questions about firearms--routine in these times of terrorist threats. But the border cop in his bulletproof SWAT uniform took one look inside her car and immediately seized the contraband held by Sigalla's 8-year-old daughter: her lunch leftovers. "He looked slightly embarrassed, but he confiscated my McDonald's trash," Sigalla says with a chuckle. "Of course, you notice that I wasn't afraid to purchase a McDonald's hamburger, even in Canada."

For the U.S., could this be the year of mad cow? The U.S. Department of Agriculture (USDA) banned Canadian beef in May after mad-cow disease, or bovine spongiform encephalopathy (BSE), turned up in a single calf there. Now it is America's turn. More than 30 countries have banned U.S. beef imports since BSE was detected in a slaughtered 6-year-old dairy cow in Washington State on Dec. 23. Though officials say the cow entered from Canada in 2001, the USDA last week instituted a series of measures to reassure consumers that American beef is safe, including a ban on the slaughter of cattle too sick or injured to walk, called downers, for human food. The BSE-infected cow was one such downer. The USDA also called for immediate implementation of a national animal-tracking system so the source of any diseased cattle could be more readily identified.

As the public copes with the news, the U.S.'s $40 billion cattle business is bracing for trouble. The industry, led by the National Cattlemen's Beef Association in Denver, had originally fought the ban on downers as costly and unnecessary. But the losses caused by the BSE discovery in Washington State are likely to make those steps seem cheap by comparison. Big overseas customers like Japan and South Korea no longer want U.S. steaks; ships at sea packed with meat bound for Asia are turning back. Containers of frozen French fries cooked in beef tallow for the export market are idling in U.S. ports.

In short, America's $4.3 billion beef-export business is pretty much dead meat, at least for now. "We still haven't felt the full shock of this because of the holidays," says James Robb, director of the Livestock Marketing Information Center in Lakewood, Colo. Don Roose, president of U.S. Commodities Inc., a grain-and-livestock investment firm in West Des Moines, Iowa, predicts the damage will be long-term: "We've already got Taiwan saying they're going to ban U.S. beef for seven years."

Before the scare, the American cattle industry had been doing well. That was true at nearly every level in the complex chain that starts at the bottom rung with the cantankerous collection of cow-calf ranchers, who sell to feedlot operators, who in turn sell to giant corporate packers like Cargill Meat Sector. After several tough years, profits suddenly exploded this fall as the wholesale price of beef soared to a record high of $120 per 100 lbs.--a 50% increase in one year.

The rise was largely due to a shortage of cattle; ranchers had abandoned the business because of thin profits. The U.S. herd--some 96 million cattle--is at a seven-year low. Short supply had run headlong into the popularity of high-protein diets like Atkins, which promote lots of meat on your plate. And then came Washington's decision last summer to stop importing live Canadian cattle, which accounted for 7% of U.S. beef consumption. Delighted cattlemen from Texas to Montana rushed to fill the void as prices went through the roof. Choice cuts became particularly pricey, in part because feedlots sent cattle to packers sooner than usual in order to meet demand. And skinnier cows meant fewer choice cuts for outlets ranging from Outback Steakhouse to Costco.

That lone dairy cow that fell ill now puts those gains at risk. Wholesale prices have already fallen 15% owing to fears that the decimated export market--about 10% of beef sales--will lead to a glut. But even as a third herd in Washington State was quarantined last week for possible mad-cow disease, beef emporiums like McDonald's and Morton's said sales were holding up.

If prices do fall, cattlemen like Bill Murphy in Montana expect they can wait it out. The trick in this business, he notes, is timing. The 60-year-old rancher says a lot of cow-calf operators have played the market right so far. They sold this year's calf crop when prices were up and may find that the market for beef has recovered by the time they are ready to sell their herds again next fall. Out at Murphy's ranch, on the snowy prairie of southern Montana, his pregnant cows' offspring will not be ready for sale until next fall. With no way to test live animals for BSE, Murphy admits he had been fatalistic about a mad-cow crisis occurring in the U.S. "It's not if it was going happen, but when."

Less fortunate are the feedlot owners who paid record prices to buy cattle this fall but now will probably have to sell them to processors for far less than planned. There is not much feedlots can do to cut their costs; it takes a long time--120 to 200 days--to plump a cow for slaughter. "It's not like Ford, where you tell the workers to go home for a couple of days," says Robb. "You can't turn off cows." When the crisis erupted just before Christmas, cattle in Amarillo, Texas, were trading at $91 per 100 lbs. Three days later, the price had slipped to $75--a drop of $150 to $200 per steer.

Meanwhile, in the trading pits of the Chicago Mercantile Exchange, there were further signs of trouble. The Merc is a forward market that allows cattlemen and feedlot owners to hedge the price they will get for their products and offset some of the normal business risks. The traders provide the liquidity for that risk. But mad cow is anything but normal. James Brooks, floor-operations manager for the nation's largest cattle-futures trader, R.J. O'Brien, says the atmosphere is tense. "People are stressed out. Tempers are short. Nerves are shot," says Brooks. "We're seeing small fights break out. People are having words." The dramatic drop in futures prices--down more than 20% from Dec. 17 to Dec. 24--"wiped away billions of dollars' worth of equity in the industry," he says. One ray of hope: last Friday's market closed up after five straight losing days.

Looking out over 45 acres of pens with 7,000 head of cattle, feedlot owner Norm Haaland is concerned but philosophical. From his second-story vantage point at TBone Feeders in Shepherd, Mont., he watches corn trucks rumble in to dump loads of feed. He is worried about the fallout from the mad-cow crisis, but his cattlemen customers are more concerned about the recent U.S. decision to allow imports of boxed beef from Canada as long as it comes from cattle younger than 30 months. "The big packers are making a killing up there, buying Canadian cattle from the feeders at hardship prices, then shipping it down here at a profit of $30 a hundredweight," complains Haaland.

It is a tradition among cattlemen, of course, to grouse about the power of packers, who are constantly finding ways to cut costs--through mergers, automation and assaults on labor unions. But the three largest companies--Tyson Foods, Cargill and Swift & Co.--have their own woes. About $300 million in beef and by-products like liver and tongue (which American consumers generally disdain) are caught in the pipeline for foreign countries. In the far bigger domestic market, the packers are watching closely to see how consumers respond. Even then, it is unclear how a drop in demand would ripple through the industry. As Cargill spokesman Mark Klein explains, "Just because cattle prices come down--let's say 20%--doesn't mean steaks will come down 20%."

The new USDA directives will force processors to adopt certain safety practices, but the big three say those will have little financial impact. The companies insist they have already been doing much of what is now required. Industry leaders like Eric Davis of the Cattlemen's Association say they support the USDA moves. "We may not like what they tell us, but we'll follow the facts and go where we need to go," says Davis, who runs a cow-calf and feedlot operation in Bruneau, Idaho.

The question is whether the changes will satisfy foreign buyers. The Organization for Competitive Markets, based in Lincoln, Neb., represents farmers and ranchers and believes the USDA proposals will not be enough to convince foreign buyers that the meat supply is free of mad cow. The Japanese, who paid dearly in lost sales and public confidence when they did not get tough on BSE until after a sick cow turned up in 2001, seem to be in no hurry to restart U.S. imports. Tokyo rebuffed an agricultural delegation from the U.S. last week and reportedly wants Washington to require mad-cow testing for all 35 million cattle killed in the U.S. each year--something David Hegwood, head of the American delegation, rejected. Swift, the No. 3 meat-packer in the U.S., launched a traceability program two weeks ago that uses retina tracking but said its system would not cover cattle all the way from birth to the box until the summer of 2005.

The biggest beneficiary of the U.S.'s meat crisis may well be Australia, the largest exporter never known to suffer a case of mad cow. It is probably no coincidence that most of its cattle are fed on grass, not feed concocted from animal parts, which has been banned in several countries--including the U.S.--after being suspected of spreading mad cow. But falling prices in the U.S. could hurt Australian beef, which Americans import for its leaner content. In other words, it is all a mad-cow mess, and no one quite knows where it is going. "This happens in a global economy," says Sigalla, an economist at the Federal Reserve Bank of Dallas, with a sigh. In the meantime, tell your kids to keep those McDonald's wrappers out of sight at the border. --With reporting by Sarah Sturmon Dale/Minneapolis, Pat Dawson/Billings, Jim Frederick/Tokyo, Rita Healy/Denver and Noah Isackson/Chicago

With reporting by Sarah Sturmon Dale/Minneapolis, Pat Dawson/Billings, Jim Frederick/Tokyo, Rita Healy/Denver and Noah Isackson/Chicago