by Erin Borror, USMEF economist
Since the North American Free Trade Agreement (NAFTA) was implemented 20 years ago, many factors have influenced agricultural trade between the United States, Canada and Mexico. This article examines developments in the red meat trade within the North American market.
U.S. beef exports to Mexico grew fairly steadily after the passage of NAFTA, from less than $300 million to a 2008 peak of $1.4 billion – which they reached after a quick post-BSE rebound. Because of the lingering impact of the global economic and financial crisis and diversification of U.S. exports as other markets recovered from BSE-related restrictions, exports have not recovered to 2008 levels. However, exports gained momentum in the second half of 2013 and Mexico remains the second-largest volume market (behind Japan) for U.S. beef. It ranks third in export value, behind Japan and Canada.
Drought has impacted the cattle herds in both Mexico and the United States, leading to liquidation and high cattle and beef prices. For this and other reasons, beef production and consumption have not increased significantly over the past 20 years. Comparing 2013 estimates with 1994 totals, U.S. beef production grew by 5 percent and total consumption by 1 percent. Over the same period, Mexico’s beef production declined by 2 percent and consumption fell by 9 percent, based on USDA estimates. Higher beef prices have caused Mexican consumers – like many in the United States – to turn to less expensive poultry and pork products.
Mexico has historically been a significant exporter of feeder cattle to the United States, where cattle feeders often have the advantage of less expensive feedgrains, economies of scale and proximity to packing plants. This is especially true in the years of tight cattle supplies. Over the past 20 years, imports of Mexican feeder cattle have not grown significantly due to a number of factors unrelated to NAFTA. In fact, the record year for feeder cattle imports was 1995, with 1.65 million head. In 2012, imports approached that record at 1.4 million head, as drought and high U.S. prices pulled cattle north. Imports in 2013 were down about 35 percent as rainfall improved pastures in Mexico and ranchers began working to rebuild herds. The U.S. is a net exporter of beef to Mexico, but is now a net importer when combining beef and live cattle from Mexico. This trade deficit narrowed in 2013, however, due to the decline in feeder cattle imports, a rebound in U.S. beef exports to Mexico and slower imports of Mexican beef (which had increased steadily since 2010).
Similarly, live cattle imports from Canada have not grown significantly over the past 20 years. Imports peaked in 2002 at 1.69 million head, before the U.S. closed to Canadian live cattle due to BSE. Imports eventually rebounded to 1.6 million head in 2008, but have since ranged from 700,000 to 1.1 million head per year. Live cattle trade has been impacted by exchange rates, cost of gain and U.S. cattle prices, as well as the country of origin labeling (COOL) regulations implemented in the summer of 2008.
On the beef side, U.S. exports to Canada were relatively steady from 1994 to 2003 at less than $400 million per year. But following the post-BSE resumption of trade, exports took off and will likely set another record in 2013 at approximately $1.2 billion. The United States was even a net exporter of beef to Canada for several months in 2012 and early 2013, but this was due in part to closed slaughter plants in Canada and a strong Canadian dollar. Of the three NAFTA countries, Canada’s beef production has increased the most over the past 20 years – climbing 13 percent. Domestic beef consumption is up 10 percent. Canada is also a major net exporter, with exports accounting for about one-third of beef production and 20 percent of cattle production.
Comparing 1994 results with 2013 estimates, U.S. beef exports to Mexico and Canada grew from $660 million to more than $2 billion. Canada’s exports to the U.S. and Mexico grew from $400 million to $975 million. Mexico’s exports to the U.S. grew from $10 million to $570 million. The United States is the largest market for both Canada and Mexico’s beef exports. While Japan reclaimed its position last year as the No. 1 destination for U.S. beef, Mexico and Canada have a solid hold on the No. 2 and No. 3 positions.
U.S. pork exports to Mexico and Canada have increased steadily over the past 20 years, from less than $190 million in 1994 to more than $2 billion in 2013. It took a few years to gain momentum, but exports to Mexico took off in 2000 and approached $1.2 billion in 2013, marking six consecutive years of record-breaking export values. Exports to Mexico have been fueled by consumption growth, which nearly doubled over the 20 years. Mexico’s domestic production, which increased 41 percent during the same period, has not been able to keep pace with the booming demand, and there is still room for growth in Mexico’s relatively low per capita pork consumption.
Mexico’s hog producers have benefited from increased access for U.S. corn, although duties on corn were phased out over a 15-year period under NAFTA – much longer than most agricultural products. Mexico’s pork exports to the U.S. have grown from a minimal value in 1994 to about $25 million. Mexico has recently benefited from growing pork exports to Japan, boosted by an Economic Partnership Agreement. Mexico’s comparative advantage in labor helps it produce high-value cuts demanded in markets like Japan.For Canada, exports to Mexico and the United States grew from less than $450 million in 1994 to more than $1.17 billion in 2013. The U.S. is Canada’s top pork export market, but while Canada’s beef exports are primarily to the U.S., its pork exports are diversified and domestic production growth has been driven by export growth to Russia and key Asian markets. Canada exports about 68 percent of its pork production, without accounting for live hog exports. Although the U.S. is a net importer of pork from Canada, U.S. exports to Canada have been growing steadily. Exports to Canada set a record of $856 million in 2012, and fell just slightly short of that mark last year. This growth has been particularly impressive considering Canada’s pork consumption has actually declined slightly over the past 20 years, while production grew by more than 60 percent.
Over the past 20 years, U.S. pork production also increased dramatically – increasing nearly one-third while consumption grew by just 1 percent. So exports have clearly been the key to this production growth. Over the past 20 years, U.S. exports grew from just 3 percent of production to about 23 percent today (including only muscle cuts, not variety meat).
On the live hog side, the U.S. and Canadian industries became increasingly integrated as imports of Canadian hogs grew steadily from less than 1 million head in 1994 to 10 million head in 2007. This upward trend was interrupted by the implementation of COOL and other factors – including exchange rates and feed prices – and imports of live Canadian hogs have recently dropped to about 5 million head per year.
Moving forward, the North American red meat industries should continue to benefit from integration, as capitalizing on each countries’ comparative advantages can help us meet the growing global demand for meat. However, concerns remain with the pending ruling of the WTO compliance panel on the enhanced U.S. COOL rule, and there is still work to be done to fully reopen Mexico’s market to U.S. beef. It will also take time to rebuild the drought-depleted North American cattle herd.
Mexico and Canada joining the Trans-Pacific Partnership (TPP) negotiations could also eventually change the dynamics of North American meat trade. Currently the U.S. captures a dominant share of both Canada’s and Mexico’s imported beef and pork. Through TPP, Australia and New Zealand could also gain preferential access for beef exports and we can expect more competition, especially in Mexico. However, the U.S. industry’s close proximity and well-established market presence will help us keep a solid foothold in these critical markets for U.S. red meat.