Methodology and Results of the Value of Beef Exports Analysis by United States Meat Export Federation Denver, CO July 2002

State Beef Councils funded the research detailed in this paper through their respective checkoff programs.

Executive Summary Many economists have used models to estimate the importance of exports to the beef industry. Previous research suggests that the impact of exports on the price of a fed steer varied from $7.83 to $9.66 per hundredweight in 2000. However, these models did not take into account exports of beef variety meats. U.S. exports of beef variety meats accounted for nearly 20 percent of the value of total beef exports in 2000. Further, beef demand models only distinguish between “high” and “low” quality beef. This paper builds on previous research regarding the importance of exports by analyzing U.S. beef exports at the cut level and by including exports of beef variety meats. In addition, the paper analyzes the impact of exporting items that have little or no value to consumers in the United States but sell as premium products in international markets. After analyzing trade and price data, the researchers estimated that these additional factors increased the impact of exports on the price of a fed steer by $2.79. Scope: Stakeholders often ask USMEF, "What is the value of exports to the beef industry?". While measuring the value of beef exports is relatively easy, it is more difficult to determine the price impact of exports at the farm level when considering both muscle meat and variety meat exports. This is even more complicated when many exported cuts command a much higher price internationally than they do in the domestic market. In an effort to answer this question, USMEF gathered information from several sources to determine the value of the international markets to the U.S. beef industry. The following paper details the information USMEF sought, how it collected and analyzed the information, the results of the analysis, possible implications for the industry, and areas of further research. State Beef Councils funded this research project. Project Objectives: 1. Rank the top 10 U.S. beef import items for each of the following international markets for the year 2000: Japan Taiwan Russia

China ASEAN Middle East

Korea Mexico Caribbean

Hong Kong Central/Eastern Europe C/S America

Rankings should include a grade breakdown for muscle cuts, specifications, import volume, and price by cut. 2. Determine the flow of product once it leaves the production plant and is destined for the international market. To gather the data in objective one, USMEF collected information from USMEF international offices in the respective markets and commissioned a survey of beef exporters. USMEF international staff provided the following information for each item: - NAMP number or description of the cut - Volume imported from the U.S. or percent of total U.S. imports - Breakdown of imports of the cut by grade (Prime, Choice, Select, No roll) - Price of item (in US dollars per kilogram, C&F Port of Entry) Colorado State University conducted the survey of beef exporters. However, the survey response was too low to provide a statistically significant sample and so USMEF did not include the data

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in the analysis. In addition, the lack of exporter participation precluded USMEF from analyzing the flow of product destined for the international market. Therefore, USMEF was unable to complete objective two. Lastly, USMEF analyzed several export databases to verify the estimates provided by USMEF international staff. In particular, USMEF analyzed PIERS export data from the year 2000. The PIERS database records each individual waterborne export shipment from the United States. For each shipment, PIERS collects the name of the exporter, the HS1 code of the product, the volume, the date of departure, the destination country, and a text description of the product. By using key word searches, USMEF determined the volume of exports, by cut, for each of the major markets. For example, to determine the volume of short rib exports, USMEF developed a query that aggregated exports, by country, of shipments that had the words “short” and “rib” in the text description field. In addition to the PIERS database, USMEF analyzed U.S. export data and international market import data. While U.S. Census categorizes exports of muscle cuts only as fresh or frozen and boneless or bone-in, exports of certain variety meats, such as tripe, liver, and intestines, have individual categories. In addition, some countries categorize imports by primal or cut categories. For example, Japan has a separate category for brisket and plate. Given that Japan imports limited amounts of brisket, this category is mostly comprised of short plate. Analyzing these databases allowed USMEF to provide additional estimates of export volumes and prices. Results: Top 10 Beef Export Items USMEF generated a Top 10 list for each market based on information provided by international staff and analysis of export and import data. The appendix includes the Top 10 import items for each market provided by the USMEF staff. The methods used to collect the data varied based on available information. In markets such as Japan, government agencies and private firms routinely monitor the beef imports and provide volume estimates about the type of items imported. In addition, the mix of items imported is more stable in relatively mature markets. In other markets, such as Mexico, the trade is less transparent and the government data is not as specific. For regions, such as Central Europe and ASEAN, data is less available, less specific, and the trade is more volatile depending on U.S. prices, currency fluctuations, and economic conditions. In every market, USMEF staff drew heavily from estimates provided by meat importers and their own experience. USMEF also compiled a top beef export items list for each market by analyzing PIERS data. While PIERS data provides detailed information on each export shipment of U.S. beef, it does have some drawbacks. First, some product descriptions have vague titles such as “Frozen Beef” or “Assorted Chilled Beef” making cut identification impossible. The amount of the trade accounted for by vague descriptions varied by market. Table 1 shows the total beef exports captured by PIERS, the amount of the trade where the cut was identifiable, the amount with “vague” descriptions, and the “miss” percent. The “miss” percent refers to trade that was neither vague nor identifiable. Minor cuts make up this trade.

1

HS code is short for Harmonized System code. Governments use HS codes to classify trade into discrete categories for custom duties and cataloging exports.

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Table 1: Amount of Trade Identified at Cut Level by PIERS, by market Region Japan Korea Russia European Union Eastern Europe Other Western Europe Hong Kong & China Middle East Central & South America ASEAN Taiwan Caribbean World

PIERS Total PIERS Cut Total Volume in metric tons 466,155 223,621 162,214 120,182 39,951 38,999 13,350 10,784 7,613 5,559 438 103 27,987 14,393 27,370 28,265 10,407 6,150 10,497 6,189 13,742 7,336 6,983 4,025 786,707 465,606

Pct. Of PIERS Cut Total Cuts Vague Miss 48 45 7 74 20 6 98 0 2 81 7 12 73 26 1 24 76 0 51 35 14 103 0 -3 59 31 10 59 35 6 53 42 5 58 25 17 59% 34% 7%

Source: USMEF

Another drawback is that the description sometimes lists the major item of the shipment but not minor items. For example, the description might say “Beef Short Plate” but could feasibly include a box of rib eye steaks. In addition, the product description sometimes lists two cuts in the same shipment. For example, the database query would count a product description reading “Beef Liver and Kidney” once for liver and once for kidney2. While these shortcomings are worth noting, they do not detract considerably from the usefulness of PIERS data as a sampling of export sales indicating the relative exports of beef by item. Lastly, PIERS data only covers waterborne exports and so does not include U.S. beef exports to Mexico and Canada. Further, the top 10 list is exclusive of U.S. beef exports to Canada. While Canada is an important international market, it accounted for 8 percent of exports in 2000, the U.S. and Canadian markets are very similar and the mix of cuts that packers export to Canada closely resembles the mix of cuts consumed by U.S. consumers. In short, shipping beef from the Western United States to Alberta is not significantly different from sending it to New York City. The top exports listed in this paper are shown as a proportion of the U.S. beef exports exclusive of exports to Canada. The top export items list by market derived from analyzing PIERS data is included in the appendix. To create a global Top 10 beef export list, USMEF combined the results of top items provided by USMEF staff and the results of the PIERS data. First, USMEF added the top cuts from the Mexico market, based on estimates from USMEF staff, to the PIERS data to create an adjusted PIERS top cuts list. USMEF made this adjustment so that they could compare the PIERS list on equal footing to the list developed from USMEF staff estimates. Second, USMEF compared the adjusted PIERS list to official USDA export statistics. USMEF found that the split between beef variety meats and beef was within a few percentage points. Unlike muscle cuts, the USDA tracks the exports of some variety meats at the item level (i.e. exports of beef liver has its own category). USMEF compared the percentage of exports of variety meats items to the adjusted PIERS list and found that the PIERS data showed a larger percent of beef tongues and a lower percent of beef liver. However, USDA statistics classify 42 percent of beef offal exports as “other”. Further analysis of the PIERS data revealed that some exporters of beef liver mistakenly classify these shipments as “other beef offal” instead of beef liver. Therefore, USMEF made no 2

This anomaly was responsible for the 103% finding for the Middle East

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adjustments based on official trade statistics. Finally, USMEF compared the adjusted PIERS list to the global list compiled from USMEF staff estimates. USMEF averaged the two lists to create the Final top 10 beef export list. Table 2 shows the two lists and the final list. Table 2: Top 10 U.S. Beef Export Items and their Percent Share of Total U.S. Beef Exports Adjusted PIERS Rank % USMEF Staff List % Final Top 10 List % List 1 Short Plate 15 Short Plate 15 Short Plate 15 2 Liver 13 Short Rib 11 Short Rib 12 3 3 Short Rib 12 Liver 7 Liver 10 4 Chuck Roll 5 Chuck Eye Roll 7 Chuck Eye Roll 5 5 Intestines 4 Outside Skirt 5 Chuck Roll 5 6 Outside Skirt 4 Chuck Roll 4 Outside Skirt 4 7 Tripe 4 Gooseneck Round 4 Tripe 4 8 Tongue 3 Tripe 4 Intestine 4 9 Gooseneck Round 3 Clod 3 Gooseneck Round 3 10 Clod 3 Tongue 3 Tongue 3 Total Top 10 65 Total Top 10 63 Total Top 10 64 11 Chuck Eye Roll 2 Intestine 3 Clod 3 Source: USMEF

While the two lists are very similar, a few items stand out as being different. First, the PIERS data showed slightly higher exports of beef intestines compared to the staff list. The PIERS data showed intestines accounting for 4.1 percent of exports while the staff estimated 3.0 percent. Conversely, the staff list estimated a higher percent of chuck eye roll, 6.7 percent, compared to the PIERS data at 2.5 percent. A possible reason for this discrepancy could be that exporters described Chuck Eye Roll simply as “chuck roll” and so PIERS data did not correctly distinguish between the two items. Aggregating chuck eye roll and chuck roll into a single item results in a 7.2 percent share based on PIERS data and 11 percent based on USMEF staff estimates. Aside from these two occurrences, the lists were very similar, particularly in terms of ordinal rankings. The top cut by a comfortable margin on both lists was short plate. The next three cuts, though not in the same order, were short ribs, liver, and a combined chuck roll/chuck eye roll item. Skirt, tripe, and Gooseneck Round ranked between 5 and 9 on both lists. The last two items, tongue and clod, ranked 8 or below on both lists. As mentioned above, intestines ranked differently on the two lists coming in at 5 on the PIERS list and eleven on the staff list. Regardless, the top 11 U.S. beef export items were the same on both lists and in generally the same order. The Value of U.S. Beef Exports Many economists have estimated the impact or importance of exports to the U.S. beef industry. Most calculate the drop in live fed cattle prices associated with the cessation of exports, as would be the case if the U.S. suffered an outbreak of FMD or BSE, by using estimates of live cattle price elasticity with respect to changes in the domestic beef supply. Estimates from a 1997 CF Resources report4 show that live cattle prices drop 3.15 tenths of a cent for every additional million pounds of beef in carcass weight equivalent (CWE) added to the U.S. beef supply. This is equivalent to 7/10 of a cent for every 1,000 metric tons CWE. Given 2000 beef exports of 1,119,000 metric tons CWE, average 2000 live cattle prices would have been $7.83 per 3 4

“Short Rib” includes chuck and rib short ribs Beef and Pork Exports: Impact on U.S. Livestock Industries 1997

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hundredweight lower without exports. Other economists estimate that live cattle prices drop 1.5 percent for every 1 percent increase in production. Given that beef exports account for 9.4 percent of production5, a cessation of exports would drop live cattle prices 14 percent, or $9.66 per hundredweight based on average 2000 prices of $68.37. Another methodology used to estimate the value of exports is a slight modification of the two previous methodologies. This method assumes that increases in supply will meet any increase in demand generated by exports. Therefore, exports must continue to rise faster than supply in order to keep upward pressure on prices. This method uses price elasticity estimates but only gives exports credit for annual increases. In practice, some economists use annual changes in the exports of beef while others use changes in exports as a percent of production. While all methodologies are useful in estimating the importance of beef exports, they are incomplete measures in three important aspects. First, the estimates do not include variety meats in their calculations. In 2000, variety meats accounted for 35 percent of total beef exports by volume and 17 percent by value. Second, the estimates use the price elasticity relative to supply in the United States market for additional quantities of meat generated by a larger cattle slaughter. This supply increase produces a mix of beef cuts relative to their portion of the beef carcass whereas an increase in supply due to a cessation of exports produces additional quantities of meat based on their proportion of exports. For example, the slaughter of a 1,200-pound fed steer increases the supply of Japanese specification short plate by approximately 20 pounds. However, the exported beef equivalent of that steer, 548 pounds of boneless beef, includes 82 pounds of short plate since short plate accounts for 15 percent of U.S. beef exports. The third aspect overlooked by the previous work estimating the value of beef exports is that they do not account the differing tastes between U.S. and international consumers and the resulting price differentials for items that have limited or low value marketing opportunities in the United States. For example, short plate, if not exported, would go into beef trimmings and sell for approximately 50 percent less than its export value. For variety meats, such as tongue, the domestic value is less than 5 percent of the export value since most packers would sell tongues as a pet food input if no export market existed. This last aspect, the importance of the export market for sales of items with little or no U.S. demand (often called underutilized items), was the focus of additional USMEF analysis. To gain a more complete understanding of the difference between the value of beef items when the United States has access to international markets compared to the value of these items if the access did not exist, USMEF asked their international staff to provide local prices for each of the cuts in their top 10 list. The prices were quoted as the average prices in their market for 2000 in US$ per kilogram at the port of entry. Prices were on a C&F6 basis and did not include tariffs or other transfer costs. Where the staff provided a grade breakdown for the cut, they also provided a separate price for each grade. In addition, the staff provided estimates for freight costs. Once USMEF had an estimate for the international price of each cut, they then determined the appropriate domestic reference price based on how the industry would use the item if exports ceased. USMEF referred to this as the alternative domestic use of each item. To determine the alternative domestic use, USMEF provided the list of the top beef export items to several U.S. beef exporters and asked each exporter to determine how they would sell each item in the U.S. if exports ceased due to a disease outbreak, a loss of export demand, or market access barriers. The alternative domestic use options were to sell the item in the same form as it was exported, to use the product in 50 percent trimmings, 65 percent trimmings, 85 percent trimmings, pet food, or for 5

USDA/ERS, 2000 C&F is an international payment term meaning Cost & Freight. It includes the cost of the beef shipment plus shipping the beef to the port of entry. 6

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rendering. Once USMEF determined the alternative domestic use of the item, they then determined its alternate domestic price. For example, the exporters determined that if they could not export a Choice rib eye, they could still sell the product “as is” in the U.S. market. Therefore, the alternative domestic price for a Choice rib eye was equal to the average 2000 price for Choice rib eyes as reported by the USDA Carlot report7. Exporters would render other items, such as tripe, if no export market existed. The alternative domestic price for tripe was equal to the price for beef used in rendering8. Table A1 in the appendix shows the alternative domestic use for each of the top export items and the corresponding reference price. Table A2 in the appendix shows the prices for the alternative domestic uses (50 percent trim, 65 percent trim, 85 percent trim, beef for pet food, and beef for rendering). Once USMEF determined an alternative domestic price, they calculated the difference between the international price, less transportation costs, and the price of the alternative domestic use. The difference between the two prices is an estimate of the value gained by having access to international markets for a particular item versus sales being limited to the U.S. market. Equation 1 shows how USMEF calculated the extra value from exporting beef tongue versus using the item domestically in pet food. Equation 1: Difference between the domestic and international value of beef tongue Price of beef tongue in Japan (PJ):

$9.92/kg

Price of beef tongue if used in U.S. as pet food (PUS):

$0.22/kg

Transportation cost to Japan from U.S. (CT):

$0.40/kg

Volume of tongue exports to Japan (VT):

35,310,000 kilograms

[(PJ - PUS) - CT)]

*

VT

= Total Extra Value

[(9.92 − .22) − .40]* (35,310,000) = $328,383,000 Equation 1 shows the simplest example where beef tongue exports are to one country. When an item was on the top 10 list of more than one country, USMEF calculated the extra value for each country, given unique values for the export price, transportation cost, and export volume, and aggregated the results. Table 4 shows these gains for each cut9. Short ribs generated the highest difference worth $388 million more in the export market versus selling in the U.S. market as 65 percent or 85 percent trim10. The difference is likely higher given that short ribs are mostly sold as bone-in and the bones would be sold in the U.S. for rendering thus lowering the alternative domestic value of short ribs and increasing the difference between the domestic and export prices. USMEF estimates that accounting for the low domestic value of bones adds at least $50 million 7

2000 National Carlot Meat Trade Review, USDA AMS, some prices provided by CattleFax Rendering converts beef byproducts, such as viscera and bone, into meat and bone meal (MBM). Pork and poultry producers use MBM as a protein source in the feed ration. 9 Table 4 calculated from export volumes and prices supplied by USMEF international staff. The table shows the Top 10 items ranked by their extra value and the total extra value added for all exported items. 10 USMEF placed chuck short ribs and rib short ribs in the same category because PIERS data did not allow for distinguishing between the two cuts. i.e. many shipments simply said “short ribs”. Percent of chuck vs. rib short ribs based on USMEF estimates. The domestic value for chuck short ribs were based on 65% trim while the value of rib short ribs is based on 85% trim. 8

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to the domestic versus export price differential. The next largest difference was for beef tongue at $328 million dollars. In Japan, beef tongue brings nearly $10 per kilogram versus packers selling this item as an input in U.S. pet food for $0.22 per kilogram. In addition, the difference between the export price and the alternative domestic price was negative for a few items. U.S. exports of chuck roll to Korea accounted for $12 million of the total $20 million of the negative value found in the analysis. Upon further analysis, Korean trade sources indicate that they buy U.S. chuck roll during times of seasonally low prices and so using the average U.S. chuck roll price for the entire year inflates the domestic value and results in negative returns from exports of this item. During the seasonally low price period for chuck roll, generally in the spring, 2000 prices were at levels that resulted in small profits from exporting the item versus selling it into the domestic market. Other items that returned negative values, such as shank and prime rib, could have quality differences between items for the U.S. compared to those for export. While anecdotal evidence suggests that exporters did not sell these at a loss, USMEF kept the $20 million worth of negative values in the overall number for consistency. Had USMEF removed these items, or “zeroed out” their values, the total extra value would have been $1.232 billion versus $1.212 billion. Table 4: Difference in Value between U.S. and International Prices of Beef Export Items Item Short Ribs

U.S. Value (US$/kg)

International Exported Total Extra Volume Value Value (metric tons) (million US$) (US$/kg)

1.33-2.09

4.00-10.00

121,395

$388

Beef Tongue

.22

9.92

35,310

$328

Outside Skirt

2.09

3.50-6.00

50,516

$166

Short Plate11

.96

1.74-2.65

162,690

$63

2.62-2.68

3.50-6.00

71,223

$43

Intestine

.10

.90-1.70

31,814

$35

Tripe

.10

.50-3.00

38,520

$35

1.33 1.25-1.30 8.18-9.23

2.94-3.80 3.46-6.17 11.00

13,883 9,548 18,212

$27 $26 $23

--

--

921,558

$1,212

Chuck Eye Roll

Rib finger Chuck Flap Tail Rib Eye Roll

All Items

International Market(s) ASEAN, HK/China, Japan, Korea, Russia, Taiwan Japan CS America, Japan, Korea, Mexico ASEAN, HK/China, Japan, Russia, Taiwan, Middle East ASEAN, Japan, Korea, Taiwan Japan, Korea Caribbean, CS America, HK/China, Europe, Mexico Korea, Taiwan Japan, Taiwan Caribbean, Japan

--

Source: USMEF Estimates

All told, the difference between the alternative domestic use of beef export items and their value in international markets, less transportation costs, equaled $1.2 billion in 2000. In 2000, total U.S. exports of beef and beef variety meats equaled $3.6 billion. Therefore, the premiums paid by the international market for underutilized items account for $1.2 billion, or one third, of the total export value. Looked at from another perspective, the additional value of exporting these underutilized items to countries willing to pay a premium is equivalent to $33.47 per slaughtered animal or 2.79 cents per pound live weight. Interestingly, while the domestic value of variety meats is very low and so the extra value from exporting these items disproportionately high, variety meats only accounted for 40 percent of the $1.2 billion of extra value. The additional 11

Domestic price of short plate is calculated as 75% of the 50% trim price and 25% of the 65% trim price given the percent of available short plate by yield grades.

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value of exporting underutilized items from the carcass, such as short ribs and short plate, accounted for 60 percent of the $1.2 billion. In table 4, the second column shows the value of the item if used in the United States. For muscle cuts, the first number refers to the select price while the second number refers to the choice price12. The third column shows the range of values for the item found in international markets while column four shows the exported volume in metric tons. The fifth column shows the total extra value as calculated according to equation 1 and aggregated for each market. The final column, “International Market(s)”, shows the international markets included in the calculation of the Total Extra Value. These markets included the item as one of its top 10 cuts. Given the profit potential of exporting the cuts in table 4 versus selling them in the United States, one would expect that packers export a large portion of the U.S. production of these items. In fact, this is the case. Table 5 lists the yield per slaughtered animal and the estimated U.S. production for the cuts in table 4. Table 5 shows that the beef items that generate the largest extra value are, in general, disproportionately exported. The U.S. exports nearly all its rib finger meat production and more than half of its production of short ribs, tongue, outside skirt, and short plate. Exports of beef tripe and intestine only accounted for 22 and 21 percent of production respectively. That said, the actual number could be higher if the analysis had accounted for condemnation rates. Chuck Eye Roll exports accounted for 11 percent of Chuck Eye Roll production. However, since exports of Chuck Roll include the Chuck Eye Roll (the Chuck Eye Roll is part of the Chuck Roll), total Chuck Eye Roll exports equal 21 percent. Exports of Rib Eye Roll only accounted for 4 percent of production. According to the USDA, 2000 beef muscle cut exports accounted for 9.4 percent of production. USMEF estimates that beef variety meat exports accounted for 49 percent of production. Table 5: Exports as a Percent of Estimated Production for selected Beef Export Items Item Short Ribs Beef Tongue Outside Skirt Short Plate Chuck Eye Roll Intestine Tripe Rib finger Chuck Flap Tail Rib Eye Roll Source: USMEF Estimates

Yield per Animal (kg) 8.2 1.5 2.7 9.0 16 5.5 5.1 .5 1.6 9.1

Exports as a Percent of Production 57 70 61 68 11 21 22 94 22 4

Conclusions If every consumer in the world had the same preferences and tastes for beef, then the price of beef would only differ across markets by the amount of transportation and transfer costs (including tariffs, port fees, value added taxes, etc.). If this were the case, then the only benefit of exporting would be to remove supply from the domestic market and apply upward pressure on prices 12

An exception is the U.S. prices shown for short ribs. These refer to the prices for 65% trim (the use for chuck short ribs) and 85% trim (the use for rib short ribs) respectively.

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through the supply response. However, as table 4 shows, there is a difference between the value of many cuts depending on whether they have access to international buyers with different tastes and preferences. In short, access to the export market benefits the U.S. beef industry by increasing the number of consumers, an increase in aggregate demand, and by adding consumers who complement U.S. demand by paying higher prices for certain underutilized parts of the beef animal. Taking the example of beef tongues, if the packer did not have access to the international market, tongues would only have value as inputs into pet food. Selling the entire production of U.S. beef tongues as pet food inputs would generate just under $12 million. However, access to the international market allows the packer to sell nearly all of his tongues, 70 percent according to this research, for nearly $10 per kilogram in Japan. Given that the packer can harvest one tongue weighing 1.5 kilograms (3.3 pounds) from each animal, the packer could pay up to $15 more per animal if the tongue is of acceptable quality and the Japanese will pay $10 per kilogram exclusive of transfer costs13. Fifteen dollars per head is equal to 1.25 cents per pound live weight for a 1,200-pound animal. Additionally, if all 36 million cattle slaughtered in 2000 produced an acceptable tongue and the U.S. could have sold its entire supply of tongues at $10 per kilogram, the additional value to the U.S. cattle industry would have been $540 million dollars. For a variety of reasons, including prices of lower than $10 per kilogram and less than 100 percent production, the actual value was $328 million. If the U.S. were unable to export to Japan, the value of beef tongue production would likely fall to $12 million, the value of tongues used in pet food. The packer would only be willing to pay 33 cents for a tongue given that he can only sell tongues to pet food manufacturers. The industry would lose $316 million or roughly $9.00 per head. Extending the tongue example to the entire range of items available from the slaughtered beef animal, the value of a steer is the sum of the values for each of its individual parts. A packer attempts to maximize revenue from each animal by selling each part to the customer willing and able to pay the highest price. Access to the export market simply increases the number of customers bidding for the packer’s products and creates the opportunity to find customers willing to pay more for certain items with low U.S. demand. Access to the export market simply allows the packer to fully realize the value of each animal by exploiting arbitrage opportunities on a global, rather than domestic, basis. Just as access to the international market raises the value of the products from one steer, it raises the value of the products from all U.S. cattle in two ways. First, it raises the value by increasing the number of customers and raising prices through an increase in aggregate demand. This is the additional value measured by the price elasticity with respect to supply as discussed earlier in this paper. Second, access to international markets increases the value of the products from all U.S. cattle by allowing packers to sell the products to those customers willing and able to pay the highest prices on a global, rather than domestic, basis. Using 2000 data, this would mean that the value of exports is $9.66 per hundredweight live for the price elasticity with respect to supply plus $2.79 per pound per hundredweight live given higher international prices for certain cuts. The total value of exports is $12.4514. This value, equal to 18 percent of the value of a fed steer in 2000, is 29 percent higher than previously estimated.

13

This analysis does not make any assumptions about bargaining power disparities between sellers and buyers of live cattle. These disparities may exist but are not germane to the research. In short, the study focused on how exports create value, not how value chain participants share this value. 14 This value would equal $10.64 using the CF Industries beef elasticity estimate (i.e. $7.83 vs. $9.66)

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Implications Given that U.S. beef exports have additional value to the industry beyond removing supply from the market, it raises several interesting questions. First, does this mean that the U.S. is more likely to export some items simply based on differing consumer demand in domestic and international markets? And by extension, is there an optimal amount of exports based on the percentage of the animal accounted for by these cuts? Should achieving the optimum export/domestic mix be the benchmark for measuring performance rather than constantly increasing exports? For example, should the goal of the industry be to maximize the value of each animal slaughtered by selling each harvested item to the consumer who is willing and able to pay the highest price? From a promotional perspective, should USMEF strive to add value to the industry by both increasing the overall demand for US beef plus increasing the opportunity for exporters to realize the gains from global arbitrage? This would suggest that activities such as Muscle Profiling, a project that analyzed the suitability of beef muscles, rather than cuts, for export markets, provide a good return on investment. In fact, foreign buyers have traditionally searched through items that packers send to the trim line to find salvageable products for their markets. Muscle Profiling simply formalizes this practice. Lastly, do the premiums generated by export items allow the packer to sell items in the domestic market for less than he would normally? For example, if production costs remain constant, the packer could retain the additional revenue generated by exporting certain undervalued items as profit, pass part onto the producer through higher prices, or use the additional revenue to lower the cost of other items. This cross-subsidy effect could stimulate additional quantity demanded for domestically consumed beef items by lowering prices. Shortcomings As noted in the text, the analysis had several shortcomings that are worth noting again. First, the prices used to determine the extra value of exporting an item versus selling it domestically were averages for the year 2000. These prices do not accurately reflect the range of prices that occurred within the year or differences in quality or specification between suppliers and markets. Second, some items sell for more in international markets due to value added to meet customers needs. An example would be the 9’’ Guyudun specification for Japanese short plate exports. While this extra value benefits the beef industry by stimulating employment and generating additional revenue, it is not the same as the extra value realized through arbitrage. In fact, it is no different than the value generated for the shipping industry from beef exports. It is not pure profit though it does stimulate employment and has other positive benefits for the US economy. Third, the survey of beef exporters yielded little useful information and so was not helpful as an additional verification point in determining the top export cuts or the export prices of those cuts. Fourth, this paper argued that exports add value both through the supply response, as measured by the price elasticity with respect to supply, and though global arbitrage opportunities. These two avenues of extra value apply to both beef muscle cuts and beef variety meats for a total of four unique estimates. However, the paper only calculated three of the four estimates since no information regarding the price elasticity of beef variety meats exists. Fifth, this analysis did not examine the influence of hides on the value of exports or the pricing of meat. Just as a high value for variety meats may allow the packer to lower the price on muscle cuts, a high price for hides could do the same. Given that the U.S. exports a large percentage of the cattle hides, the international market plays a vital role in their value. Lastly, the research studied beef exports and prices in a static, versus dynamic, environment. The value of several alternative domestic uses, such as trim and chuck roll, would be lower if exports ceased and packers had to sell large volumes of chuck roll and thin meats in the domestic market. While price elasticity estimates

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should account for some of the price drop, the impact at the cut level is not well understood. A lower value for these alternative domestic uses would have increased the value of exports according to the methodology employed in this paper. Further Research While the results of this analysis are certainly not definitive, they are useful in defining areas of further research. One area of research is to better estimate the differing impacts of increases in domestic demand versus increases in export demand. This analysis suggests that there are differences in their impact on live cattle prices and further research should attempt to clarify and, if possible, quantify these differences. In addition, given the importance of variety meat exports, price elasticity estimates for the major export items, such as liver, tripe, tongue, and intestines, would improve our understanding of how these items add value to the animal. Also, as mentioned above, the impact of hide value on beef prices should be studied. Last, studying price differentials in a dynamic, rather than static, environment would increase the understanding of cut level impacts due to changes in exports. Researchers should explore these areas to determine any implications for the U.S. beef industry and the demand development activities of USMEF.

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Appendix Table A1: Use of Beef Items if not Exported Choice Price Item NAMP # (US$/kg) Prime Rib 109 8.10 Rib Eye Roll 112A 9.23 Shoulder Clod 114 2.30 Top Blade Muscle /1 114D 2.36 Chuck Roll 116A 2.80 Chuck Flap Tail/2 116D 2.87 Chuck Eye Roll 116D 2.62 Shank 117 Brisket 120 2.05 Short Plate /3 121B Outside Skirt 121C Short Ribs (SK spec) 123A Short Ribs (JP spec) 123D Back Ribs /4 124 1.98 Rib Finger 124A Chuck Short Rib 130 Bones 134 Knuckle 167A 2.79 Inside Round 168 2.85 Top Round 169A 3.62 Gooseneck Round 170A 2.46 Short Loin 174 7.06 Strip loin 180 7.44 Strip loin (PSO 0x1) 180 10.05 Sirloin /5 181 3.22 Top butt 184 4.27 Coulotte 184D Tri-tip 185C 4.49 Tenderloin 189A 15.58 Flank 193 6.75 Rib Eye /6 1112 9.83 Porterhouse /7 1173 T-bone /7 1174 Lips 1704 2.23 Beef Tongue 1710 Sweetbreads 1722 Hearts 1723 0.42 Liver 1724 Kidney 1728 Tripe 1739/40/41 Intestine 1743/44 Aorta Back strap 1761 -

Select Price (US$/kg) 7.02 8.18 2.35 2.36 2.72 2.76 2.68 2.04 1.98 2.83 2.76 3.56 2.40 5.86 5.86 7.87 2.56 3.57 4.37 13.83 6.24 8.73 2.22 6.99 0.42 0.50 0.29 0.79 -

Domestic Use Domestic Domestic Domestic Domestic Domestic Domestic Domestic 85% Trim Domestic 50/65 Trim 85% Trim 85% Trim 85% Trim Domestic 65% Trim 65% Trim Render Domestic Domestic Domestic Domestic Domestic Domestic Domestic Domestic Domestic 85% Trim Domestic Domestic Domestic Domestic Domestic Domestic Domestic Petfood Render Domestic Petfood Petfood Render Render Render Render

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Item Tunic tissue Hanging Tenders Tendon Ox tail Heel Muscle

NAMP # 1763 1765 1781 1791 ***

Choice Price (US$/kg) 3.96 -

Select Price (US$/kg) 3.96 -

Domestic Use Render 85% Trim Render Domestic 85% Trim

Source: 2000 National Carlot Meat Trade Review (USDA AMS), Survey of U.S. Exporters, USMEF Key: “Domestic” means that item sells in domestic markets in same form as export markets. In this case, the alternative domestic price equals the U.S. price for the appropriate grade. “85% Trim” and “65% Trim” means item would be used in trimmings if not exported “Petfood” items sold into pet food. “Render” items rendered /1 TBM price based on selling as NAMP# 114 /2 Chuck Flap Tail price based on selling as NAMP# 116A /3 Short Plate price is 75% 50% Trim and 25% 65% Trim, based on US 50:65 Trim mix /4 Back Rib price was for all grades /5 Sirloin price based on selling as NAMP# 181A /6 Rib eye price based on NAMP# 112A /7 no price found (omitted from analysis)

Table A2: Prices for Alternative Domestic Uses of U.S. Beef Name of Use Fresh 50% Lean Trimmings (50% Trim) Fresh 65% Lean Trimmings (65% Trim) Fresh 85% Lean Trimmings (85% Trim) Offal Items for Pet food (Petfood) Offal Items for Rendering (Render)

Price (US$/kg) 0.84 1.33 2.09 0.22 0.10

Source: 2000 National Carlot Meat Trade Review (USDA AMS)

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Top 10 Beef Imports Items by Market

As ranked by USMEF International Staff ASEAN 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

Liver Strip loin Prime Rib Short ribs Tenderloin Short loin Rib eye Short plate Top Blade Chuck Eye Roll

Caribbean 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

Strip loin Bones Tripe Top butt Top/inside round Tenderloin Knuckle Rib eye Flank Chuck roll

Central and South America 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

Liver Sweetbread Tripe Trimmings Rib eye Strip loin Shoulder Clod Coulotte Outside Skirt Brisket

Hong Kong and China 1. 2. 3. 4. 5. 6. 7.

Short plate Omasum Short Ribs bone-in Back strap Tunic Tissue Chuck Short Ribs Aorta

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8. Rib eye 9. Tendon 10. Strip loin Mexico 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

Gooseneck Round Clod Inside Round Tripe Knuckle Brisket Skirts Out/In Chuck Roll Lips Liver

Middle East 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

Liver Tenderloin Strip loin Prime Rib Breakfast Beef Rib eye Short loin T-Bone Steak Round Rib Porterhouse

Europe 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

Mixed offal (for pet food) Liver Tripe Strip loin Kidney Top round Rib eye Tenderloin Short loin Brisket

Japan 1. 2. 3. 4. 5. 6.

Short Plate Chuck eye roll Chuck Short Ribs Beef Tongue Outside Skirt Rib Eye Roll

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7. 8. 9. 10. 11.

Hanging Tenders Boneless Short Ribs Steak Ready Strip loin, (PSO) Chuck Flap Tail Intestine

Korea 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

Short rib Chuck Roll Rib Finger Chuck short rib Chuck eye roll Shank Outside skirt Beef intestine Brisket Back rib

Russia 1. 2. 3. 4. 5. 6. 7. 8. 9. 10.

Liver, clean Hearts Trimming, 50v.l. Short Ribs Rib eye T-bone Tenderloin Strip loin Sirloin Short Plate

Taiwan 1. 2. 3. 4. 5. 6. 7. 8. 9.

Rib eye Bone-in Short Rib Strip loin Top Blade Muscle Chuck Short Rib Chuck Flap Heel Muscle Rib Finger Chuck Eye Roll 10. Short Plate

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U.S. Beef Exports by Cut World Totals 2000 Determined from PIERS data

Item Short Plate Liver Short Rib Intestine Chuck Roll Tongue Skirt Chuck Eye Roll Rib Fingers Tripe Hanging Tender Brisket Kidney Chuck Flap Ribeye Heart Back Ribs Trimmings Feet/Bones Tenderloin Shank Corned Beef Oxtail Strip Loin Sirloin Butt Clod Top Blade Muscle Sweetbreads Back Strap Cartilage Lungs Tendon Gooseneck/Bottom Round Hamburger Flat Round Heel Muscle Tunic Tissue Inside/Top Round Jerky Tri Tip Aorta Ribeye Roll Flank

Grand Total

Volume (MT) 98,015 78,708 75,605 26,000 24,510 19,942 16,772 15,693 15,020 12,235 11,995 7,576 6,437 5,560 5,337 5,327 4,017 3,531 3,482 3,241 2,913 2,589 2,193 2,156 1,767 1,610 1,456 1,366 1,275 1,166 1,141 1,108 993 863 713 662 640 587 518 404 255 121 107 465,606

Percent of Exports 21% 17% 16% 6% 5% 4% 4% 3% 3% 3% 3% 2% 1% 1% 1% 1% 1% 1% 1% 1% 1% 1% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0% 0%

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U.S. Beef Exports by Cut and Region 2000 Determined from PIERS data

Japan Item Short Plate Short Rib Intestine Tongue Skirt Hanging Tender Chuck Eye Roll Chuck Roll Ribeye Chuck Flap Liver Rib Fingers Tripe Tenderloin Brisket Strip Loin Sirloin Butt Trimmings Clod Gooseneck/Bottom Round Oxtail Flat Round Cartilage Top Blade Muscle Inside/Top Round Jerky Tri Tip Back Strap Tunic Tissue Hamburger Flank Sweetbreads Ribeye Roll

Region Total

Volume (MT) 90,272 20,832 19,955 19,942 12,078 11,427 10,153 6,427 3,875 3,773 3,141 2,799 2,580 2,421 2,082 1,838 1,673 1,197 1,196 993 803 713 644 590 549 518 404 354 117 109 107 36 23

Percent of Market 40.4% 9.3% 8.9% 8.9% 5.4% 5.1% 4.5% 2.9% 1.7% 1.7% 1.4% 1.3% 1.2% 1.1% 0.9% 0.8% 0.7% 0.5% 0.5% 0.4% 0.4% 0.3% 0.3% 0.3% 0.2% 0.2% 0.2% 0.2% 0.1% 0.0% 0.0% 0.0% 0.0%

223,621

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Korea Item

Volume (MT)

Short Rib Chuck Roll Rib Fingers Intestine Chuck Eye Roll Brisket Skirt Back Ribs Feet/Bones Shank Liver Chuck Flap Short Plate Tripe Oxtail Tendon Heart Top Blade Muscle Hanging Tender Tenderloin Clod Back Strap Ribeye Ribeye Roll Strip Loin Trimmings Inside/Top Round

48,289 18,009 10,575 5,833 5,425 5,123 4,468 3,929 2,917 2,823 2,425 1,674 1,661 1,352 1,293 1,065 774 561 548 470 397 191 157 98 44 43 38

Region Total

120,182

Percent of Market 40.2% 15.0% 8.8% 4.9% 4.5% 4.3% 3.7% 3.3% 2.4% 2.3% 2.0% 1.4% 1.4% 1.1% 1.1% 0.9% 0.6% 0.5% 0.5% 0.4% 0.3% 0.2% 0.1% 0.1% 0.0% 0.0% 0.0%

Russia Item

Volume (MT)

Liver Heart Kidney Trimmings Tripe Tenderloin

33,664 3,186 1,591 423 118 17

Region Total

38,999

Percent of Market 86.3% 8.2% 4.1% 1.1% 0.3% 0.0%

European Union Item Liver Lungs Kidney Tripe Cartilage Heart Sweetbreads Trimmings Intestine Hamburger Tenderloin

Region Total

Volume (MT) 8,328 604 601 564 461 83 65 25 20 18 15

Percent of Market 77.2% 5.6% 5.6% 5.2% 4.3% 0.8% 0.6% 0.2% 0.2% 0.2% 0.1%

10,784

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Eastern Europe Item

Volume (MT)

Tripe Liver Heart Trimmings

4,969 547 24 19

Region Total

5,559

Percent of Market 89.4% 9.8% 0.4% 0.3%

Other Western Europe Item

Volume (MT)

Liver

103

Region Total

103

Percent of Market 100.0%

HK/China Item

Volume (MT)

Short Plate Short Rib Tripe Back Strap Ribeye Tunic Tissue Aorta Skirt Strip Loin Intestine Rib Fingers Heel Muscle Chuck Roll Tenderloin Feet/Bones Hamburger Brisket Hanging Tender

4,938 4,314 2,169 689 544 523 255 205 185 117 102 80 74 74 43 40 21 20

Region Total

14,393

Percent of Market 34.3% 30.0% 15.1% 4.8% 3.8% 3.6% 1.8% 1.4% 1.3% 0.8% 0.7% 0.6% 0.5% 0.5% 0.3% 0.3% 0.1% 0.1%

Middle East Item

Volume (MT)

Liver Kidney Hamburger Heart Feet/Bones Trimmings

23,630 3,785 489 202 140 19

Region Total

28,265

Percent of Market 83.6% 13.4% 1.7% 0.7% 0.5% 0.1%

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Central and South America Item

Volume (MT)

Liver Trimmings Sweetbreads Corned Beef Heart Lungs Feet/Bones Cartilage Brisket Tripe Skirt

1,789 1,770 1,265 662 332 123 77 61 26 24 21

Region Total

6,150

Percent of Market 29.1% 28.8% 20.6% 10.8% 5.4% 2.0% 1.3% 1.0% 0.4% 0.4% 0.3%

ASEAN Item

Volume (MT)

Liver Heart Lungs Short Plate Tripe Ribeye Short Rib Tenderloin Brisket Strip Loin Rib Fingers

4,769 616 314 145 119 83 60 30 27 23 3

Region Total

6,189

Percent of Market 77.1% 10.0% 5.1% 2.3% 1.9% 1.3% 1.0% 0.5% 0.4% 0.4% 0.0%

Taiwan Item

Volume (MT)

Short Rib Rib Fingers Short Plate Ribeye Heel Muscle Top Blade Muscle Brisket Tenderloin Tripe Chuck Eye Roll Chuck Flap Heart Sirloin Butt Intestine Feet/Bones Back Ribs Strip Loin Tendon Back Strap

2,110 1,541 815 657 582 305 215 192 122 115 113 110 94 75 73 67 66 43 41

Region Total

7,336

Percent of Market 28.8% 21.0% 11.1% 9.0% 7.9% 4.2% 2.9% 2.6% 1.7% 1.6% 1.5% 1.5% 1.3% 1.0% 1.0% 0.9% 0.9% 0.6% 0.6%

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Caribbean Item

Volume (MT)

Corned Beef Kidney Liver Feet/Bones Tripe Hamburger Short Plate Lungs Oxtail Shank Brisket Trimmings Tenderloin Ribeye Back Ribs Clod

1,927 460 312 232 218 207 184 100 97 90 82 35 22 21 21 17

Region Total

4,025

Percent of Market 47.9% 11.4% 7.8% 5.8% 5.4% 5.1% 4.6% 2.5% 2.4% 2.2% 2.0% 0.9% 0.5% 0.5% 0.5% 0.4%

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