EXECUTIVE SUMMARY:  The North American Free Trade (NAFTA), implemented on January 1, 1994, catapulted North America into one large beef market.  The elimination of import/export duties for beef and slaughter cattle among NAFTA partners paved the way for major changes in beef trading within North America which will have future implications for the beef industry, allied industries, and consumers in the United States, Canada and Mexico.

The North American beef industry is a complex industry characterized by major differences between the NAFTA trading partners in industry structure and technology levels, beef production and inspection systems, and beef distribution and merchandising programs.  The North American beef market consisted of more than 370 million consumers in 1992 with widely varying demand for beef, real per capita incomes, tastes and preferences for beef, population growth levels, and industry infrastructure.

With the implementation of NAFTA, cattle and beef industry firms were faced with the prospects of making production, marketing, management, financial, and other types of business decidions in the absence of a comprehensive and simultaneous economic analysis concerning the impact of NAFTA on the beef industries in North American.  This study developed a North American Beef Trade (NABT) model, a large multidimensional transhipment model, to analyze the impact of NAFTA on the competitiveness of beef fabrication, packaging and trade among 41 regions in the United States, Canada and Mexico.  Given regional cost data such as labor, fabrication, packaging, distribution, merchandising and associated expenditures, the NABT model allocated beef among three fabrication/packaging systems -- boxed beef, central vacuum packaged beef cuts, and portion control/HRI beef -- so that the total costs of transforming, packaging and distributing the existing qualities of beef as case-ready fresh beef to consumers in the 41 NAFTA regions was minimized.

This study shows that the North American beef industry can anticipate major changes in regional competitive position, in location of optimal markets, least cost distribution routes, and volumes of beef merchandised by fabrication/packaging systems as the beef industry adjusts to NAFTA and as economic, production, and demographic factors undergo change.  Factors generating change in the North American beef industry include the productive potential of the North American cattle/beef industries, growth in population and per capita incomes, changes in regional wage rates and the rate of technology adoption, and industry infrastructure impacting the beef fabrication/packaging and distribution systems.  Important also will be harmonization of instpection systems, border crossing agreements, harmonization of border crossing documents and bills of lading, adoption of trailer load limit standards, and adoption of common truck safety/financial responsibility standards prior to unlimited access for distributin beef products by common truck carriers from originating source throughout North America.

The North American Free Trade Agreement, greatly increased the market area for beef -- especially for U.S. and Canadian beef producers.  Mexican beef producers, primarily Northern Mexico beef producers, also have potential to expand their market area to the U.S. West Coast provided Mexico attains surplus beef producing status.

Immediate Post-NAFTA Impact

Given the beef supply, demand and economic conditions which existed when NAFTA was implemented in 1994, the NABT model revealed that the Texas-Oklahoma Panhandle and Colorado enjoyed a locational advantage for shipping boxed beef to Mexico and would likely enjoy the most immiediate benefits from NAFTA.  Findings from the NABT model also revealed that other major U.S. surplus beef producers as Kansas and Nebraska are poised to compete for the Mexican beef market by possessing non-shipment opportunity costs which were less than $1.00 per hundredweight.  These results suggest that if Kansas and/or Nebraska were to discount specialty beef cuts, dark cutters, etc., by $1.00 or more per hundredweight under prevailing market prices for such items, other things equal, they could compete with the Texas-Oklahoma Panhandle or Colorado for the Mexican boxed beef market.  South Texas exhibited a strong potential for entering the Mexican HRI beef market with a non-shipment opportunity cost of $0.06 per hundredweight followed by the Texas-Oklahoma Panhandle, West Texas, New Mexico and Colorado.  These results reflect primarily the competitive potential of U.S. beef producing regions for the higher quality beef demanded by teh Mexican tourist markets and by Mexican wholesalers/retailers catering to the more affluent Mexican consumers.

The immediate post-NAFTA impact upon beef trading between the U.S. and Canada revealed that Alberta, the largest beef producer in Canada, had a locational advantage for shipping boxed beef and HRI beef to the U.S. Pacific Northwest and West Coast markets rather than to the Eastern Canadian markets in Ontario and Quebec.  Colorado, which has a locational advantage over Alberta for the deficit West Coast beef market, the nearby Western States, and the Texas-Oklahoma Panhandle are major competitors for the West Coast beef market with Alberta.  The NABT model further revealed that beef deficit markets in Eastern Canada as Ontario and Quebec could realize cost savings by importing HRI beef from the U.S. Northern Plains states and from Nebraska.  The deficit Quebec boxed beef market also looked Southwest primarily to Minnesota-Wisconsin and also to Iowa for boxed beef supplies.  Thes findings suggest that Alberta, which is located substantially closer to the deficit U.S. West Coast beef market as compared to the deficit Eastern Canadian market, will become a major competitor for the West Coast beef market that prior to NAFTA were supplied primarily by U.S. beef producers located in Colorado, nearby Western States, and the Texas-Oklahoma Panhandle.  Eastern Canada will likely become more dependent upon U.S. suppliers of boxed beef and especially HRI beef since labor and fabrication costs are lower in the U.S. compared to Canada.

In addition to the pre-NAFTA and base post-NAFTA models the study developed a series of 24 alternative scenarios depicting changes in population and income, wage rates, technology levels, beef production and distribution costs which were systematically incorporated into the base post-NAFTA model to estimate the impact upon regional competitive positions, optimal markets, and least cost distribution routes among the NAFTA trading partners.  Given the prevailing beef production, economics, consumption and demographic conditions which existed upon implementation of NAFTA on January 1, 1994, and incorporation of selected scenarios described above, some major impacts of NAFTA may be summarized as follows:
 

• The Texas-Oklahoma Panhandle and Colorado have a locational advantage for shipping boxed beef to Mexico over the other major surplus beef producers in North America.

• Kansas and Nebraska are poised to compete for the Mexican beef market with the Texas-Oklahoma Panhandle and Colorado, but have about a $1/hundredweight locational disadvantage.

• South Texas has substantial competitive advantage over other U.S. and Canadian surplus HRI suppliers for the Mexican HRI market.

• Alberta, the largest producer of surplus beef in Canada, has a greater competitive and locational advantage for the U.S. Pacific Northwest and West Coast Markets than it does for the deficit Ontario and Quebec markets.

• The Northern Plains, Minnesota-Wisconsin, Nebraska and Iowa enjoy a competitive advantage in supplying deficit boxed beef and HRI beef requirements to the Manitoba, Ontario and Quebec markets.  U.S. HRI fabricators/suppliers generally had a competitive advantage over Canadian HRI fabricaotrs/suppliers because of lower labor costs in the U.S. compared to Canada.

• Increased beef demand inMexico due to growth in population and income, without compensating increases in beef production, would encourage increased beef shipments from the U.S. -- especially the Texas-Oklahoma Panhandle and Colorado.  Increased beef shipments to Mexico by the Texas-Oklahoma Panhandle and Colorado would, in turn, open up U.S. markets formerly supplied by the Texas-Oklahoma Panhandle and Colorado to other surplus beef producers as Kansas, Iowa and Nebraska.

• Increases in Mexican beef industry wage rates of 50 percent or greater, without compensating increase in technological efficiencies impacting output per manhour, could provide a relatively strong comeptitive advantage for the Mexican HRI market to regions as South Texas where wage rates are also relatively low along with existing technological efficiencies in beef fabrication.

• The NABT model revealed that if beef production were to increase in Northern Mexico to the extent that Mexico became a surplus beef producer, Northwest Mexico would become a strong competitor for the Southern California beef market.  Northeast Mexico, on the other hand, would find it difficult to compete with the Southern and Central Plains surplus beef producers for the nearby deficit Texas and Florida beef markets.

• Increased beef production in the 13 major U.S. cattle feeding states, other things equal, would have minor impacts on changes in optimal beef distribution routes within NAFTA other than increases in volume of beef shipments.

• Increased beef production in Alberta and Saskatchewan would result in increased competition by Alberta for the U.S. Pacific Northwest and West Coast beef markets.

• Given 1992 fabrication, packaging and merchandising budgets, centrally prepared vacuum packaged beef was not a viable option for any regions in Mexico.  Vacuum packaged beef was a potentially vialble option for some of the case-ready beef for those regions in the U.S. and Canada with relatively high retail labor costs provided merchandising and/or packaging efficiencies were introduced to offset consumer resistance to change and the associated packaging costs.

• Given 1992 production, economic and beef industry technological levels, the NABT model revealed that although the Mexican beef industry enjoyed relatively low industry wage rates, it was not a strong competitor for the U.S./Canadian beef markets since Mexico was a deficit beef producer with generally lower levels of beef industry technological advancements than the U.S. or Canada.

• Although Western Canada, especially Alberta, has a locational advantage for shipping surplus beef to the U.S. West Coast, Eastern Canadian Provinces will likely be increasingly dependent on U.S. surplus beef producing regions as Nebraska, Kansas, Iowa, North Dakota-South Dakota, and Minnesota-Wisconsin for deficit boxed beef and, especially, HRI beef requirements.

• Temporary disruptions in currency exchange rates within NAFTA countries, as occurred in Mexico in early 1995, can have several major impacts.  Given the Mexican peso's loss of value relative to the U.S. dollar, costs of U.S. beef products flowing into Mexico become relatively higher priced to Mexican consumers wihch discourages purchases of U.S. products by Mexican consumers.  Conversely, shipments of Mexican products as feeder cattle to the U.S. are relatively lower priced to U.S. buyers during the period when the peso loses value relative to the dollar, which encourages U.S. producers/firms to purchase the cheaper Mexican products.