Effects Of Animal Identification On Cattle Market Structure Prepared by: Darrell R. Mark, Ph.D. Asst. Professor & Extension Livestock Marketing Specialist Department of Agricultural Economics University of Nebraska-Lincoln Web: Western Center for Risk Management Education Western Extension Marketing Committee

Structural Change Is: 1.Change In Number Of Firms 2.Change In Size Of Those Firms 3.Change In Geographic Location Of The Firms Because NAIS Continues To Be Developed & Implemented, Impacts On Beef Industry Structural Change Is Currently Uncertain

Cow-Calf Sector

U.S. Beef Cow Operations, 2003 Average 41 Cows Per Operation Large Number Of Small Operations Over 40% Of Operations & 60% Of Cow Herd In Western States Beef Cow Operations Beef Cow Inventory 1-49 Head Head Head 500+ Head Total 620,55095,82570,3455,330792,05032,860, %12.1%8.9%0.7%100% Source: USDA-NASS

Costs Will Vary For Operations Some Will Not Participate Unless ID Becomes Mandatory –No Increase In Costs, But May Jeopardize Market Access Some Will Only Obtain Premises ID Number, But Not Do Individual Head ID –Will Keep Costs Low –Potential Benefits Would Be Low

Group/Individual Head ID Small Herd Sizes –Variable Costs (Tagging, Scanning): $2-5/head –Fixed Costs (Electronic Readers): $4-25/head –Costs Per Head Will Decrease With Increasing Herd Size Source: Blasi et al.

Third-Party Technology Provider Collect Traceability Information Required By NAIS & Report It Collect Production & Management Information –Birth Dates & Weights, Vaccination Records, etc. –Provide Summary Reports & Benchmark Information To Producer –Beneficial Only If Producers Use It To Make Better Production Management Or Marketing Decisions

Costs For Third-Party Providers Depends On: –Amount & Type Of Hardware & Software –Individual Tags & Recordkeeping Charges –Decreases In Technology Costs Over Time

Small Sized Operations Three Alternatives 1.Contract With Third Party 2.Forgo ID As Long As It Is Voluntary & They Maintain Market Access 3.Cooperatively Own Hardware & Software With Other Producers As Long As NAIS Is Voluntary & Technology Neutral, Costs Should Remain Low (<$5/head)

Medium & Large Sized Operations Larger Herd Sizes Can Distribute Fixed Costs Over More Cattle Medium Sized Operations Must Determine Whether To Use Third-Party Provider Or Invest Themselves

Structural Change All Operations Will Adapt In Least-Cost Manner –Each Size Has Advantages & Disadvantages Structural Change Will Be Led By How Producers Use The Individual Head Production Records –Not Required By NAIS –Better Tracking Of Productivity May Provide Comparative Advantage, This Return Could Be Reinvested In Operation To Increase Its Size

Market Access & Price Differentials If Program Is: 1.Voluntary 2.Some Producers Don’t Participate 3.There Are Benefits To ID Stocker Or Finishing Operations Or Packers Will Eventually Discount Cattle Without Tags Or ID Records Or Possibly Not Buy Them

Liability If Improved Traceability Exposes Producers To Additional Liability For Quality Or Safety, Smaller Sized Operations Would Be More Impacted By This Risk Geographic Differences May Exist Depending On State Laws To Provide Protection

Seed Stock Sector

Structural Changes Likely Minimal Because Some Type Of Individual ID Is Already Used –Don’t Need Technology To Quickly Read Large Numbers Of Cattle NAIS May Provide A Way To Verify Breeding & Genetics Of A Particular Line That Might Have A Valuable Attribute

Stocker Sector

Stocker Operators NAIS Guidelines Would Have Cattle Tagged Before Being Sold, So Stockers Should Not Have These Costs, At Least After System Is Functioning Buyers Of Cattle Have Responsibility To Report The New Location Stocker Operators That Use Multiple Premises Sites May Have To Report Movements That Do Not Include Change Of Ownership

Sourcing Cattle From Multiple Locations Results In Cattle With Different Types Of Tags & Different Technology –It Is Hard To Make The Different Technologies & Software Work Together Seamlessly –Will Stockers Have To Re-Tag Or Buy Cattle With Only One Type Of Tag? Some Cattle Purchased Will Continue To Be Serviced Throughout Their Life By The Original Third-Party Provider

Feeding Sector

Feed Yard Operators Have Same Issue With Multiple Sources Of Cattle & Different Technologies –To Get Useful Individual Head Data, They Need All Information Aggregated Into One System More Difficult With Producers Retaining Ownership Have Incentive To Build Relationship With Feeder Cattle Suppliers –Lower Costs, Consistent Technology, Liability Protection

Costs By Size Small Yards Likely Need Only One Panel Reader & One Hand-Held Reader Large Yards May Need Multiple Panel Readers & Hand-Held Readers –Can Spread Hardware, Software, & Technology Costs Across More Cattle & Pounds Gained To Create Economies Of Scale –If They Realize A Benefit From The Data Collected, They Will Likely Gain The Most

Implications

Vertical Coordination Animal Identification Creates Strong Incentive For Linkages Between Cow- Calf, Stocker, & Finishing Sectors That Would Share Information –Easier Liability Transfer –Do Business With As Few Firms As Possible May Reduce Liability & Improve Product Quality & Safety

Sales Method Direct Sales/Private Treaty Will Be Easier To Transfer & Exchange Information –Fed Cattle Market Will Be Less Affected Central Markets Present Numerous Issues For Traceback

Public vs. Private Benefit Public Benefit From 48-Hour Trace back –Avoid Negative Demand Shock From Animal Disease Problem Private Benefit From Using “Extra” Production Management Data –The Greater These Benefits, The More Disparity Between Producers Using Individual Animal ID Data & Those Who Do Not