| Posted March 9,
2006: With last December’s reopening of the
Japanese market to US beef we thought that just maybe the
BSE (bovine spongiform encephalopathy or mad cow disease)
story was winding to a close. But our hopes were dashed with
two late January announcements. A US packer included spinal
column material in a shipment of veal to Japan resulting in
the Japanese once more closing their market to US beef. The
second story was the discovery of another Canadian animal
with BSE.
But that wasn’t the worst of it. Mixed into all of
this was a case of foot-in-mouth disease on the part of a
USDA official who was reported by the Japanese press to have
said “that there was a higher probability of being hit
by a car while going to buy beef at a store than being harmed
by eating beef infected with mad cow disease.”
While that may be true from a statistical perspective, such
a statement does not communicate any awareness of how seriously
the Japanese take the problem of BSE. One can get by with
ridiculing one’s enemies, but that is hardly the way
to treat a customer who prior to the discovery of BSE in one
cow in December 2003 purchased $1.4 billion worth of beef
a year.
As we review this whole saga from its start in late 2003,
it appears to us that the US response to Japanese concerns
has been ill-considered at best. From the beginning US officials
have treated the issue as if the Japanese response were a
matter of trade protectionism on their part – protecting
their domestic beef market – instead of treating it
as a reflection of a real concern on the part of the Japanese
public.
The result has been to run the risk of driving the Japanese
beef consumer into the arms of one of our export competitors,
Australia. While US officials did everything they could to
force the Japanese to back down on their demand that every
animal be tested for BSE, the Australians were moving into
the market and capturing a part of the market share that had
been occupied by US beef producers. The wrangle lasted for
nearly two years giving the Australians plenty of time to
convince Japanese consumers of the quality of their product.
Much of this could have been avoided if the USDA and the
US meat industry had remembered the old adage, “The
customer is always right,” even if a majority of other
market participants disagree. The traffic death toll matters
little if what the customer is concerned about is BSE.
Within a month and a half of the discovery of BSE in the
US herd, Creekstone Farms submitted a request to USDA to be
allowed to conduct private BSE testing at their plant in Arkansas
City, Kansas. The Japanese were willing to cover the extra
testing cost and open their market to Creekstone’s product.
If the USDA had permitted Creekstone to test all of the animals
it sent to Japan, US exports could have resumed quickly giving
the Australians little time to move into that market.
Instead the USDA waited six weeks before refusing Creekstone’s
request. In part the USDA argued that if they allowed one
company to test for BSE in order to sell into the Japanese
market it would force all other companies wishing to sell
to the Japanese to test for BSE as well. And if it became
the norm a fear was that domestic consumers may begin to demand
testing as well.
What an interesting perspective. One company makes an innovation
like painting cars red, yellow, green, and blue and pretty
soon all car companies will have to do it, even though black
cars work just as well as green ones and green paint is a
little more expensive. Ford ignored consumer preference and
ended up permanently losing market share.
Having been forced to buy other brands to get the color they
wanted, consumers developed loyalties to these companies.
When growing up we knew several generations of families who
only bought Plymouths or Chevys or Pontiacs.
Other innovations fall by the wayside like the huge fins
on the back of 50s and 60s Chrysler Corporation vehicles.
Consumer preference is the way the market sorts out various
innovations.
Our guess is that if the USDA had quickly approved Creekstone’s
request the market interruption for US beef would have been
less than three months, giving little time for competitors
to establish themselves in the market. In addition it would
have signaled our attentiveness to the concerns of Japanese
consumers.
Instead, we are once again at loggerheads with Japanese agricultural
and trade officials – hardly a position from which we
are likely to quickly recapture a market worth $1.4 billion.
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