USDA has announced the final rules for Country of Origin Labeling (COOL) to be effective on March 16, 2009. Most of the trade policy debate related to COOL has been with cattle and hog producers in Canada and feeder cattle producers in Mexico. Changes in the final rules have elicited a positive response from Canadian officials, but have left unresolved concerns about the impacts on livestock producers and consumers in the three countries.

In early December Canada filed a case with the WTO asking for consultations with the U.S. due to potential economic harm to cattle and pork producers from the interim final rules implemented on September 30. Mexico also filed a separate case. The final rules are slightly revised from the interim final rules and Canada and Mexico will need to file new cases. Canada has chosen to hold off until markets have a chance to respond to the final rules.

The attitude change in Canada appears to be the results of intense discussions between Canadian officials and counterparts at USDA and USTR, particularly as it relates to “C” animals. Under the interim final and final rules “A” animals are born, raised and slaughtered in the U.S. and “B” animals are born in Canada or Mexico and fed out and slaughtered in the U.S. The “A” muscle cuts carry the USA label and the “B” cuts are clearly products of the U.S. and Canada or Mexico. The “C” animals are born and fed in Canada or Mexico and imported into the U.S. for immediate slaughter. Under the interim final rules it was thought that “C” animals could not be slaughtered on the same day in a plant with “A” or “B” animals and receive a label with the U.S. and the other country as sources. The final rule allows that labeling. From the Canadians point of view this change will allow more opportunities for Canadian animals to be slaughtered in plants that also slaughter other animals and reduce price discounting for Canadian animals. If that works in practice, it should become evident in the weeks ahead.

While the Canadians are positive about the final rule, groups in the U.S. that have pushed COOL are less enthusiastic. They see the “C” animal solution as a way to water down the impact of COOL. A slaughter plant could choose to include a few “C” animals each day and label all of the retail products as a product of the U.S. and Canada and/or Mexico. This could cause consumers and perhaps retailers to conclude that this is the only meat available or that it is the same as meat with the U.S. label. If U.S. consumers have a strong preference for meat labeled only from the U.S. that will need to be communicated in the marketplace to retailers and meat suppliers to encourage the production of U.S. labeled meats.

The final rule may not be the final rule for long. Some members of the House and Senate in rural and urban areas have supported COOL in response to constituent pressures. If the final rule does not result in the outcomes those groups desired they will likely go to Congress or the Obama Administration to push for further changes. The new Administration may face an early test of its approach on sensitive trade policy issues.

Beef and hog producers from Canada have not released new estimates of the actual harm they are suffering from lower market prices. The Canadian Cattlemen’s Association continues to use a $90 per head estimate first mentioned last fall. In the U.S., USDA does not break out market prices for live animals or for meat that would give a clear indication of price differences for animals or meat based on the COOL regulations. Clear market price differences would be the best measure of lost income due to COOL. Price differences may be somewhat muted because COOL does not apply to foodservice and restaurant sales and Canadian products could be shifted to those outlets. Also, from October 1 to April 1 USDA is in an “education and outreach” period for the new regulations with enforcement beginning in April when the full impact of COOL may be felt.

According to data from the Agricultural Marketing Service of USDA shipments of feeder cattle to the U.S. from Canada were about the same in 2008 as in 2007. Movement to the U.S. of steers and heifers for immediately slaughter were down about 25 percent, but 2008 was only the third year of full trade since limits were imposed in late 2003 after BSE was discovered in Canada. Feeder cattle from Mexico were down about 30 percent in 2008 from 2007, which is part of a down trend that began in 2005. Feeder pig shipments from Canada were at a six-year high, but hogs for slaughter were at a six-year low. The decline in the value of the Canadian dollar versus the U.S. dollar in the last half of 2008 may have encouraged more exports of meat to other countries rather than live cattle to the U.S. for slaughter. Cattle placed in feedlots in Canada increased in October and November of 2008.

The trade policy part of the COOL debate will come down to whether animals from Canada and Mexico have been disadvantaged by U.S. policies. COOL is not unique to the U.S. A 2003 report from the General Accounting Office found that of 57 trading partner countries surveyed 48 required COOL for one or more products covered by U.S. COOL, 41 required labeling of one or more meat products and 44 required domestic products to be labeled. The issue is the market impact of the regulations.

The larger economic policy issue is the cost of COOL for producers and consumers in the three countries. NAFTA allows for market integration across the three countries. The beef and pork industries organized to utilize the availability of feed, animals, processing plants and consumers. Two-way U.S. trade for livestock and meat with Mexico and Canada was $8.1 billion in 2008, with $2.6 billion of live animals shipped to the U.S. If COOL results in a loss of economic efficiencies, producers and consumers will be the losers.