Industry economics will continue to remain challenging, but opportunities are there for the finding.
The theme of the BEEF seminars at the World Ag Expo in Tulare, CA, this year was “Profitability in a Turnaround Economy.” That's a challenging thing, given the uncertainty still permeating the U.S. and world economies.
But that doesn't mean it isn't possible, according to the three speakers who addressed cattlemen during the world's largest ag expo in January.
Used to be, you could manage according to the cattle cycle, making annual plans with your cow-calf operation. Not any more, says Jim Robb with the Livestock Marketing Information Center in Denver.
“Manage and evaluate in three-month periods, not cattle cycles,” he says. “Cattle cycles will still be here, but other factors will be way more important.”
That's because those other factors — unanticipated shocks to the market, ethanol and a permanent trend to a narrow Choice-Select spread — will cause price volatility to continue.
So far this decade, the cattle market has experienced three major shocks — the 9-11 terrorist bombings, BSE and, most recently, the international credit crisis; each of these events caused the cattle market to decline for four to eight weeks. “Those shocks will continue,” Robb predicts, and you need to have a plan in place when the next one hits.
Then there's ethanol. “Grain markets whipsawing the calf and yearling market will continue,” he says. “The ethanol people are making money again after a year of losing money. What are they going to do? They're going to burn corn.”
And that has the potential to hit you squarely in the back pocket. “If corn goes up 10¢/bu. year to year, a five- to six-weight steer calf in the Southern Plains, everything else being equal, will drop $1/cwt. If corn goes up $1/bu., like it did last year, calf prices will drop $10/cwt,” Robb says.
However, those shocks to the market are also an opportunity if you have the ability to carry cattle through the wreck. “If you took a calf to a yearling weight after each one of those shocks, you made money,” Robb says. “If you waited four or five weeks after the crash, you sold at the lowest price. But if you have a good forage-based program and you turned a five-weight into an eight-weight, you made money.”
Another fundamental change that Robb sees in the business is the narrowing of the Choice-Select spread. “Normally, the Choice-Select spread (at that time of year) should be about $8, and it's $2,” Robb says. “At times last year, we had no premiums for Choice over Select.”
That's because demand for higher-priced beef cuts has been dismal the last year or so while the percentage of fed cattle grading Choice has increased. Robb says Choice has historically accounted for about 54% of fed-cattle slaughter. “Last year it was 58% and now we're doing 63%,” he says, due to better genetics and instrument grading.
While the Choice-Select spread will improve once consumer demand gets better and people start eating steaks in restaurants again, Robb doesn't think the industry will return to previous levels. “Are we going to go back to a premium where the Choice cattle started bringing $20-$25 over Select? I don't think we'll get that anymore. This is a permanent change.”
Earn their trust
“The future of fresh meat is, in my opinion, verifiable attributes — things that were or weren't done, that you can't see, that are part of your story. To be sure that those attributes are actually there, we're going to have to have two things — traceability, verified by a third party.”
With that, Gary C. Smith gave BEEF seminar attendees a look at the future of beef marketing.
“We are moving from a commodity type of production to a branded beef kind of industry because that's where we can add more money,” says Smith, University Distinguished Professor and holder of the Ken and Myra Monfort Endowed Chair in Meat Science at Colorado State University. “The idea is to create things for people who want them, so they can find them at the retail counter and pay a premium for them.”
Smith calls it “story beef” and says that for consumers to believe your story — how you produced that beef, the care and handling of your cattle, how you treated your employees, how you treat the land, among other attributes — takes third-party verification. “People have come to believe those things for which there is some kind of verification.”
But when they do believe your story, they're willing to pay for the product they want. In January 2010, 27% of all people who went into the supermarket bought something local, Smith says. That number was 15% in 2006.
“How many people bought something for which there was a welfare claim? 18%. It would be higher, but there aren't enough products that have that claim yet. It was 6% four years ago. How many people bought a sustainable product in January? 36%. And that number was 9% in 2006. So all these things are increasing in popularity,” Smith says.
What consumers want above all else is a feeling of connectedness, he says. For example, Laura's Lean beef developed an extremely loyal customer base because their customers believed Laura looked out for them, he says.
“We all want to feel like somebody has our back. We want to feel connected. And that is really what verifiability means,” Smith adds.
To see more of Smith's thoughts on traceability and verification, go to http://beefmagazine.com/animal-id-nais/1201-beef-system-traceability/index.
Two Ds are the top issues worldwide for cattlemen — demand and drought. “We can't look at the impact of the recession without looking at how it affected the global beef market as well as the domestic market,” according to Steve Kay, editor and publisher of Cattle Buyers Weekly and contributing editor for BEEF.
The extent of the recession around the globe caught everyone by surprise, especially the drop in gross domestic product (GDP), Kay says. In the U.S., it fell 2.2% in 2009. In the countries that buy U.S. beef exports, it fell 6.9% in Mexico, 2.5% in Canada, and 5.3% in Japan. The net result was that export volumes fell 8% last year.
Then there was drought, not only in the U.S. but worldwide. “Drought really cut cattle numbers in key countries,” Kay says. “And those shrinking herds really are a threat to the industry structurally, both to packers and cattle feeders. If you're a cow-calf producer, it's better news because there will be more demand for your cattle. But we've got to see better demand for beef before there's going to be stronger demand for feeder cattle.”
The good news, he says, is that forecasts are for GDP to increase in 2010, which should give consumers worldwide the confidence to again buy beef. “We're going to see an improvement in beef demand, both domestically and globally, I think starting next year.”
That paints a bright future for cattlemen, he says. “We're going to have a shortage of beef in the coming years and those people who maintain their numbers are going to be in the best position to take advantage of it. I have no doubt that the stronger demand relative to shrinking supplies will underpin a whole new price level for beef and cattle,” Kay says.
For more on Kay's comments, go to http://beefmagazine.com/beeftv/cattlemen-sustainability/.