Are we willing to listen to what the economics are telling us?
Randy Blach, executive vice president of Cattle-Fax, posed that question recently to participants at the Limousin breed's Visions Symposium. But, he and other industry leaders on the program could have been posing that question and accompanying comments to every cattle producer — purebred or commercial — in the nation.
Attrition within all segments of the beef production industry during the past three decades has occurred for a simple reason: economics signaled it had to happen. Rather than being part of some Communist, New World Order conspiracy, concentration and consolidation have occurred for the same reason. And, the future looks no different.
For instance, economics have helped push the industry's cow-calf operations closer to cattle feeding and beef packing operations. There were 30.2% of the nation's beef cow operations in the Northern Plains and Southern Plains in 1986; their numbers have increased to 36.7% today.
For clarity, start with Montana and Wyoming and then draw a straight line south, including New Mexico. On the eastern border, draw a line from North Dakota through Kansas, Oklahoma and Texas. Throw in the Southeast (from Arkansas to West Virginia as a northern boundary), and 65.7% of cow-calf operations were in the two regions in 1986, 70.3% today.
According to Blach, the nation's largest feedlots (greater than 32,000-head capacity) have increased marketings the most since 1971, while the smallest (less than 1,000-head capacity) have decreased marketings the most. At the same time, feedlot bunk capacity has continued to increase — 19% from 1990 to 2001. Not coincidentally, the number of packing plants harvesting more than 50,000 head/year has declined from 130 in 1985 to about 60 in 2003.
Likewise, more marketing has moved from cash to grids, formulas and other marketing arrangements. From 1995-2002, the percentage of fed cattle trading outside the cash market increased from about 17% to a little more than half. While tighter supplies and economics associated with them pressed that percentage down in 2003-2004 (still more than 40%), Blach believes at least 70% of fed cattle will trade outside cash within the next five years or so.
Retail has a similar story. The 20 largest food retailers today account for 64.7% of food sales (the top 10 account for 55.1%). “We think the top five to seven will control 65-70% of the retail market in the next five years,” Blach says.
Are you beginning to see a picture? Economics are driving retailers to attain economies of scale. As they acquire size, the market signals they send are demanding that their packer suppliers grow large enough to meet their needs. In turn, packer buyers want to procure their supplies from fewer and larger feedlots.
Besides volume, the trend has everything to do with wanting to know more about the supply being acquired. Such efforts are more manageable with fewer suppliers than more.
Pointing that up, Blach says branded beef products (not counting store brands) currently account for about 10% of annual fed-cattle production, and he expects it to grow significantly by the end of the decade. For one thing, Wal-Mart has won the price battle; its competitors are left to wage the war for market-share the old-fashioned way — product differentiation. Beef is one of the few opportunities retailers have to differentiate and add value to a commodity product.
Does that mean cow-calf producers have to grow in scope to fill the needs of fewer, larger feedlots? Not necessarily. But it signifies more discounts will be levied on cattle unable to fit market specifications of fewer packers who likely will become engaged in more vertically coordinated systems with retailers and food service.
In fact, Blach says the calf and feeder markets the past few years have already served up more price variation for the same weight, same class cattle sold in the same geographic locations at the same time. He expects the price gap to grow.
The drought and export disruptions that combined to delay the end of the last cattle cycle haven't erased the trends in place before the delay occurred. As the cow herd begins to expand, which it is, these trends will become more magnified.
So, the urgency in all corners of the industry comes in evaluating whether you and your product fit into a system that will increasingly demand cattle fit the window of acceptability.
The good news is the window hasn't changed much in three decades. The market wants high yielding (Yield Grade 1-2) cattle that measure at least Select. There's no room for Standards or YG 4s.
The bad news is average quality grades have remained unchanged and the percentage of YG 1-2 carcasses has declined; this at a time when the industry has more information and tools than ever.
Again, are we willing to listen to what the economics are telling us?