Stagnant corn demand and cheap corn prices begat modern beef production. The need for quality protein to feed a growing domestic population blown increasingly westward by the Depression and Dust Bowl years also played a hand in the evolution.

Today, increasing feed costs due to increasing corn demand — both natural and artificial — are destroying a least some of beef’s supply chain, even as the population continues to grow.

That’s the simplest way to sum up the forces that built the national beef cowherd to a peak of 46.9 million head in 1975, and then systematically chipped it down to today’s 29.3 million head (as of Jan. 1, 2013). That’s 37% fewer head in almost four decades.

Such an explanation is oversimplified, of course. But economics ultimately go a long way in describing the size and shape of the current beef industry.

It is economics that make chiseling a profit from cows so difficult.

“No one can start a ranch business with ranch earnings and expect to earn $60,000 before self-employed and income taxes,” said James McGrann, a noted agricultural economist, a couple of years ago. “With a 2% return on investment in ranching, it would require $3 million in equity. Assets earning 2% can service only limited debt. The cow-calf sector is an investment business and return on investment is what attracts capital for growth. In reality, less than 4% of the beef cow-calf operations make their sole living from the cow-calf enterprise.”

Economics — high input costs — and historic cattle feeding losses on a cash basis continue to hamstring cattle feeders. Most recently, these economics appear to have spawned some reverse migration of the sector (or at least the cattle) back to the Corn Belt.

High input costs relative to short cattle numbers and lackluster demand continue to pressure beef packers. This January, Cargill idled its facility at Plainview, TX. It boasted a 2,400-head daily capacity.

“The U.S. cattle herd is at its lowest level since 1952,” John Keating, Cargill Beef president, explained at the time. “Increased feed costs resulting from the prolonged drought, combined with herd liquidations by cattle ranchers, are severely and adversely contributing to the challenging business conditions we face as an industry.”

 

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Presumably, economics also partly explain the decline in quantity of beef demanded by consumers over time.

The U.S. population has increased about 48% since 1975; the population totaled 314 million in 2012. But beef production remained fairly flat during that span. It was technology and management that enabled the industry to provide a similar level of production with significantly fewer cows.

Demand itself has proven extraordinarily resilient, but the sheer price of beef appears to be altering consumer habits, pushing some to lower-value beef, and others out of the market altogether.

As it is, ground beef accounts for about half of all beef sold at retail. And about half of domestic consumption occurs through retail, with the other half moving through food service.

Growing in a smaller industry

In order to remain economically viable, a minority in each industry segment has grown larger over time and accounted for more production.

Only 9% of beef cattle operations have cowherds of 100 head or more and control 51% of the nation’s herd. Conversely, 80% of beef cow operations have herds of 50 or fewer cows, accounting for 27.7% of the national herd.

Meanwhile, a handful of cattle feeding organizations churn out the lion’s share of the nation’s fed cattle. Four beef packing companies account for 80% of annual fed-cattle slaughter. And, in 2009, the 20 largest food retailers accounted for 64.2% of all U.S. grocery store sales, up from 39.2% in 1992.

Saddled to a different pony, by and large, the beef industry remains a commodity business driven by pounds, narrow margins and the necessity to lower costs.

Arguably, more vertical cooperation exists between various industry sectors than at any time in history, but the linkages remain few and tenuous.

New market targets and valuations have turned up. Alternative marketing arrangements have emerged that enable folks in each sector to reduce cost and manage risk. Some feedlots and packers have worked together to market branded-beef products. Others have tried to identify and share value with cow-calf producers, regardless if they retained ownership in the cattle.

Staggering sums of money have been lost by a few entities trying to create closed-loop, fully integrated systems. A few hardy souls, such as U.S. Premium Beef, developed successful models to value beef closer to the consumer and price the cattle to producers accordingly.

Mostly, though, the trade remains based on immediate need and long-term relationships. Sheer scope and equity requirements are part of it.

The national beef cowherd of 29.3 million head is dispersed among 729,000 or so different operations. There are currently about 2,140 feedlots with 1,000 head or more capacity. In 2009, there were 210,000 traditional food stores in the U.S., according to USDA’s Economic Research Service. There are 980,000 restaurant and food service outlets, according to the National Restaurant Association.

Industry fragmentation is part of it. There are cow-calf producers, stocker operators, feedlots, seedstock producers, packers, wholesalers, retailers and food service. Few participants retain ownership in the cattle or beef product beyond a single sector.

All of this occurs ahead of more than 300 million potential domestic consumers getting a crack at buying the finished product.

International demand is the key

Going forward, a couple of things seem certain.

  • First, given the declining quantity of beef demanded by domestic consumers, logic suggests any opportunity to grow the U.S. beef business significantly rests on the shoulders of international consumers. By March of this year, U.S. beef exports were accounting for 9% of U.S. muscle-cut production and $222.20/head of fed-cattle slaughter.
     
  • Second, maintaining domestic demand means coming to grips with an evolving population and a new generation of market-makers. The millennial generation (born 1980-2000) numbers 80 million; they’re a larger group than the baby boomers. According to various research, millennials like beef, but few of them know much about cooking it.

Overall, the average U.S. household is getting smaller. Traditional families (a married couple with children) accounted for 30% of all U.S. households in 1980. This figure was 24% in 2000, and it’s expected to be just 17% by 2020.

The U.S. population is growing older and more ethnically diverse, too. By 2056, for the first time in history, the U.S. Census Bureau expects the population ages 65 or older to outnumber those ages 18 or younger.

In addition, the U.S. is projected to become a majority-minority nation for the first time in 2043. Minorities represent 37% of the U.S. population currently; they’re projected to make up 57% of the population in 2060.

Those are all trends that a changing U.S. beef industry must adapt and react to.
 

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