Mike Miller, Cattle-Fax chief operating officer, and Paul Clayton, U.S. Meat Export Federation (USMEF) senior vice president, provided a snapshot of the cost, quality, demand and profit picture for U.S. cattlemen during the 2008 BEEF Quality Summit.

“This industry has changed more in the last 24 months than in probably the previous 10-15 years,” Miller says. “And we've got more changes ahead of us.”

His main concern during these uncertain times is for cow-calf producers. “Without the cow-calf producer, we don't have an industry,” Miller points out. As calf prices tanked during fall 2008, a time when most producers market their crop, it didn't look like cow-calf producers would average a profit in 2008 (see Fig. 1).

The great hope is the export market. Reassuringly, “many consumers worldwide prefer the taste of U.S. beef compared to their local or other meats,” Clayton says.

Cost structure increasing

Cost is likely a sore subject for most people in the cattle business. The price of corn doubled, and in some cases tripled, during the last 24-36 months. Some producers couldn't make fertilizer pencil. Comparing input prices in 2008 to 2000, crude oil was up 156%, pasture 135%, corn 132%, nitrogen 128% and hay 90%. Yet when these costs were examined in mid-2008, the average price for a 550-lb. steer compared to eight years ago was only up 12%.

In 2005, the beef industry's production system breakeven was between 65-75¢/lb., figuring in cow costs, the cost of adding 200 lbs. during backgrounding and the cost of the 550-lb. gain in the feedyard. Excluding margin in both scenarios, breakeven today is 90¢/lb. Figure another 10¢/lb. for natural programs.

“We've gone from $350/head profit to share between the production segments to being lucky to break even,” Miller says.

In order to get $350 of profitability back in the system, Miller says the boxed beef cutout would have to average $200, fed cattle prices would need to average $122/cwt. and retail beef prices would need to increase by 20%.

Cattlemen have seen temporary cost relief as the result of the economic slowdown. In November, corn was down 18%, but feeder cattle and live cattle contracts were also lower (see Fig. 2). Despite the temporary relief, Miller believes corn is in a long-term uptrend from a price standpoint — anywhere from $4/bu. to $8/bu. — so don't expect it to drop back to $2.50/bu. anytime soon. Now that harvest is finished, he believes corn will rebuild momentum from a price standpoint.

“We've created additional demand for corn here in the U.S. each and every year at least through the year 2015,” Miller says. “So for at least the next seven years, corn demand domestically is going to increase at a time when it's increasing around the world.”

All this has transpired during a run of 6-7 years of record-large corn crops in the U.S. Any crop failure will bring corn to a new price level.

Framing up the cost discussion, Miller says, “Our higher costs are here; we think they're here to stay. We might get some relief in different components of our cost structure, but we don't see a lot of big relief coming anytime soon.”

Demand is slowing

In the short term, the financial crisis the last few months of '08 has slowed beef demand. The first indicator is consumer spending — specifically, buying habits have changed. A second indictor is business spending, particularly from foodservice and high-end restaurants.

“The foodservice industry is under tremendous strain,” Miller says. “They are wonderful buyers of our Choice and Select middle meats.”

In August, inflation was up 5.9%; Miller expects it will increase. At the retail level, beef prices have inflated over the last seven years — now all food items are under pressure to move higher. This will make it nearly impossible to extrude another 20% increase at the retail level in order to return profitability to the cattle industry.

Miller believes the changing consumer will impact the direction of beef quality. Consumers have gone from saying: “This is what I want, produce it for me and I'll buy it.” Today, they're thinking: “Can I afford what I want?”

A component to watch in the demand scheme is beef's competing proteins, Miller says. The pork and poultry industries have seen increased costs, but, unlike the beef industry, haven't seen an increase in prices paid for their product.

“The environment out there is extremely competitive for U.S. consumers' dollar and their attention,” Miller says. He expects the poultry industry to cut back on production to increase prices.

The bright note in demand has been the export market, where 10-15% of U.S. production is merchandized.

“We could sell U.S. beef for high prices overseas until October, then the value of the dollar began to increase,” Clayton says. “So it's a little tougher, but margins are very good.”

Prime ribeyes sold domestically in October at $12/lb., $9/lb. for Choice; overseas, these products averaged $20-$60/lb. While these middle meats don't often get exported, short ribs almost exclusively are. U.S. short ribs in Asia sell for $50/lb. If there were any left in the U.S., they would retail at $4/lb.

USMEF economists estimate that by 2011, 92% of short ribs will go out of the U.S. — in other words, every beef produced will contribute its short ribs to Asia. Variety meats are another low-value, high-margin product.

Two boosts in demand in '09 could come from the reopening of the South Korean and Japanese markets. Clayton says this will be dependent upon the new USDA administration and U.S. trade representative.

“We're still not fully opened in our biggest market, which is Mexico,” Clayton says. “We need to get to the new administration and lay out negotiating plans to get all the markets fully open.”

Quality — more Choice product

In 2008, cattle grading Choice increased 4%. Miller's hypothesis for the sudden increase: Recalibrating the grading system to match what it will look like once new plant technology comes online.

“We're producing a lot more Choice product relative to Select in 2008,” Miller says. The result is a narrowed Choice/Select spread. He believes it will take the market a few years to deal with the imbalance, although 2009 should be better than the $5.50 spread seen in 2008.

“One of the things we use to send signals to produce high-quality product isn't going to work as well over the next couple of years,” Miller says.

Yet, Cattle-Fax is very positive about long-term global demand for high-quality U.S. beef. Miller says it's important to not only focus on what the U.S. customer wants and is willing to pay for, but on global consumers also.

Clayton agrees, pointing to an array of quality perceptions held internationally. Everything from natural, organic, free-range, non-hormone treated to leanness and nutritional content, to Kosher and Halal. But the biggest perception of quality is what USMEF exploits: “The value of feeding grain. That differentiates U.S. beef from everybody else in the world,” Clayton says.

It's not only what cattle are fed, but also production practices, postmortem procedures, gender and breed influences. “We promote a grain-fed product that has high food-safety standards, quality management and consistent supply,” Clayton says.

Profit from efficiencies

“We've always had this balancing act between quality and the economic realities of wanting to produce that quality product,” Miller says. Two years ago, there was $250-$350/head shared among cow-calf producers, stocker operators and feedyards. Today there is $0.

Miller says costs will be cut where they can be, and cattle will be expected to produce as efficiently as they possibly can.

“Production efficiencies have probably taken a step or two or ten forward in the list of things we evaluate compared to what we were thinking of a couple of years ago,” Miller says.

Could this approach impact quality? It might, but quality won't be totally disregarded, in Miller's opinion. There will still be an emphasis on adding value to calves by branding and differentiation, and these opportunities should be evaluated each year.

2009 beef industry sized up

Mike Miller, Cattle-Fax chief operating officer, gives a synopsis of today's beef industry.

In the last few years, the cattle cycle hasn't held true. From 1999-2006, cow-calf producers were highly profitable, but it didn't lead to expansion. A myriad of factors play a role — everything from weather and land values to urban sprawl and government policy.

Miller says given the cost environment today, the beef herd won't expand anytime soon. In fact, Cattle-Fax estimates that Jan. 1, 2009 inventory will show that the cowherd contracted 2% during '08. Miller anticipates losing another 2-3% in the next couple of years.

“Our factory is shrinking,” Miller says. “These costs have put producers in a position where they've found a better use for their money.” Yet, he says output will remain relatively stable, with increased imports from Canada and Mexico and carcass weights getting heavier each year.

“We still produce an awful lot of beef even with fewer cattle,” Miller says.

Given those factors, Cattle-Fax expects per-capita net supply to decrease. Starting with how much beef is produced in the U.S., subtracting the amount exported, adding imported beef and dividing by the population is the basis for per-capita net supply (Fig. 3.) “U.S. consumers will see less beef next year,” Miller says, unless trade components change significantly.

A smaller supply means reduced per-capita consumption. Miller speculates U.S. consumers could see less than 60 lbs. of beef in the next few years if export-market strength returns and the U.S. dollar remains relatively weak.

Cattle-Fax forecasts:

  • Cattle numbers will decline.
  • Per-capita beef consumption will shrink.
  • Beef exports will grow.
  • Retail, wholesale and fed prices will slowly move higher.
  • Industry consolidation will accelerate.
  • Beef quality, branding and differentiation will be a focus.
  • Production efficiencies will be increasingly important.
  • The global market is here, and here to stay.