1 K-State Research & Extension Cattle Outlook Kansas Agricultural Bankers Association April 20, 2006...

K-State Research & ExtensionK-State Research & Extension

Cattle OutlookCattle OutlookKansas Agricultural Bankers AssociationKansas Agricultural Bankers Association

April 20, 2006April 20, 2006

James Mintert, Ph.D.James Mintert, Ph.D.Professor & Extension State Leader Professor & Extension State Leader

Department of Agricultural EconomicsDepartment of Agricultural EconomicsKansas State UniversityKansas State University

www.agmanager.info/livestock/marketingwww.agmanager.info/livestock/marketing

[email protected]@ksu.edu

mailto:[email protected]


Forces Shaping Change in U.S. Beef SectorForces Shaping Change in U.S. Beef Sector

• Beef DemandBeef Demand

• International TradeInternational Trade

• Shifts in Optimum Firm SizeShifts in Optimum Firm Size

• Putting It All TogetherPutting It All Together


Beef DemandBeef Demand


A Picture of A Healthy IndustryA Picture of A Healthy Industry

U.S. Cattle InventoryJ anuary 1, 1925-1975

50

6070

8090

100110

120130

140

25 30 35 40 45 50 55 60 65 70 75Year

Million

Head

Source: USDA & K-State Research & ExtensionKSU Dept. of Ag Econwww.agmanager.info


U.S. Cattle InventoryJ anuary 1, 1975-2006

50

60

70

80

90

100

110

120

130

140

75 80 85 90 95 00 05Year

Million

Head

Source: USDA & K-State Research & ExtensionKSU Dept. of Ag Econwww.agmanager.info

A Shrinking IndustryA Shrinking IndustryResponding to a Lack of Profitability Responding to a Lack of Profitability

Current inventory is about 26% Current inventory is about 26% smaller than in 1975smaller than in 1975


Measuring Changes In Beef DemandMeasuring Changes In Beef Demand1980-19981980-1998

Annual Retail Choice Beef Demand Index

88 86 8379 76

70 6966 65 62 59 58 56 55 53 51

94

50

0

10

20

30

40

50

60

70

80

90

100

81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98Year

Ind

ex V

alu

e

Source: USDA, Dept. of Commerce & K- State Research & Extension Price Deflated By CPI, 1980 =100 for Beef Demand Index

KSU Dept. of Ag. Econ. www.agmanager.info


Measuring Changes In Beef DemandMeasuring Changes In Beef Demand1998-20051998-2005

Annual Retail Choice Beef Demand Index

52 54 56 5559

63 61

50

0

10

20

30

40

50

60

70

80

90

100

98 99 00 01 02 03 04 05Year

Ind

ex V

alu

e

Source: USDA, Dept. of Commerce & K- State Research & Extension Price Deflated By CPI, 1980 =100 for Beef Demand Index

KSU Dept. of Ag. Econ. www.agmanager.info

Beef Demand During All of ’05 Decreased About 3.6%But Demand in ’05 Was Still Up About 21% from 1998 Level


Beef Demand ShiftersBeef Demand ShiftersWhat’s been taking place recently?What’s been taking place recently?

• Growth in consumer incomeGrowth in consumer income

• New product offeringsNew product offerings

• Positive health information Positive health information

– Low carb dietsLow carb diets

– But low carb diet effect appears to have leveled offBut low carb diet effect appears to have leveled off

• Implication: beef demand could weakenImplication: beef demand could weaken

– Product innovation will be importantProduct innovation will be important


Who Benefits Most from Beef Demand Increases?Who Benefits Most from Beef Demand Increases?

– In the long run:In the long run:

• Cow-calf producersCow-calf producers

– How?How?

• Higher prices for calves & cullsHigher prices for calves & culls

– Profitability IncreasesProfitability Increases

– Rise in profitability leads to industry expansionRise in profitability leads to industry expansion


TradeTrade

• All trade is voluntaryAll trade is voluntary

• All trade is mutually beneficialAll trade is mutually beneficial

• International trade increases consumption International trade increases consumption possibilitiespossibilities


If Trade Is So Good, Why Is It Controversial?If Trade Is So Good, Why Is It Controversial?

• Free markets and free trade increase social Free markets and free trade increase social welfare (benefits outweigh costs) for society at welfare (benefits outweigh costs) for society at largelarge

• But not all individuals and groups are made But not all individuals and groups are made better offbetter off


Increases in Trade Fueled Economic GrowthIncreases in Trade Fueled Economic GrowthWorld GDP

Annual, Inflation Adjusted (2000 $'s)

10

15

20

25

30

35

40

71 76 81 86 91 96 01 06

Year

Tri

llion $

Source: World Bank & ERS-USDA, 2006 Estimated


Net Exports of U.S. Cattle, Beef, & By-Products1979-2005

-2.00

-1.50

-1.00

-0.50

0.00

0.50

1.00

1.50

2.00

2.50

3.00

79 81 83 85 87 89 91 93 95 97 99 01 03 05

Year

Bil

lio

n $

Source: U.S. Dept. of Commerce & LMIC Net Exports = Exports - Imports

U.S. Has Been A Net Exporter Since 1981U.S. Has Been A Net Exporter Since 1981


Top 5 Importers Top 5 Importers Accounted for 91% of U.S. ExportsAccounted for 91% of U.S. Exports

Top 10 Importers of U.S. BeefRanked by Value of Imports in 2003

Other Category Consists of All Other Destinations

$0

$200,000

$400,000

$600,000

$800,000

$1,000,000

$1,200,000

$1,400,000

$1,600,000

Japan Mexico S. Korea Canada HongKong

Taiwan Russia China Kuwait Egypt Other

Destination

Va

lue

(T

ho

us

an

d $

)

.

.

Source: USDA-FAS .


Annual Cattle Imports From Canada .

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

1.8

74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04

Year

Millio

n H

ea

d .

Source: USDA

Cattle Imports from Canada Are IncreasingCattle Imports from Canada Are Increasing But Rebound Has Been Slower Than Expected But Rebound Has Been Slower Than Expected

Aug.-Dec. ’05 imports Aug.-Dec. ’05 imports 35% below 2002 and 35% below 2002 and 11% below the 11% below the 2000-2002 average2000-2002 average


Increases in Beef Industry ConcentrationIncreases in Beef Industry Concentration


Cattle Feeding Concentration IncreasingCattle Feeding Concentration Increasing

19751975

7 Major Feeding States7 Major Feeding States

• 56,221 feedlots marketed 15 million cattle56,221 feedlots marketed 15 million cattle

• Average marketings/feedlot = 267 headAverage marketings/feedlot = 267 head

• Feedlots > 1,000 hd. (1,221 lots) marketed 74% of Feedlots > 1,000 hd. (1,221 lots) marketed 74% of cattlecattle

Source: USDA, Cattle On FeedSource: USDA, Cattle On Feed 7 states = AZ, CA, CO, IA, KS, 7 states = AZ, CA, CO, IA, KS, NE, TX NE, TX


Fewer But Larger Cattle FeedersFewer But Larger Cattle Feeders

19951995


• 23,472 feedlots marketed 20.2 million cattle23,472 feedlots marketed 20.2 million cattle

• Average marketings/feedlot = 858 headAverage marketings/feedlot = 858 head

• Feedlots >1000 hd. (1,584 lots) marketed 93% Feedlots >1000 hd. (1,584 lots) marketed 93% of cattleof cattle

Source: USDA, Cattle On FeedSource: USDA, Cattle On Feed 7 states = AZ, CA, CO, IA, 7 states = AZ, CA, CO, IA, KS, KS, NE, TX NE, TX


Even Fewer But Larger Cattle FeedersEven Fewer But Larger Cattle Feeders

20042004


• 14,932 feedlots marketed 20.4 million cattle14,932 feedlots marketed 20.4 million cattle

• Average marketings/feedlot = 1,369 headAverage marketings/feedlot = 1,369 head

• Feedlots >1000 hd. (1,632 lots) marketed 95% Feedlots >1000 hd. (1,632 lots) marketed 95% of cattleof cattle

Source: USDA, Cattle On FeedSource: USDA, Cattle On Feed 7 states = AZ, CA, CO, IA, 7 states = AZ, CA, CO, IA, KS, KS, NE, TX NE, TX


Share of U.S. Fed Cattle Marketings By Feedyard Size Category, 1979-2004

0%

10%

20%

30%

40%

50%

60%

79 81 83 85 87 89 91 93 95 97 99 01 03

Year

Sh

are

of

U.S

. F

ed

Ca

ttle

Ma

rke

tin

gs

32,000 Hd. & Over 16,000-31,999 Hd.8,000-15,999 Hd. 4,000-7,999 Hd.2,000-3,999 Hd. 1,000-1,999 Hd.

Source: USDA, LMIC, & K-State Research & Extension

Survivor Analysis:Survivor Analysis:Which Size Category Is Gaining Market Share?Which Size Category Is Gaining Market Share?


Why Is Feedlot Concentration Increasing?Why Is Feedlot Concentration Increasing?• Lower costs for larger firmsLower costs for larger firms

• Why? Why?

• Larger firms in better position to utilizeLarger firms in better position to utilize– TechnologyTechnology– Management skillsManagement skills

• Labor managementLabor management• Financial managementFinancial management• Marketing managementMarketing management

• Implication: Small & medium size feeders Implication: Small & medium size feeders operate at a cost disadvantageoperate at a cost disadvantage


Beef Packing SectorBeef Packing SectorConcentration Increased DramaticallyConcentration Increased Dramatically

• 4-Firm Concentration Ratio (CR4) increased from 4-Firm Concentration Ratio (CR4) increased from 41% to 78% during ’80’s41% to 78% during ’80’s– Transition to large plant sizes was dramatic Transition to large plant sizes was dramatic – 19721972

• 70% of all slaughter in plants handling less than 250,000 hd/year70% of all slaughter in plants handling less than 250,000 hd/year• 35% of all slaughter in plants handling less than 100,000 hd/year35% of all slaughter in plants handling less than 100,000 hd/year

– 19921992• 70% of all slaughter in plants handling over 500,000 hd/year70% of all slaughter in plants handling over 500,000 hd/year• 4% of slaughter in plants handling less than 100,000 hd/year4% of slaughter in plants handling less than 100,000 hd/year

Source: McDonald & Ollinger, 2005


Have Packing Industry ChangesHave Packing Industry Changes Been Good or Bad? Been Good or Bad?

Shift toward larger plant sizes reduced costs Shift toward larger plant sizes reduced costs dramaticallydramatically

Industry Weighted Average Processing Costs Industry Weighted Average Processing Costs

YearYear Per Head Cost (1992$)Per Head Cost (1992$)

19771977 $131.42$131.42

19921992 $96.58 $96.58

19971997 $90.65 $90.65

20022002 $85.09 $85.09

Source: McDonald & Ollinger, 2005


Have Packing Industry ChangesHave Packing Industry Changes Been Good or Bad? Been Good or Bad?

• Meat packing labor productivity increasedMeat packing labor productivity increased

– Index of output per hour rose 80% from 1970 to 1998Index of output per hour rose 80% from 1970 to 1998

• 1970 -1998, inflation adjusted spread between 1970 -1998, inflation adjusted spread between live and wholesale beef prices declined 57%live and wholesale beef prices declined 57%

• Technology & productivity improvementsTechnology & productivity improvements

– reduced farm-wholesale price spread by $0.23/cwt.reduced farm-wholesale price spread by $0.23/cwt.

– boosted live cattle prices $1.75/cwt. boosted live cattle prices $1.75/cwt.

Source: Marsh & Brester, 2001


What About the Rest of the Food Supply Chain?What About the Rest of the Food Supply Chain?

Beef Packer & Retail Grocer ConcentrationBeef Packer & Retail Grocer Concentration2004 concentration levels (approximate)

Top 4 Beef Packers Top 4 Retail Grocers(steer & heifer slaughter)

82% Market Share 33% Market Share

Tyson Wal-Mart (15%)Cargill Kroger (7%)Swift & Co. Costco (6%)National Beef Albertsons (5%)

Sources: GIPSA-USDA, Cattle Buyers Weekly, and Supermarket News, Top 75 Grocery Retailers


Where Are We Headed?Where Are We Headed?

TradeTrade

• U.S. strength is in high quality beef productsU.S. strength is in high quality beef products

• Other countries may have comparative Other countries may have comparative advantage in cow-calf productionadvantage in cow-calf production

• Regaining market share could take yearsRegaining market share could take years

• Consumer incomes in importing countries Consumer incomes in importing countries are key to long-run growth in exportsare key to long-run growth in exports


Long, Slow Road to Export RecoveryLong, Slow Road to Export Recovery

Annual U.S. Beef Exports

0.0

0.5

1.0

1.5

2.0

2.5

3.0

80 82 84 86 88 90 92 94 96 98 00 02 04 06

Year

Bil

lio

n L

bs

.

Source: USDA & LMIC, 2006-2007 Forecasts


Where Are We Headed?Where Are We Headed?Beef Packing SectorBeef Packing Sector

• Lower costs encouraged growth of large packing plantsLower costs encouraged growth of large packing plants

• Movement toward large firms encouraged byMovement toward large firms encouraged by

– Lower operating costs Lower operating costs

– Lower procurement costs (per unit)Lower procurement costs (per unit)

– Lower marketing costs (per unit)Lower marketing costs (per unit)

– And food safety advantagesAnd food safety advantages

• Bulk of transition to large plants & firms has already taken placeBulk of transition to large plants & firms has already taken place

• Future developments likely to be in more vertical alliances or integration Future developments likely to be in more vertical alliances or integration

• Small packing plants operate at huge cost disadvantageSmall packing plants operate at huge cost disadvantage

– Future Beef (Winfield, KS) - BankruptFuture Beef (Winfield, KS) - Bankrupt

– Iowa Quality Beef Supply Network (Tama, IA) - BankruptIowa Quality Beef Supply Network (Tama, IA) - Bankrupt


Where Are We Headed?Where Are We Headed?

Beef DemandBeef Demand

• Short run gains from low-carb diets behind usShort run gains from low-carb diets behind us

• Future gains will come from product innovationFuture gains will come from product innovation

• Opportunities abound for innovatorsOpportunities abound for innovators


Pork Production Expected To Rise Next Several YearsPork Production Expected To Rise Next Several Years

Annual U.S. Commercial Pork Production .

11

13

15

17

19

21

23

70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06

Year

Bil

lio

n P

ou

nd

s

Source: USDA, 1999 KSU Forecast

Source: USDA, 2006 & 2007 LMIC Forecasts


Poultry Production Increases Could ModeratePoultry Production Increases Could Moderate

Annual U.S. Poultry Production Ready-To-Cook Weight

0

5

10

15

20

25

30

35

40

45

81 83 85 87 89 91 93 95 97 99 01 03 05 07Year .

Pou

ltry

Pro

du

ctio

n

(B

illion

Lb

s.)

Chicken Production Turkey Production

Source: USDA & K-State Research & ExtensionLMIC Forecasts for 2006 & 2007

KSU Dept. of Ag Econwww.agmanager.info


Beef Production Will Rise CyclicallyBeef Production Will Rise Cyclically

Commercial Beef Production

20

21

22

23

24

25

26

27

28

70 72 74 76 78 80 82 84 86 88 90 92 94 96 98 00 02 04 06

Year

Bill

ion

Pou

nd

s

Source: USDA & K-State Research & Extension LMIC Forecasts for 2006 & 2007


Record High Annual Average in ’05Record High Annual Average in ’05Lower Prices in ‘06Lower Prices in ‘06

W. Kansas Direct Slaughter Steer Prices .

60

65

70

75

80

85

90

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06

Year

Pri

ce

($

/cw

t.)

Source: AMS-USDA, Dodge City, KS, 2006 Forecast

Slaughter could rise 3 to 5%, and beef production could rise 4 to 6%, but trade improvements mean per capita supplies could increase just 1 to 2%


Where Are Corn Prices Headed?Where Are Corn Prices Headed?Higher Corn Prices Spell Trouble for Livestock ProducersHigher Corn Prices Spell Trouble for Livestock Producers

Kansas Monthly Corn Prices

1.251.501.752.002.252.502.753.003.253.503.754.004.254.504.755.00

75 77 79 81 83 85 87 89 91 93 95 97 99 01 03 05

Year

Co

rn P

rice

($/

bu

.)

Source: USDA-Kansas Agricultural Statistics &K-State Research & Extension

1985-1989 Average = $2.23/bu.1990-1994 Average = $2.40/bu. 1995-1999 Average = $2.65/bu.2000-2004 Average = $2.23/bu.2004 Average=$2.59/bu.2005 Average=$2.02/bu.


Feeders In ‘05 Averaged A Record High of $112/cwt.Feeders In ‘05 Averaged A Record High of $112/cwt.Prices in ’06 Could Wind Up Near ’04’s AveragePrices in ’06 Could Wind Up Near ’04’s Average

Dodge City, KS 700-800 Lb. Steer Prices .

60

65

70

75

80

85

90

95

100

105

110

115

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06

Year

Pri

ce

($

/cw

t.)

Source: AMS-USDA, Dodge City, KS & KSU, 2006 Forecast .


Record High Calf Prices In ‘05Record High Calf Prices In ‘05And Near Record High in ‘06And Near Record High in ‘06

Dodge City, KS 500-600 Lb. Steer Prices .

6065707580859095

100105110115120125130135

90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05 06

Year

Pri

ce

($

/cw

t.)

Source: AMS-USDA, Dodge City, KS & KSU, 2006 Forecast .

www.agmanager.info/livestock/marketingwww.agmanager.info/livestock/marketing

1 K-State Research & Extension Cattle Outlook Kansas Agricultural Bankers Association April 20, 2006...

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