K-State Research & Extension Livestock Industry Structure James Mintert, Ph.D. Professor & Extension...

K-State Research & Extension

Livestock Industry Structure

James Mintert, Ph.D.

Professor &

Extension Ag. Economist, Livestock Marketing

Dept. of Agricultural Economics

Kansas State University


Plotting Inflation Adjusted Price vs. Per Capita Consumption Provides A Picture of Beef Demand

Beef Price Quantity Relationships

Annual, 1980-2000.

80

81

82

83

84

85

86

8788

00

89

275

300

325

350

375

400

425

450

64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80

Per Capita Consumption - Retail Weight .

Deflated Beef Price - Cents per Lb

Source: USDA & Commerce Dept.

Price Deflated by GDP Implicit Price Deflator 1999=100

94

95

93

90

92

91

96

99

98

97



Annual, 1980-2000.

80

81

82

83

84

85

86

8788

00

89

275

300

325

350

375

400

425

450

64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80





94

95

93

90

92

91

96

99

98

97

Declining Demand Has Plagued The Beef Industry For 20 Years

Beef Demand Declined Precipitously During The 1980’s



Annual, 1980-2000.

80

81

82

83

84

85

86

8788

00

89

275

300

325

350

375

400

425

450

64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80





94

95

93

90

92

91

96

99

98

97

Declining Demand Has Plagued The Beef Industry For 20 Years

Demand Continued To Decline During the 1990’s


Best News In

Beef Industry In The

Last Two Decades


Demand Showed Signs of Strengthening In 1999, 2000 & Again In 2001

Beef Price Quantity RelationshipsAnnual, 1980-2001

80

81

82

83

8485

86878801

00

89

275

300

325

350

375

400

425

450

64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80Per Capita Consumption - Retail Weight .

Deflated Beef Price - Cents per

Lb

Source: USDA & Commerce Dept. Price Deflated by GDP Implicit Price Deflator 1999=100

94 95

93

90

92

91

9699

9897


Another Look At Demand

Compute a demand index

The index accounts for changes in beef quantity

The index relates current beef prices to prices expected if demand was held constant at some prior year’s level


Domestic Retail Beef Demand Increased Last 3 Years

Retail Choice Beef Demand Index

88 8683

79 7670 69

66 65 6359 58 56 55 53 51

56

50

94

5352

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 98 99 00 01

Year

Index Value

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

Retail Choice Beef Demand Increased 4.6% During 2001


“This squall between the packers and the producers of this country ought to have blown over forty years ago, but we still have it on our hands…”

Senator John B. Kendrick of Wyoming

(1919)


Concentration Has Increased Dramatically

1976

• 145 steer and heifer slaughter plants with capacity greater than 50,000 head

• Slaughtered a total of 22.4 million head

• 5 plants slaughtering more than 500,000 head, accounted for 15% of slaughter



1998

• 38 steer and heifer slaughter plants with capacity greater than 50,000 head

• Slaughtered a total of 26.7 million head

• 14 plants slaughtering more than 1,000,000 head, accounted for 67% of slaughter

• Average slaughter in large plants nearly doubled from 1976 to 1998



1976Steer & heifer slaughter of four largest firms equivalent to 25% of total

1998Steer & heifer slaughter of four largest firms equivalent to 80% of total


Largest Beef Packers, 2001

Rank Firm # of Plants Cap./Day

1 IBP 10 35,000

2 Excel 6 24,800

3 Conagra 6 20,600

4 Farmland/Nat. 2 10,000

5 Smithfield 5 8,525

Source: Cattle Buyers Weekly


Concentration Driven By Cost Considerations

• Historically, gross profit margins have been about the same for all major meat packers

• Differences in profitability across firms was attributable to differences in costs

• Low cost firms came out on top

• Economies of size in slaughtering and fabrication were very large(Sersland, Duewer & Nelson; McDonald; Paul)


How Do We Measure Impact of Concentration?

• Concern revolves around prices packers pay for livestock

• How do we measure this?

– Spread between prices packers pay for cattle and prices they receive for wholesale meat

• Farm-to-Wholesale Price Spread


What Are Price Spreads? • Price spreads are differences in prices (adjusted to

equivalent weights) across different stages of the market channel

• Price spreads by themselves are not measures of profitability

• Price spreads are a barometer of the cost of providing marketing services

• the farm-to-wholesale margin is the estimated gross return processors receive (on average) for processing cattle and selling boxed beef cuts, offal products, and hides


As Concentration Increased, Price Spread Declined

Beef Farm-Wholesale Price SpreadAnnual Average, Inflation Adjusted (2001 $'s), 1970-2001

10

20

30

40

50

60

70

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

Year

Inflation Adjusted Price Spread

(cents/lb.)

Source: USDA, Dept. of Commerce, & K-State Research & Extension .


But The Spread Has Widened RecentlyWhy?

Beef Farm-Wholesale Price SpreadAnnual Average, Inflation Adjusted (2001 $'s), 1970-2001

10

20

30

40

50

60

70

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

Year

Inflation Adjusted Price Spread

(cents/lb.)

Source: USDA, Dept. of Commerce, & K-State Research & Extension .


What’s Behind Recent Increases In Spread?

• Costs changes drive most price spread changes – labor, packaging, transportation, depreciation,

advertising, fuel, utilities, rent, interest, repairs and maintenance, meat inspection costs, and taxes

• How have costs changed recently?– Energy costs today are higher than they were

throughout much of the 1990’s – Food safety costs have risen substantially

• installed new technology and instituted new procedures designed to satisfy HAACP requirements


Cattle Feeding Concentration Increasing

1972

• 104,340 feedlots marketed 23.9 million cattle

• Average marketings/feedlot = 2,287 head

• Feedlots> 1,000 head marketed 65% of cattle


Fewer But Larger Cattle Feeders

1995

• 41,365 feedlots marketed 23.4 million cattle

• Average marketings/feedlot = 5,648 head

• Feedlots >1000 head marketed 90% of cattle


Largest Cattle Feeding Firms, 2001

Rank Firm # of Lots 1-Time Cap.

1 Cactus 9 480,000

2 ConAgra 5440,000

3 ContiBeef 6 425,000

4 Caprock 4 296,000

5 Simplot 3 275,000

Source: Cattle Buyers Weekly


Big Supermarkets Dominate The Retail Food Landscape


Concentration Among Food Retailers Is Also Taking Place

26.5%


Beef Packer and Retail Grocer Concentration

2000 concentration levels

Top 4 Beef Packers Top 5 Retail Grocers(steer & heifer slaughter)

82% Market Share 38% Market Share

Tyson (IBP) KrogerConAgra Wal-MartCargill (Excel) AlbertsonsFarmland National Beef Safeway

Royal Ahold

Sources: GIPSA-USDA and Progressive Grocer, 68th Annual Report of the Grocery Industry


Changing Marketing Methods

• Increase in plant size

• Increase in firm size

• & desire to deliver products consumers want

Led to change in marketing methods

– Declining share of cash sales

– Increasing share of contract sales


Where Are We Headed?2002 Survey of Cattle Feeders

• More Marketing Agreements

– 1996 - 23%

– 2001 - 52%

– 2006 - 65%

• More Grid Pricing

– 1996 - 16%

– 2001 - 45%

– 2006 - 62%


Why Feeders Use Marketing Agreements

2002 Cattle Feeders Survey

• Obtain quality/yield grade premiums

• Provides access to detailed carcass data

• Guarantees buyer for cattle

• Reduces marketing time and costs


Motivations for Change in Cattle Marketing Practices

• Price system failed to communicate information from consumers to producers

– USDA grading system problematic

• To help ensure product quality, industry shifting toward non-price coordination

• Industry shifting toward an integrated food chain


Where Are We Headed?

• Lower costs encouraged growth of large plants

• Lower costs, procurement, marketing and food safety advantages have all encouraged growth of large firms

• Procurement requirements & desire to market more consistent products are encouraging vertical integration


Identity Preservation Is An Issue

• Co-mingling products has many disadvantages

– Reduced incentive to innovate

– Difficult to develop branded products

• Canada, Australia & Europe are implementing identity preservation systems

– Genetic programs could be targeted at specific market outlets


Vertically Coordinated Supply Chains

• Livestock producers need to consider how to fit in to a supply chain with more vertical coordination

• Alliances offer the opportunity to reap some of the benefits of a vertically coordinated supply chain

• Consider how you market your livestock

– How desirable are your livestock?

– Will they be in demand in the future?

For Updated

Livestock Marketing Information

Visit the

K-State Livestock & Meat Marketing

Web Site

www.agecon.ksu.edu/livestock

K-State Research & Extension Livestock Industry Structure James Mintert, Ph.D. Professor & Extension...

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