Changing how we look at beef-industry markets

Most people directly involved in U.S. beef production have been somewhat amazed at prices across the industry today. But, at the same time, record prices also create a great deal of trepidation as cattlemen look ahead. Over the past year, we have continually heard and read comments that demand is going to become an issue as consumers simply won't pay these prices. As the saying goes, there is no better cure for high prices than high prices. We expect prices to fall hard.

Over the last 30 years of analyzing markets and forecasting, a great deal of my analysis came down to that same assessment. However, I now think it is time to take into consideration other important influences in the industry that may have become over-riding to "the way things used to be." Is that to say I have thrown caution to the wind and history should take a back seat? I don't think so. But, I do think it is time to consider changing economics and market performance as the industry evolves and becomes increasingly consumer driven. 

First, let's take a look at structure and packer capacity. Just as in any industry, packing plant capacity or, more importantly, the location and utilization of the capacity is important to industry performance. And yes, there is more capacity than there are cattle currently which strongly implies as it always has that there must be and will be an adjustment, i.e., reducing kills or shuttering a plant. In less than two years, the industry has already reduced fed slaughter capacity 6 percent and cow slaughter capacity 13 percent. Adjustment in capacity by individual firms will continue to be a business strategy. However, today's packers are not the same companies who were slaughtering and fabricating cattle 20 years ago or, for that matter, even 10 years ago. The old names IBP, Swift and Excel still exist but in brand name only. This changes the dynamics of decisions concerning capacity. 

Twenty years ago, the industry was driven by the decisions of IBP. Today, IBP is Tyson, and Tyson is a far cry from the old IBP. As analysts, we certainly don't sit around and wring our hands over whether IBP will kill on Saturday as we assessed next week's market. Twenty years ago or even 10 years ago, none of us knew the name JBS. While JBS bought the old Swift and Company, JBS is not Swift. Today, JBS, a Brazilian family-owned company, is the world's largest protein business. Its view of meat-industry economics does not necessarily coincide with our view of meat industry economics, which is largely driven by our experiences and history of this industry. Furthermore, Cargill Meat Solutions, the third-largest U.S. packer, is not the same Excel Meats that existed 20 years ago. 

All three of these companies are value-added companies increasingly driven by the dynamics of consumer demand, not necessarily the short-term ebbs and flows of the supply and the market. Of course, procurement cost, the cutout, the drop value and gross margins are still just as important as they always were. But now, the strategies to buy the "right cattle for the right market," converting and capturing the greatest value possible from that raw material and associated credit items in order to achieve a sustainable margin have changed. One example that I have discussed with clients and various groups is how the packing industry has dramatically changed how it views beef trim in a fed-cattle plant. Prior to about 10 years ago, trim was considered a "credit item" sold into the commodity market. Grinders bought that trim, blended it with 90 percent lean from cows and produced patties. This was an attractive, value-added, high-margin business and one which the major packers were increasingly looking at with an eye toward where they needed to be. They soon began adding patty lines to the plant, and the trim, accounting for roughly 20 to 25 percent of the fed steer, became a profit center that transfers raw material to ground beef production for retail and foodservice, i.e., patties and chubs. The value of trim fluctuates according to the number and weight of cattle, but it cannot be denied that this major change in how business is done has impacted the value of that market with added efficiencies and by minimizing food-safety issues. Those same benefits carry over to the fab operation by transferring chucks and rounds to the grind when the grinding value is greater than the whole-cut value for those items.

The development of value-added products is consumer driven. This is demand pull, with the demand for value-added ground beef patties in foodservice and in retail growing. The number of branded ground beef patties in supermarkets is noticeable. It is a value-added business with a solid margin and, consequently, a perfect fit for packers to integrate into their business. 

So, what does this all mean to cattlemen who on the one hand feel really good about the price they got for calves and cull cows this year, but at the same time are wringing their hands as they think about the last time prices went to record levels? The take-away is that the companies that I described above do not want to see a "wreck" in the live-cattle market any more than you as a cow-calf or feedlot operator wants to see. A sharp break in fed-cattle prices would snowball through the feeder and calf markets, and I would submit that the possibility of thrusting the industry back into liquidation would significantly increase. No one in the beef supply chain from producers to end-users wants that to happen, including packers who want to look forward to increased cattle numbers as they grow U.S. and global markets. I believe the strategy is to see this tight supply and the inherent problem of capacity utilization through to 2017 when a larger cattle herd will be realized. The worst strategy is to create a situation where producer economics are drastically changed, thus changing producer motivation to build herds. The inherent risk of weather can do that.


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