Efficiency and Quality Support Industry Production Margins
Production efficiency in the U.S. beef industry has a significant and positive impact on both market performance and industry margins. In 2015, when supplies were relatively tight, the industry produced the same amount of beef as it did in 1975, but with 43 million fewer cattle.
Production in 2015 came from a calf crop in 2014 that was over 17 million head smaller than the 1974 calf crop that was the foundation for 1975 beef production. In other words, in 2015 the industry produced 707 pounds of beef per calf compared to 465 pounds per calf in 1975. That is a remarkable increase in production efficiency resulting from significant improvements across the production chain from cow-calf to feedlot to packer-processor.
Obviously, increased efficiency has allowed the beef industry to produce more product with fewer cattle, benefitting both U.S. consumers and global trade partners, too. It has also had positive implications for the environment.
Additionally, there are also strong and positive implications on margins. Though we often view margins in relation to prices and thus, gross revenue, those same production efficiencies that weigh on prices as herd building takes hold also work to lower the costs of production across the supply chain. Efficiency and quality improvement have definitely supported the beef industry even in the face of lower market prices in much the same way as efficiencies in the economy support growth.
The packing industry has evolved from “kill and cut” to “boxed beef” to “case-ready” and now, further down that path and closer to the end user with “value-added” products. This is not only changing the face of the industry, it is changing the use of raw material within the plant and subsequently market prices.
As packers increasingly add those value-added products on the other end of the plant, i.e. ground beef lines, market performance will change as the supply of various sub-primal and trim products available to the market changes relative to the packer’s internal usage. This can mark a significant shift in the production and flow of beef supplies. This is not only a huge step from their traditional role of harvesting and fabricating cattle, it carries even greater margin enhancement opportunities. At the same time, that doesn’t necessarily take away from the important role of independent further-processors.
It can be said that while change can be disruptive, it doesn’t necessarily have to be adverse. I believe the changes that have occurred to enhance production efficiency and market efficiency in the beef industry are good for the industry, producers, the supply chain, and the consumer. In evaluating the economic health of the industry, we must get beyond simply prices and consider the role that major improvements in production and marketing play.
