It's easy to look smart when calves are trading for better than a buck, covering up mistakes slicker than a flood washing away deer tracks.
Best yet, cow-calf producers will likely have the opportunity to enjoy these economic smarts for a while—notwithstanding the seasonal crest and ebb—because no one has been tempted to start expanding the nation's cow herd yet. A variety of reasons, including droughts and the need to heal equity, mean that heifers are not yet being retained to any degree, thus extending calf price power.
In fact, according to Randy Blach who heads up Cattle-Fax, “Assuming we can sustain demand, we should be able to roll into 2003 or 2004 before we see prices peak.” He was offering an economic outlook to participants at the recent Beef Stock Conference coordinated by Kansas State University.
Of course, transforming this prediction into reality depends on a number of key wonderments.
The Wild Cards
First, consumer beef demand will continue to drive the profit equation. Blach notes that increased beef demand over the past 30 months or so has meant plenty to producers' bottom lines. “Demand growth has been worth about $100 per head,” he explains. “Without it, you could take $20 off the feeder market and $10 off the fed market today.”
Yep, the tragedy of September 11 did crash beef futures by about $6. But, according to a number of market analysts, the market was already poised for a significant drop, based in part on artificial premium that had crept into the market, and based on fears about a loss of steam in demand. Just before September 11, retail beef price reports documented the largest month-to-month decline in retail prices in a decade.
Next, whichever horse demand chooses to ride, increasing consolidation in and out of the beef industry will likely determine how rough or how smooth the ride is. Specifically, how producers choose to react to the changes wrought by consolidation will determine how much or little they like the scenery.
Up front, understand that consolidation within the beef industry, in large part, is merely a reaction to the pressures of consolidation at the retail level.
Today, Blach points out the five largest food retailers command 41 percent of total sales; the largest 10 control 59 percent and the largest 20 account for 73 percent of food sales. Within five years he says it is more than conceivable that the largest 5-7 retailers will command 70-75 percent of the market; retail consolidation is moving that fast!
“How many suppliers for beef do you think those retailers will want to deal with?” asks Blach. Efficiency demands that they will deal with as few as possible.
Consequently, the beef industry is peeping through the keyhole of industry at the emergence of large self-contained vertically cooperative beef production systems capable of delivering a handful of retailers the volume and quality attributes they demand.
As an example, Rancher's Renaissance, one of three primary suppliers for the new Cattleman's Collection beef brand, sent more than 100,000 head alone last year. These suppliers provide the product to Excel Corporation, which in turn markets the branded product exclusively to Kroger, the nation's largest meat retailer.
Likewise, in August, Future Beef Operations, armed with its own packing plant and a gene-to-plate cooperative system began marketing product exclusively to Safeway Stores, another of the nation's meat marketing behemoths.
“The brand name is where the buck stops. Everyone who contributes to the brand will have to do their part. We'll have to be accountable for all that we do,” says Blach.
Really, increased accountability is the bedrock principle beneath the increasing percentage of fed cattle trading away from the cash market, many via grid-price systems. Obviously, the reason 45 percent trade away from the cash today, compared to 17 percent in 1995 (Blach predicts as many as 75 percent could trade away from the cash by 2005) is that producers have the chance to make more money through premiums and discounts than they can by selling the cattle for an average price. But the documented value attributes and performance levels rewarded and discounted on a price grid are just another way of saying how close or how far away the product was to being accountable for predetermined performance standards.
What's more, Blach says, “We're going to see much bigger premiums and discounts as we move forward.” As it is, he says, “I've never seen a time when we had as wide of a price range as we do today.”
As an example, Blach says this fall similar class and weight feeder cattle have traded across a range of $15/cwt. based on whether or not they were accompanied by management and performance documentation.
“How far away are we from trading fed cattle for a single price good for 6 months or 12 months on a 3-5 year contract?” wonders Blach. “I think we'll see these kinds of changes in the next several years.”
By the same token, chances are some producers can still conduct business as usual if they choose. “There will continue to be somebody who handles commodity cattle and there will still be money to be made on them, but it will be at an entirely different price level,” says Blach.
Changing for a Reason
The retail reality described above fuels the trend in economic efficiency-based consolidation that has underscored the beef industry for better than a decade. For perspective, Blach points out 3.3 percent of cow/calf operations in this country control about a third of the nation's cowherd and two percent of the nation's feedlots turn out about 85 percent of the fed cattle.
As part of that or because of it, breed consolidation is well under way with the majority of commercial bulls traded each year comprising breeds you can count on less than two hands. Along with that, the age of purebred breeders on every corner with something to sell is giving way to larger seedstock supply systems than offer more breeds, more bulls and females, and more service than a smaller one usually can.
“We are not in the cattle business, we're in the protein business and the food business,” says Blach. “Every one of us is in the money business and we have chosen cattle to try to get adequate return for our money.”
With that in mind, Blach points out, “The reason we are seeing all of this structural change in the industry is because no one has been making any money. The changes we are seeing in our industry are no different than those we see occurring in other industries, but we've been slow to respond.”
Although there will always be some producers who generate more net revenue than others, the fact is over the past 20 years, the cow/calf business has been, on a average, a break-even business, period. Actually, the steadiest profits have come in grazing and stocker operations. During the same 20 years Blach says winter grazing programs have returned an average profit of $35 per head, while summer grazing programs have spun $12.54 per head.
Bottom line, the changes have occurred and are occurring for one simple reason: economic survival.
As the industry continues its evolution away from commodity production and economics toward an age of consumer based and valued supply, Blach says, “I'd encourage you, if you don't know what your cattle are doing (in terms of performance), take advantage of this part of the market to find out…And, you need to know what you production costs are.” No matter how high calf prices are or how attractive a cooperative system may be, Blach points out high-cost producers will always have a tough time making the numbers yield a profit.
More than anything, Blach suggests now is the time to take a gut check on how change-friendly or change-averse you are.
“Don't be afraid to react,” says Blach. “As you look at other industries, those who don't change or adapt, you quickly see that you may be replaced.”