Cattle Outlook

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Cattle Outlook

• James Mintert, Ph.D.
• Professor Extension State Leader
• Department of Agricultural Economics
• Kansas State University
• www.agmanager.info/livestock/marketing
• jmintert_at_ksu.edu

Presented at Industry Outlook Conference
Chicago, IL October 17, 2006
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A Shrinking IndustryResponding to a Lack of
Profitability
Current inventory is about 26 smaller than in
1975
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Rising Productivity Is Partially Responsible
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But Weaker Demand Was Key Beef Demand 1980-1998
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Measuring Changes In Beef Demand1998-2004
Demand in 04 Was Up About 25 from 1998 Level
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Measuring Changes In Beef Demand1998-2005
Beef Demand During All of 05 Decreased About
4 But Demand in 05 Was Still Up About 21 from
1998 Level
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2nd Quarter Demand Index Fell About 10 Below A
Year Ago
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Beef Demand ShiftersWhats been taking place
recently?

• Low carb diet effect has worn off
• Consumers disposable income growth slowing
• Expect more domestic demand weakness
• How do we turn this around?

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Increases in Beef Industry Concentration
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Cattle Feeding Concentration Increasing

• 1975
• 7 Major Feeding States
• 56,221 feedlots marketed 15 million cattle
• Average marketings/feedlot 267 head
• Feedlots gt 1,000 hd. (1,221 lots) marketed 74 of
  cattle
• Source USDA, Cattle On Feed 7 states AZ, CA,
  CO, IA, KS, NE, TX

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Fewer But Larger Cattle Feeders

• 1995
• 7 Major Feeding States
• 23,472 feedlots marketed 20.2 million cattle
• Average marketings/feedlot 858 head
• Feedlots gt1000 hd. (1,584 lots) marketed 93 of
  cattle
• Source USDA, Cattle On Feed 7 states AZ, CA,
  CO, IA, KS, NE, TX

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Even Fewer But Larger Cattle Feeders

• 2004
• 7 Major Feeding States
• 14,932 feedlots marketed 20.4 million cattle
• Average marketings/feedlot 1,369 head
• Feedlots gt1000 hd. (1,632 lots) marketed 95 of
  cattle
• Source USDA, Cattle On Feed 7 states AZ, CA,
  CO, IA, KS, NE, TX

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Largest Cattle Feeding Firms, 2005

• Rank Firm of Lots 1-Time Cap.
• (head)
• 1 5 Rivers Ranch 10 811,000
• 2 Cactus 10 520,000
• 3 Cargill 4 300,000
• 4 Friona 4 275,000
• 5 AzTx 4 232,000

Source Cattle Buyers Weekly
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Which Size Category Is Gaining Market Share?
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Why Is Feedlot Concentration Increasing?

• Lower costs for larger firms
• Why?
• Larger firms in better position to utilize
• Technology
• Management skills
• Labor management
• Financial management
• Marketing management
• Implication Small medium size feeders operate
  at a cost disadvantage

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Beef Packing SectorConcentration Increased
Dramatically

• 4-Firm Concentration Ratio (CR4) increased from
  41 to 78 during 80s
• Transition to large plant sizes was dramatic
• 1972
• 70 of all slaughter in plants handling less than
  250,000 hd/year
• 35 of all slaughter in plants handling less than
  100,000 hd/year
• 1992
• 70 of all slaughter in plants handling over
  500,000 hd/year
• 4 of slaughter in plants handling less than
  100,000 hd/year

Source McDonald Ollinger, 2005
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Large Packing Plants Have Lower Costs

• Eliminating wage differentials across plant sizes
  provided incentive to build large packing plants
• Large plants paid higher wages in 60s 70s
• 1960-1972
• Plant size 1 -wages 9 than mid-size plant
• 1982
• Plant size 1 -wages 6 than mid-size plant
• 1992
• Plant size 1 -no change in wages

Source McDonald Ollinger, 2005
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What Motivated Shift to Large Plants in 1980s?

• Change in packing plant labor costs facilitated
  shift to larger plants in the Plains
• 1978, 45 of meat product workforce was unionized
  
• Union workers wages 29 gt non-union workers
• 1987, just 21 of workforce unionized
• In 1960s 1970s, meatpacking wages 14 to
  18 gt than manufacturing wages
• 2002, meatpacking wages were 25 below
  manufacturing wages

Source McDonald Ollinger, 2005
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Have Packing Industry Changes Been Good or Bad?

• Meat packing labor productivity increased
• Index of output per hour rose 80 from 1970 to
  1998
• 1970 -1998, inflation adjusted spread between
  live and wholesale beef prices declined 57
• Technology productivity improvements
• reduced farm-wholesale price spread by 0.23/cwt.
• boosted live cattle prices 1.75/cwt.

Source Marsh Brester, 2001
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Have Packing Industry Changes Been Good or Bad?

• Shift toward larger plant sizes reduced costs
  dramatically
• Industry Weighted Average Processing Costs
• Year Per Head Cost (1992)
• 1977 131.42
• 1992 96.58
• 1997 90.65
• 2002 85.09

Source McDonald Ollinger, 2005
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International Trade Outlook
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U.S. Was A Net Exporter From 1981-2003
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Top 5 Importers Accounted for 91 of U.S. Exports
U.S. needs to recapture these markets to regain
s and volume
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Cattle Imports from Canada Are Increasing But
Remain Well Below 2002s Record Level
Jan-July 2006 imports 32 below 2002s and 21
below 2001s
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Beef Imports From Canada Decline
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Result U.S. Imports Falling Below 2005s
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Where Are We Headed?

• Trade
• U.S. strength is in high quality beef products
• Other countries may have comparative advantage in
  cow-calf production
• Exports to Pacific Rim increasing in 07
• Regaining market share will take several years
• Market access is key
• Consumer incomes in importing countries are key
  to long-run growth in exports

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Long, Slow Road to Export Recovery
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Export Recovery Means Net Beef Imports in 2007
Could Be 1/2 2004s
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Supply Side in the U.S.
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Mid-Year Inventory Was Above 2005s, And
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Strong Profitability Encouraging Expansion, But
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Poor Pasture Conditions Could Be Holding Back
Expansion
Livestock Marketing Information Center Data
Source USDA/NASS
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U.S. Beef Cow Slaughter Up 17 vs. 2005
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But Producers Have Been Holding Back Heifers
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Slaughter Is Expected To Rise Modestly
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Large On Feed Inventory
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Drought Pushing Light Weight Placements Up
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Weights Will Remain Heavy
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And Beef Production Will Rise Cyclically
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Sharp Price Recovery from Summer Lows
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Prices Will Be Near Record High Again in 06
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Futures Are Pretty Optimistic For Spring
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Quarterly Slaughter Steer Price Projections

• Qtr.Yr USDA LMIC KSU
• Q4.06 86-90 87-89 86-89
• Q1.07 84-90 87-90 88-91
• Q2.07 84-90 86-90 88-91
• Q3.07 81-87 80-84 82-87
• WASDE

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Despite Feedlot Losses, Feeders Remain Optimistic
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But Higher Corn Prices Lead To Lower Bids for
Feeders
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Feeders In 05 Averaged A Record High of
112/cwt.Prices in 06 Could Wind Up Near 05s
Average
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Rising Corn Prices Pushing Prices Lower
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Near Record High Calf Prices Again In 06Cycle
Peak in 05 06
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Ethanol, Corn Prices, Cattle
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3 Largest Corn Crops On Record
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But Corn Usage Has Been Growing Rapidly
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Ethanol Usage Growing Rapidly
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U.S. Will Need More Corn AcresHow Do We Get Them?
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It Will Take Higher Prices To Push Acreage Higher
Average Prices Will Be Higher and Frequency of
Price Spikes Could Increase
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Where Are Corn Prices Headed?Higher Corn Prices
Spell Trouble for Livestock Producers
Ethanol?
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Quarterly 700-800 Lb. Steer Price Projections

• Qtr.Yr USDA LMIC KSU
• Q4.06 108-112 113-115 105-109
• Q1.07 105-111 110-113 102-106
• Q2.07 103-109 106-110 103-107
• Q3.07 100-106 108-114 103-107
• Livestock, Dairy Poultry Outlook

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www.agmanager.info/livestock/marketing
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