Livestock Industry Structure

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Livestock Industry Structure

• James Mintert, Ph.D.
• Professor
• Extension Ag. Economist, Livestock Marketing
• Dept. of Agricultural Economics
• Kansas State University

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While concentration was increasing, beef demand
was declining
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Plotting Inflation Adjusted Price vs. Per Capita
Consumption Provides A Picture of Beef Demand
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Declining Demand Has Plagued The Beef Industry
For 20 Years
Beef Demand Declined Precipitously During The
1980s
5
Declining Demand Has Plagued The Beef Industry
For 20 Years
Demand Continued To Decline During the 1990s
6
Best News In Beef Industry In The Last Two Decades
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Demand Showed Signs of Strengthening In 1999,
2000 Again In 2001
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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 years level

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Domestic Retail Beef Demand Increased Last 3
Years
Retail Choice Beef Demand Increased 4.6 During
2001
10
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)

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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

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Concentration Has Increased Dramatically

• 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

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Concentration Has Increased Dramatically

• 1976 Steer heifer slaughter of four
  largest firms equivalent to 25 of total
• 1998 Steer heifer slaughter of four
  largest firms equivalent to 80 of total

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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
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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)

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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

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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

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As Concentration Increased, Price Spread Declined
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But The Spread Has Widened RecentlyWhy?
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Whats 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 1990s
• Food safety costs have risen substantially
• installed new technology and instituted new
  procedures designed to satisfy HAACP requirements

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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

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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

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Largest Cattle Feeding Firms, 2001

• Rank Firm of Lots 1-Time Cap.
• 1 Cactus 9 480,000
• 2 ConAgra 5 440,000
• 3 ContiBeef 6 425,000
• 4 Caprock 4 296,000
• 5 Simplot 3 275,000

Source Cattle Buyers Weekly
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Big Supermarkets Dominate The Retail Food
Landscape
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Concentration Among Food Retailers Is Also Taking
Place
26.5
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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) Kroger ConAgra Wal-Mart Cargill
(Excel) Albertsons Farmland National
Beef Safeway Royal Ahold Sources
GIPSA-USDA and Progressive Grocer, 68th Annual
Report of the Grocery Industry
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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

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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

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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

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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

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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

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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

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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?

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For Updated Livestock Marketing Information
Visit the K-State Livestock Meat Marketing
Web Site

• www.agecon.ksu.edu/livestock