2. K-State Research & Extension Livestock Industry Structure James Mintert, Ph.D. Professor & Extension Ag. Economist, Livestock Marketing Dept. of Agricultural Economics Kansas State University

3. K-State Research & Extension While concentration was increasing, beef demand was declining

4. K-State Research & Extension Plotting Inflation Adjusted Price vs. Per Capita Consumption Provides A Picture of Beef Demand

5. K-State Research & Extension Declining Demand Has Plagued The Beef Industry For 20 Years Beef Demand Declined Precipitously During The 1980’s

6. K-State Research & Extension Declining Demand Has Plagued The Beef Industry For 20 Years Demand Continued To Decline During the 1990’s

7. K-State Research & Extension Best News In Beef Industry In The Last Two Decades

8. K-State Research & Extension Demand Showed Signs of Strengthening In 1999, 2000 & Again In 2001

9. K-State Research & Extension 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 year’s level

10. K-State Research & Extension Domestic Retail Beef Demand Increased Last 3 Years Retail Choice Beef Demand Increased 4.6% During 2001

11. K-State Research & Extension “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)

12. K-State Research & Extension 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

13. K-State Research & Extension 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

14. K-State Research & Extension 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

15. K-State Research & Extension Largest Beef Packers, 2001 RankFirm# of PlantsCap./Day 1IBP1035,000 2Excel 624,800 3Conagra 620,600 4Farmland/Nat. 210,000 5Smithfield 5 8,525 Source: Cattle Buyers Weekly

16. K-State Research & Extension 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)

17. K-State Research & Extension 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

18. K-State Research & Extension 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

19. K-State Research & Extension As Concentration Increased, Price Spread Declined

20. K-State Research & Extension But The Spread Has Widened Recently Why?

21. K-State Research & Extension What’s 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 1990’s –Food safety costs have risen substantially installed new technology and instituted new procedures designed to satisfy HAACP requirements

22. K-State Research & Extension 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

23. K-State Research & Extension 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

24. K-State Research & Extension Largest Cattle Feeding Firms, 2001 RankFirm# of Lots1-Time Cap. 1Cactus9480,000 2ConAgra 5440,000 3ContiBeef6425,000 4Caprock4296,000 5Simplot3275,000 Source: Cattle Buyers Weekly

25. K-State Research & Extension Big Supermarkets Dominate The Retail Food Landscape

26. K-State Research & Extension Concentration Among Food Retailers Is Also Taking Place 26.5%

27. K-State Research & Extension Beef Packer and Retail Grocer Concentration 2000 concentration levels Top 4 Beef Packers Top 5 Retail Grocers (steer & heifer slaughter) 82% Market Share38% Market Share Tyson (IBP)Kroger ConAgraWal-Mart Cargill (Excel)Albertsons Farmland National BeefSafeway Royal Ahold Sources: GIPSA-USDA and Progressive Grocer, 68 th Annual Report of the Grocery Industry

28. K-State Research & Extension 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

29. K-State Research & Extension 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%

30. K-State Research & Extension 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

31. K-State Research & Extension 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

32. K-State Research & Extension 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

33. K-State Research & Extension 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

34. K-State Research & Extension 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?

35. For Updated Livestock Marketing Information Visit the K-State Livestock & Meat Marketing Web Site www.agecon.ksu.edu/livestock