1 K-State Research & Extension Cattle Outlook* James Mintert, Ph.D. Professor & Extension State Leader Department of Agricultural Economics Kansas State University *Presented at Industry Outlook Conference Chicago, IL October 17, 2006

2 K-State Research & Extension A Shrinking Industry Responding to a Lack of Profitability Current inventory is about 26% smaller than in 1975

3 K-State Research & Extension Rising Productivity Is Partially Responsible

4 K-State Research & Extension But Weaker Demand Was Key Beef Demand

5 K-State Research & Extension Measuring Changes In Beef Demand Demand in 04 Was Up About 25% from 1998 Level

6 K-State Research & Extension Measuring Changes In Beef Demand Beef Demand During All of 05 Decreased About 4% But Demand in 05 Was Still Up About 21% from 1998 Level

7 K-State Research & Extension 2 nd Quarter Demand Index Fell About 10% Below A Year Ago

8 K-State Research & Extension Beef Demand Shifters Whats been taking place recently? Low carb diet effect has worn offLow carb diet effect has worn off Consumers disposable income growth slowingConsumers disposable income growth slowing Expect more domestic demand weaknessExpect more domestic demand weakness How do we turn this around?How do we turn this around?

9 K-State Research & Extension Increases in Beef Industry Concentration

10 K-State Research & Extension Cattle Feeding Concentration Increasing Major Feeding States 56,221 feedlots marketed 15 million cattle56,221 feedlots marketed 15 million cattle Average marketings/feedlot = 267 headAverage marketings/feedlot = 267 head Feedlots > 1,000 hd. (1,221 lots) marketed 74% of cattleFeedlots > 1,000 hd. (1,221 lots) marketed 74% of cattle Source: USDA, Cattle On Feed7 states = AZ, CA, CO, IA, KS, NE, TX

11 K-State Research & Extension Fewer But Larger Cattle Feeders Major Feeding States 23,472 feedlots marketed 20.2 million cattle23,472 feedlots marketed 20.2 million cattle Average marketings/feedlot = 858 headAverage marketings/feedlot = 858 head Feedlots >1000 hd. (1,584 lots) marketed 93% of cattleFeedlots >1000 hd. (1,584 lots) marketed 93% of cattle Source: USDA, Cattle On Feed7 states = AZ, CA, CO, IA, KS, NE, TX

12 K-State Research & Extension Even Fewer But Larger Cattle Feeders Major Feeding States 14,932 feedlots marketed 20.4 million cattle14,932 feedlots marketed 20.4 million cattle Average marketings/feedlot = 1,369 headAverage marketings/feedlot = 1,369 head Feedlots >1000 hd. (1,632 lots) marketed 95% of cattleFeedlots >1000 hd. (1,632 lots) marketed 95% of cattle Source: USDA, Cattle On Feed7 states = AZ, CA, CO, IA, KS, NE, TX

13 K-State Research & Extension Largest Cattle Feeding Firms, 2005 RankFirm# of Lots 1-Time Cap. (head) (head) 15 Rivers Ranch10811,000 2Cactus 10520,000 3Cargill 4300,000 4Friona 4275,000 5AzTx 4232,000 Source: Cattle Buyers Weekly

14 K-State Research & Extension Which Size Category Is Gaining Market Share?

15 K-State Research & Extension Why Is Feedlot Concentration Increasing? Lower costs for larger firmsLower costs for larger firms Why?Why? Larger firms in better position to utilizeLarger firms in better position to utilize –Technology –Management skills Labor managementLabor management Financial managementFinancial management Marketing managementMarketing management Implication: Small & medium size feeders operate at a cost disadvantageImplication: Small & medium size feeders operate at a cost disadvantage

16 K-State Research & Extension Beef Packing Sector Concentration Increased Dramatically 4-Firm Concentration Ratio (CR4) increased from 41% to 78% during 80s4-Firm Concentration Ratio (CR4) increased from 41% to 78% during 80s –Transition to large plant sizes was dramatic – % of all slaughter in plants handling less than 250,000 hd/year70% of all slaughter in plants handling less than 250,000 hd/year 35% of all slaughter in plants handling less than 100,000 hd/year35% of all slaughter in plants handling less than 100,000 hd/year – % of all slaughter in plants handling over 500,000 hd/year70% of all slaughter in plants handling over 500,000 hd/year 4% of slaughter in plants handling less than 100,000 hd/year4% of slaughter in plants handling less than 100,000 hd/year Source: McDonald & Ollinger, 2005

17 K-State Research & Extension Large Packing Plants Have Lower Costs Eliminating wage differentials across plant sizes provided incentive to build large packing plantsEliminating wage differentials across plant sizes provided incentive to build large packing plants Large plants paid higher wages in 60s & 70sLarge plants paid higher wages in 60s & 70s – Plant size 1% -wages 9% than mid-size plant Plant size 1% -wages 9% than mid-size plant –1982 Plant size 1% -wages 6% than mid-size plant Plant size 1% -wages 6% than mid-size plant –1992 Plant size 1% -no change in wages Plant size 1% -no change in wages Source: McDonald & Ollinger, 2005

18 K-State Research & Extension What Motivated Shift to Large Plants in 1980s? Change in packing plant labor costs facilitated shift to larger plants in the PlainsChange 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% > non-union workers –1987, just 21% of workforce unionized –In 1960s & 1970s, meatpacking wages 14 to 18% > than manufacturing wages –2002, meatpacking wages were 25% below manufacturing wages Source: McDonald & Ollinger, 2005

19 K-State Research & Extension Have Packing Industry Changes Been Good or Bad? Meat packing labor productivity increasedMeat packing labor productivity increased –Index of output per hour rose 80% from 1970 to , inflation adjusted spread between live and wholesale beef prices declined 57% , inflation adjusted spread between live and wholesale beef prices declined 57% Technology & productivity improvementsTechnology & productivity improvements –reduced farm-wholesale price spread by $0.23/cwt. –boosted live cattle prices $1.75/cwt. Source: Marsh & Brester, 2001

20 K-State Research & Extension Have Packing Industry Changes Been Good or Bad? Shift toward larger plant sizes reduced costs dramatically Industry Weighted Average Processing Costs YearPer Head Cost (1992$) 1977$ $ $ $85.09 Source: McDonald & Ollinger, 2005

21 K-State Research & Extension International Trade Outlook

22 K-State Research & Extension U.S. Was A Net Exporter From

23 K-State Research & Extension Top 5 Importers Accounted for 91% of U.S. Exports U.S. needs to recapture these markets to regain $s and volume

24 K-State Research & Extension Cattle Imports from Canada Are Increasing But Remain Well Below 2002s Record Level Jan-July 2006 imports 32% below 2002s and 21% below 2001s

25 K-State Research & Extension Beef Imports From Canada Decline

26 K-State Research & Extension Result: U.S. Imports Falling Below 2005s

27 K-State Research & Extension Where Are We Headed? Trade U.S. strength is in high quality beef productsU.S. strength is in high quality beef products Other countries may have comparative advantage in cow-calf productionOther countries may have comparative advantage in cow-calf production Exports to Pacific Rim increasing in 07Exports to Pacific Rim increasing in 07 Regaining market share will take several yearsRegaining market share will take several years –Market access is key Consumer incomes in importing countries are key to long-run growth in exportsConsumer incomes in importing countries are key to long-run growth in exports

28 K-State Research & Extension Long, Slow Road to Export Recovery

29 K-State Research & Extension Export Recovery Means Net Beef Imports in 2007 Could Be 1/2 2004s

30 K-State Research & Extension Supply Side in the U.S.

31 K-State Research & Extension Mid-Year Inventory Was Above 2005s, And…

32 K-State Research & Extension Strong Profitability Encouraging Expansion, But…

33 K-State Research & Extension Livestock Marketing Information Center Data Source: USDA/NASS Poor Pasture Conditions Could Be Holding Back Expansion

34 K-State Research & Extension U.S. Beef Cow Slaughter Up 17% vs. 2005

35 K-State Research & Extension But Producers Have Been Holding Back Heifers

36 K-State Research & Extension Slaughter Is Expected To Rise Modestly

37 K-State Research & Extension Large On Feed Inventory

38 K-State Research & Extension Drought Pushing Light Weight Placements Up

39 K-State Research & Extension Weights Will Remain Heavy

40 K-State Research & Extension And Beef Production Will Rise Cyclically

41 K-State Research & Extension Sharp Price Recovery from Summer Lows

42 K-State Research & Extension Prices Will Be Near Record High Again in 06 Prices Will Be Near Record High Again in 06

43 K-State Research & Extension Futures Are Pretty Optimistic For Spring

44 K-State Research & Extension Quarterly Slaughter Steer Price Projections Qtr.YrUSDA*LMICKSU 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

45 K-State Research & Extension Despite Feedlot Losses, Feeders Remain Optimistic

46 K-State Research & Extension But Higher Corn Prices Lead To Lower Bids for Feeders

47 K-State Research & Extension Feeders In 05 Averaged A Record High of $112/cwt. Prices in 06 Could Wind Up Near 05s Average

48 K-State Research & Extension Rising Corn Prices Pushing Prices Lower

49 K-State Research & Extension Near Record High Calf Prices Again In 06 Cycle Peak in 05 & 06

50 K-State Research & Extension Ethanol, Corn Prices, & Cattle

51 K-State Research & Extension 3 Largest Corn Crops On Record

52 K-State Research & Extension But Corn Usage Has Been Growing Rapidly

53 K-State Research & Extension Ethanol Usage Growing Rapidly

54 K-State Research & Extension U.S. Will Need More Corn Acres How Do We Get Them?

55 K-State Research & Extension It Will Take Higher Prices To Push Acreage Higher Average Prices Will Be Higher and Frequency of Price Spikes Could Increase

56 K-State Research & Extension Where Are Corn Prices Headed? Higher Corn Prices Spell Trouble for Livestock Producers Ethanol?

57 K-State Research & Extension Quarterly Lb. Steer Price Projections Qtr.YrUSDA*LMICKSU Q4.06$ $ $ Q1.07$ $ $ Q2.07$ $ $ Q3.07$ $ $ * Livestock, Dairy & Poultry Outlook