OCA Members Hear Thoughts On
Future Of The Beef Industry

OKLAHOMA CITY — The Oklahoma Cattlemen’s Association, gathered here last week to celebrate its 50^th anniversary, attracted a good crowd. Many of the long-time OCA members reminisced about bygone times and in almost the same breath lamented the challenges facing the industry today.

One of the convention’s keynote speakers was Steve Kay, editor and publisher of Cattle Buyers Weekly.

"The issues facing the industry are very complex and we obviously will not make light of that," Kay told OCA members.

He outlined a few key challenges and then discussed each in detail. Those included: supply and demand, food safety and animal welfare, consolidation/structural changes, equity and capital erosion, and global pressures.

Those in the beef industry, he noted, are painfully aware that there is a profitability crisis among cattle feeders. Kay said the amount of equity lost is now approaching $2.5 billion.

"It’s more than serious; it’s a terrible blow to the financial well-being of this industry.

"A lot of people blame the packers and the retailers," he added, "and I’ll say right up front that there are some ancillary issues that resulted from what I think is the core reason for where we are today."

That core reason, he said, is an imbalance between supply and demand, something that according to Kay has been the case by and large for the last 15 or so years. The supply side, he said, seems to have a lack of discipline, which translates into ineffective marketing of cattle.

"Even though the cattle feeding sector is consolidating, we still have a remarkable lack of coordination when it comes to marketing cattle on a weekly basis," Kay commented. "Just look at how much of a struggle it was for southern Plains cattle feeders to get a marketing group established.

"I think that cattle feeders have given their leverage away to packers in a way that I think they now regret," he continued. "One of the worst decisions I think they made was to let the packers into their feedlots and let them run their cars up and down the alleys, and not only that, they gave buyers free information. Packers soon realized that they could gather all the marketing information they needed just by visiting feedlots every week."

The feedlot sector, Kay told listeners, has added to its own woes in the last two or three years by adding pen space while cattle numbers declined.

"There is an excess of capacity of about a million head. The top 30 cattle feeders in the past five years increased their pen space by 21 percent while the top four packers, who kill about 82 percent of all the fed cattle, during that same period, decreased their slaughter capacity by 5.5 percent."

The added pen space coupled with a short feeder supply, he noted, made for a competitive yearling and calf market.

"Good news for the cow-calf operators, disastrous for cattle feeders."

He cited figures from economist Bill Helming, whose data indicates that based on the average price spread between Texas fed steer prices and Oklahoma City feeder and calf prices, cattle feeders have overpaid for yearlings by about $10 cwt. over the last 20 years and $14-15 cwt. for calves just in the last two years.

Additionally, the cattle feeder in the last 10 years has gone from speculator to margin operator, and many have allowed their margins to narrow significantly by overpaying for feeder cattle.

As for the cow-calf sector, Kay cited a South Dakota University economist whose data shows that the top 16 percent of cow-calf producers are just average producers in terms of production. What set them apart from the rest was their ability to keep a tight rein on cost. They also learned how to be good marketers, not just of their calves but their breeding stock and cull cows and bulls as well.

Heavy carcasses, the speaker reminded, are another reason there is an oversupply problem.

"Fifteen years ago a packer’s ideal carcass weight was about 725 pounds. Today steers will average something close to 800 pounds. A couple of weeks ago weights had reached 828 pounds and now I figure they’ve exceeded 830 pounds. Last year in November, steers peaked at 833 pounds. I fear what they’ll weigh in November this year."

Because of these record weights the U.S. beef industry will produce 26.7 billion pounds of beef this year — about a billion pounds more than most analysts and even USDA predicted at the beginning of this year, Kay said.

"Cattle slaughter is only up three-tenths of one percent yet we’re already, up to this point, producing 2.3 percent more beef."

Add to that pork and poultry production which is also up 3.5 percent and couple it with a weakened demand base and it’s easy to see why there is an oversupply situation.

Given the overall picture, Kay said the retail domestic beef market has been remarkably resistant. The export market of late, however, has been the industry’s Achilles heel.

"It’s an indication of just how much we’ve missed the buying power of Japan. On the chicken side it looks like the Russians are playing the same game that the Europeans have played over hormones for many, many years. The Russians are hell bent on keeping our poultry out of their country, so that product will have to come back to the U.S."

The focus, the speaker said, must continue to be on capturing more of the consumer’s dollar by improving the fresh product or by adding new convenient, consumer-minded cooked meat products. The industry, he said, has made great strides in the convenience category. Last year alone, 475 new beef products were introduced, "a tremendous achievement given that four or five years ago we could pretty much count the new products on one hand."

The move to case-ready products, he added, should also help boost sales in the future.

Kay said the second major issue facing the beef industry is food safety and animal welfare. First there was the BSE crisis and then FMD, and the industry saw first-hand how a mysterious rumor of a possible disease outbreak could put the market in a tailspin and keep it there for several months. There’s also E. coli, most notably the recall of 18.6 million pounds of ground beef, the second largest recall in history.

"I think the American consumer is pretty much aware of E. coli, but when you turn on CNN and you see in the top left-hand corner of the screen a news flash that says ‘Bad Beef’ — it’s a negative for the beef industry."

He called on the entire beef industry to work together to come up with some kind of emergency funding plan to be used strictly for the purpose of eliminating E. coli.

"It’s not a packer problem. It’s not a producer problem. It’s an industry problem," Kay stressed. "The ConAgra recall is our wake-up call."

The debate over the safety of implants continues, and Kay pointed out that the debate in the last six months has gone from the Food and Drug Administration all the way to the World Health Organization.

"I believe in the safety of implants, but there are a growing number of people in this country who have concerns about implanted cattle. Why else would the market for so-called all natural beef be growing?"

Obviously, regardless of how an individual feels about implants, Key reminded listeners that there is opportunity to help fill the demand for this growing niche market.

As for the animal welfare issue, he said changes are being driven by restaurant chains, not government. Last December, for example, Applebee’s developed supplier guidelines which included a suggestion that animals not be branded.

Consolidation, another major issue, is a fact of economic life, Kay told OCA members.

"We have mega-chains in every part of the economy. Consolidation is a national as well as a global trend that cannot be ignored."

The retail sector is no exception. According to Kay, the top five grocery chains now control about 50 percent of all supermarket sales and about 31 percent of total U.S. grocery stores, and they’re forecast to have more than 70 percent of all supermarket sales by 2010.

"One cannot underestimate what Wal-Mart is doing to the food industry of which you are a part," Kay remarked. "They are selling groceries on average 30 percent below industry normals. Such competition puts price pressure on all suppliers, including meat suppliers."

Grocery chains, he said, are operating on thinner margins than ever before.

"Some of us in this room may think that retailers are cleaning up and making a lot of money. Right now they may be making more money on beef, but because their margins are so thin in the rest of the store, they’re making up their margins in the meat case."

As a result of consolidation, all major retail chains, Kay noted, now have some kind of formal business partnership with their meat suppliers. In every case, the driving force behind such arrangements is having a guaranteed supply of a consistent quality beef product. Most retailers now want their product priced out front, and food service operators want it priced six months out front.

Beef processors went through their own consolidation, in the mid to late 1980s.

"Since 1994, packer share of steer and heifer slaughter has actually gone down. But try telling that to some of the folks in South Dakota. I think it’s regrettable that some beef producers have chosen packers as their prime suspect in the great beef conspiracy. I think they’d do a lot better by educating themselves about these changes occurring in the industry and how they’re affecting their own businesses."

In the feedlot sector, according to Kay’s estimates, the top 30 cattle feeders now control about 43 percent of all fed cattle. That percentage, he noted, has been increasing at about a percent a year, and Kay predicted that equity losses will only hasten that trend.

The industry, the speaker noted, is moving from a production commodity-based kind of system to a consumer-driven, brand-based system. That new way of doing business, he acknowledged, threatens the existence of the traditional cash market.

"Quite frankly, the cash market no longer meets the needs of the consumer," Kay opined.

That said, the industry has yet to come up with a new kind of pricing structure to take the place of the cash system. It’s one of NCBA’s top priorities, Kay noted.

"That new mechanism, I believe, should include the following, at least: USDA’s new weekly boxed beef cutout, which I hope they will start publishing very soon; live product values; cash market average; and also a live cattle futures average. Put all those together into some kind of equation and come up with a figure that is truly meaningful."

The speaker also commented that changes need to be made to mandatory price reporting.

"It has some benefits, but mostly it has deficiencies and they need to be rectified. In addition, the industry needs to work harder to get some truly accurate retail data."

Yet another industry challenge is one that Kay referred to as the "establishment versus grassroots."

"There is a battle going on out there in the hearts and minds of producers, and the battle is focused on the beef checkoff.

"The real issue in my mind is whether it should be a $2 or $3 per head checkoff.

"In hindsight, maybe if the industry had taken the high road four or five years ago and taken a vote, this issue would be behind us, but then maybe not."

He touched briefly on the cash crunch now facing NCBA because of a loss in membership.

"I have seen NCBA go through various permeations over the last 15 years, and I believe it is now more focused, more determined and more determined in particular to reach out to its members and non-members in a very genuine way," Kay told the group. "I don’t know of any other organization that fights for its members in Washington and other parts of the country every day.

"Other groups might lobby on one esoteric issue. The way I see it is that those groups have a very narrow focus. They’re selfish, and I think they have potential to be destructive to the industry because they are attempting to gain support by playing on people’s emotions rather than dealing with the facts. They also tend to blame other people for the state of the world, and they refuse to take responsibility to control their own destiny."

Though the erosion in equity has dealt a serious blow to the cattle feeding sector, the "flight of capital" — from the beef packing industry to the beef industry at large — the speaker said, is even more serious.

"The beef industry from ranch to plate is suffering from undercapitalization. Well established firms are pretty well capitalized, but there’s still little support for them from Wall Street," he remarked.

That’s why IBP sought sale a year or so ago. That’s what caused ConAgra foods to spend a year looking for some kind of buyer for its red meat business. And now, because of the recent ConAgra beef recall, the deal which involves Texas buyout firm Hicks Muse Tate & Furst and Colorado entrepreneur George Gillett’s Booth Creek Management, has been delayed. In last week’s Cattle Buyer’s Weekly Kay reported that the reason for the delay is a matter of financing.

"Going to the financial markets is difficult under current circumstances anyway," Kay reported. "Asking for financing for a meat company that’s just had a massive recall will be even more difficult."

The first sign of the recall’s impact, Kay went on to report, came last week when J.P. Morgan Chase and Salomon Smith Barney delayed a $400 million senior note offering to support the deal.

"We need injection of new capital to really move this industry forward," he reiterated.

The domestic beef industry, Kay reminded, will continue to feel pressure from other beef-producing countries around the world.

"Whether it’s Australia, New Zealand, Canada — they will continue to be aggressive because they still see this as one of the best markets in the world."

Then there’s Brazil. Describing it as the "beef behemoth of South America," Kay told listeners that though Brazil may not compete directly with U.S. beef producers today, they most likely will in the near future.

"They already have 169 million cattle. Their target is to have 200 million. Their exports are increasing every year and their goal by 2005 is to be the largest beef exporter in the world."

The speaker voiced concerns about the pending implementation of country of origin labeling.

"I fear it might blow up in our face. What if Canada seizes the opportunity and brings in branded case-ready product into this country? It will be a sad day if consumers start choosing Canadian beef over American beef."

Despite the many challenges, Kay told listeners that there are just as many significant opportunities for progressive producers.

"Even though we have tremendous retail consolidation, let’s not forget that we have thousands of retail entities still competing with each other and wanting product. There are many retail companies looking for unique beef products to differentiate themselves from others, so there is tremendous opportunity to take advantage of that.

"The president and CEO of Wal-Mart said recently that one size does not fit all. He said they often ask their vendors to develop new products and promotions that satisfy regional preferences. In other words, don’t think that Wal-Mart is just going to take IBP’s Thomas E. Wilson."

He applauded the work the industry has done with case-ready products and cooked products, but added that there is much more yet to do.

"We’re starting to get a whole lot more creative, but we need to do more."

One example of creativity was described in a recent Wall Street Journal article which talked about Smucker’s launch of a frozen, individually wrapped peanut butter and jelly sandwich. And yes, it’s selling like hotcakes.

"That’s what the beef industry really has to tap into — America’s changing food habits," Kay said.

"The CEO of General Mills in a recent article said that he evaluates new products when they come on his desk by asking a simple question — ‘Are they one-handed?’

"What he meant is can they be eaten by people when they’re driving or typing on their computer? That’s the world we live in."

He discussed briefly some of the various cooperative type relationships that have been successful in the beef industry. U.S. Premium Beef, Kay said, is arguably the most successful to date.

"Members’ premiums alone in the first half of 2002 averaged $25.30 per head," Kay said, "Last year premiums averaged $44.46."

Oregon Country Beef is another success story. It started in 1986 with just 14 ranchers in the high desert of Oregon. The group now has 40 family ranches covering 2.5 million acres with 33,000 mother cows, Kay said. They sell just over half their beef to Whole Foods Market under the Country Natural Beef brand.

"Last year, returns back to the rancher were just a little above average, but this year they’re measurably better off."

One more example which he said indicates that size matters not is that of a producer in Maine whose Wolfe’s Neck Farm has been associated with all natural beef since the 1950s. Lawrence Smith realized that strength was in numbers. so he gathered up 10 farms around him and began a producer cooperative. Today that cooperative markets Wolfe’s Neck Beef through upscale grocery stores.

"The message is that it doesn’t matter where you are or how small you are, there is a niche market out there for a differentiated beef product. Nothing is impossible if you believe in the future."

Kay concluded by sharing his optimism for the future of the beef industry.

"Beef is still very much the meat of choice of the Western world, and as other parts of the world grow their economies, there will be a growing demand for U.S. beef. Just look how Mexico has taken so much more of our beef since the BSE crisis struck in Japan," he pointed out.

"The best way, I think, to position you as a producer," he continued, "is to develop relationships with those farther along the beef chain. If you don’t remember anything else, remember this: you’re not in the cattle industry, you’re in the beef industry, which is part of the food industry."

The most profound change in the beef industry, he reiterated, is beef’s move from a commodity to a brand. He predicted that in 10 years’ time nearly all beef sold at retail will have some kind of brand on it. He encouraged producers in Oklahoma to develop their own unique brand. The Oklahoma Quality Beef Network, he added, might be an appropriate vehicle from which to start.

He told producers that now is the time to consider expansion.

"Like the stock market, you should never buy when it’s at the top, rather buy when it’s at the bottom."

He encouraged everyone to put aside differences and be resolute in guiding their industry from this transition from the old to the new beef industry.

"It goes without saying that there’s going to be more pain and confusion along the way as we change, but we’re laying the groundwork for the next generation. I’m quite confident that we have the leaders with the talent, energy and the courage to lead the industry into the future," he concluded."