Like a good soaking rain, significantly stronger cattle prices during the past year have sprouted optimism among ranchers and feedyard operators. The markets have produced several months of profitability and renewed hope that the beef industry is moving toward lasting prosperity for all segments.
Today’s formula for prosperity is a mixture of a tight supply of harvest-ready cattle and continuing increases in beef demand by American consumers. The supply side of the equation is a cyclical trend in production coupled with the ban on Canadian imports due to BSE. The demand factor, however, is a result of several years of production and marketing changes spurred by your industry’s focus on improving beef’s quality, consistency and convenience.
The state of your industry is strong, and it’s gaining momentum against other protein sources.
A turbulent time ends
At this time last year, our country and our industry were in the midst of a tumultuous period. The terrorist attacks were just 12 months in the mirror, and a new war with Iraq lay on the horizon. The economy was struggling, and drought gripped much of the nation’s heartland. Cash fed-cattle prices ended August 2002 with an average of $63.25 per hundredweight, leaving feedyards with a $75-per-head loss. Feedyard margins wouldn’t climb into the black until the first week in November. In fact, that initial week of feedyard profits marked the end of 82 consecutive weeks with negative margins for cattle feeders, dating back to April 28, 2001. And in the 115 weeks from the final days in April 2000, until the first week of November 2002, harvest-ready cattle saw positive average margins during just 18 weeks.
Cash fed-cattle prices closed August of this year at $79.92, a full 20 percent higher than the same period last year. Other classes of cattle have followed. Yearling feeder steers weighing 700 to 800 pounds ended August at $94.96, nearly 19 percent higher than the previous year, and 400- to 500-pound steer calves are at least 12 percent higher. Feedyard margins for August averaged $124 profit per head, a $200 per head difference from August 2002.
The beef industry’s outlook also has been bolstered by an improving overall economy. Consumer confidence is up and our nation’s economy is growing at a modest but steady pace. Interest rates remain low, and traders on the New York Stock Exchange have confidence that the market is once again headed higher over the long term.
The possibility of terrorist attacks remains a significant threat, but confidence is growing that systems are now in place that have significantly reduced those threats. The Iraqi war is over, and while America struggles to win the peace, the uncertainty of prolonged, all-out combat has been removed.
The drought, however, continues to leave its mark on America. This spring, many regions received adequate rainfall as the growing season began, and drought’s grip appeared to loosen. But July and August brought the drought back with a vengeance to most of the Plains states. For instance, Kansas City posted the driest July on record, and August was similar until rains in the 5- to 7-inch range hit on the month’s last weekend.
Although drought and its consequences continue to have an impact on many producers, 2003 represents a remarkable turnaround for nearly everyone involved in the beef industry. And robust demand for beef deserves much of the credit.
Demand climbs higher
If consumer demand is the barometer of improvement for beef producers, then certainly our industry has made progress in the past decade. Since 1998, consumer demand for beef has steadily increased. This year, demand has surprised nearly everyone by posting gains despite higher average retail prices.
“An analysis of net beef supply (domestic production, plus import totals, minus export totals) and wholesale prices suggest that beef demand was near all-time highs during the first half of the year,” says Cattle-Fax analyst Dave Weaber. “Domestic spending for beef is on pace to be $60.14 billion, which is more than last year’s record $60.11 billion.”
Such spending is remarkable when you consider that beef production is projected to be down this year, probably about 300 million pounds. Average wholesale prices ended the second quarter of this year at $132 per hundredweight. That’s the first time average wholesale prices have ended a quarter above $130. Weighted-average cutout values averaged $128 during the first half of 2003, 15 percent higher than the $111 average during the first half of 2002.
Even more impressive, demand posted second-quarter gains despite the BSE discovery in Canada. That shows the confidence American consumers have in the wholesomeness of beef, and the rising demand suggests quality and value have improved.
In the late 1990s, industry leaders knew one of the keys to building demand was to develop new products. Our industry desperately needed to update our retail and foodservice product offerings to better compete with pork and poultry. In response, our industry has developed at least 300 new products over the past few years, and many of those products are a direct result of checkoff-financed research and development.
One of beef’s greatest success stories is the development of new products from the chuck and the round. Products developed from the chuck and the round have added significant value to each carcass. Prior to the development of those new products, such as the flatiron steak, the bulk of the chuck and the round ended up in retail cases as ground beef.
In addition, meat cases are being relabeled according to cooking methods, and cooking instructions are appearing on packages. Instead of big hunks of raw meat scattered around the meat case, retail shoppers now find the meat case a much friendlier place than before.
New products deserve much of the credit for beef’s increasing demand the past few years, but the rapid growth of producer alliances and branded products has also helped fuel the market’s revitalization. Most of today’s alliances or supply chains are quality driven, and most have systems in place relating to quality—from genetic specification to aging and electrical stimulation of carcasses. The proliferation of alliances and supply chains continues to pull our industry away from a commodity system toward a value-based system.
Overall, the beef industry stands in much better financial shape than at this time last year. And the campaign to improve beef’s quality continues to gain momentum. Demand continues to grow at a time when retail prices are relatively high, and creative product offerings at retail and foodservice outlets have become a hit with many consumers.
Yes, progress has been made, and profitability for ranchers and feeders is up. But Beef’s Quality Campaign is far from complete. Unfortunately, there are still too many cattle produced without concern for their next owner in the industry, and with little regard for the end product. Industry leaders believe economic incentives will soon change those production practices. As those incentives fall into place, fewer and fewer producers will be able to afford to ignore beef’s quality movement.