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Issue # 584
Beef & The 3 C's - No Rest For The Weary - Nevil Speer, PhD, MBA, Western Kentucky University (reprinted with permission on 4/14/08 from CattleNetwork.com)
January's Monthly Market Profile was subtitled "2008 - Corn, Consumers and Capacity." During the past several months the beef complex has been inundated with the converging influence of those three factors. Where are we with respect to the 3 C's?
First, let's look at consumers. Clearly, the American public is very concerned about the general economy. There's increasing evidence that the U.S. has indeed entered a period of recession. Most notably, the Labor Department's April employment report indicated a loss of 80,000 jobs in March - the weakest report in 5 years and marks the 3rd consecutive month of decline. Meanwhile, perception is reality: the March Reuters / Univ. of Michigan Consumer Sentiment survey reported that "…consumers were nearly unanimous in the opinion that the economy has already slipped into recession. Consumers have adopted much more cautious spending plans…" And April's preliminary index was 63.2 - the lowest reading since 1982. Trepidation about the economy is influencing the beef industry.
The Choice cutout fell below $140 in late-March - the first time since last November and well below year-ago levels (see graph below). More important, though, is the trend: the slump has occurred when cutout values are expected to seasonally improve. Perhaps more concerning is the decline in the Choice-Select spread now hovering around $1. Those levels haven't been seen since April, 1998 (against a low-$60's fed market) - a period which marked an all-time low in beef demand. That weakness has forced a significant contra-seasonal slump in the fed market: fed prices have slipped $7/cwt from a near-term high of $93 in late-February to $86 in late-March (the equivalent of $85/head in just 5 weeks). The net result is cattle feeders are leaving most, if not all, of their margin money on the table as closeouts post losses of $150-200/head.
Second, there are important developments on the corn front. USDA's Planting Intentions report (March 31) indicated U.S. farmers initially plan to grow only 86.0 million acres in 2008 (versus 93.6 million in 2007); a level not sufficient to meet total use projections for the coming marketing year (see graph below). Additionally, USDA's WASDE report (April 9) resulted in another downward adjustment to carryover. That scenario spells a dramatic decline in net carryover and stocks-to-use ratio for the coming marketing year (see table below). And the outcome means even higher prices. Meanwhile, increasing concern about saturated soil conditions through the heart of corn country has also begun to creep into the market.
Prospects for delayed plantings may potentially penalize yield and/or cause even more shift to soybean acres (especially considering capital investment required to plant corn). Corn prices have moved sharply higher in recent weeks - CBoT's December corn contract has now surpassed the $6 mark. There's plenty of risk as the market transitions into summer; look for a rocky ride as the market tries to figure out where all of this will end up!
Third and finally, the really big news of the month relates to capacity: JBS announced intentions to purchase National Beef Packing and Smithfield's beef division coupled with acquisition of the Five Rivers cattle feeding company. In January I noted that, "From a business rivalry perspective rationalization must occur." The deal is a major step towards that end and, if approved by the Department of Justice, would provide JBS capacity to harvest approximately 42,000 head daily thereby commanding nearly 1/3 of the industry's market share (see table below). The question remains, though, do the acquisitions really place JBS in an improved competitive position or has the company simply succumbed to the temptation of "volume obsession" (See www.destructivehabits.com)? How that strategy plays out remains to be seen. Regardless, it's an important, but not really surprising, development within the industry. Much of what's below stems from discussion in the Monthly Market Profile several years ago (January, 2003) dealing with business principles and consolidation.
Business strategists, Sheth and Sisodia (The Rule of Three, c. 2002), argue that industries adapt and experience change, in order to become more efficient, as a result of four primary drivers: 1) creation and implementation of industry-wide standards, 2) attempts to offset large fixed costs, 3) increased government intervention, and 4) industry consolidation. These four factors are inherently related causing on-going and amplified change within any industry. A shift in any of the first three drivers causes the fourth. Ultimately, industries respond with consolidation that leads to three companies which dominate the marketplace. For example: John Deere / CNH Global / AGCO; McDonald's / Wendy's / Burger King; American / United / Delta (based on passenger miles); Nike / Adidas / Reebok. Why three? Three main players within an industry create equilibrium between predatory competition and market collusion.
Similarly, authors Deans, Kroeger and Zeisel (Winning the Merger Endgame: A Playbook for Profiting from Industry Consolidation, c. 2003) detail the results of extensive research regarding industry consolidation trends in a variety of industries. Their thesis is that all industries experience the same pattern of consolidation; the only major difference is the length of time over which it occurs. Consolidation can be segregated into four distinct stages. These stages are defined by market share possessed by the three largest corporations within an industry. The early stages, I and II, are depicted by a highly fragmented industry with lots of players each of which possess limited market share. Stage III - the Focus Stage - is one in which "…competitors battle to be among the last ones standing". Stage IV, the final stage of consolidation ("Balance and Alliance Stage") is characterized by mature industries in which the three main players possess 70-90% of market share; e.g. tobacco, agricultural machinery, and oil.
The beef industry has witnessed a large degree of consolidation in several of its segments over the past decade. This has predominately occurred in the retail sector which is most appropriately defined by the "Stage III" description. Retail stores possess minimal margins (~2%). Therefore, the most efficient way to improve corporate competitiveness and profitability has been to increase turnover. Growth in sales has largely come via acquisition, mergers and creation of new marketing channels. The feedyard industry could also be characterized by "Stage III" of consolidation. During the past several years I've discussed the ongoing pressures within the sector that drive industry rivalry and consolidation.
Per the proposed JBS acquisition, the processing sector will be depicted by the "Stage IV" description. That event is contentious - it speaks to the heart of the single most tenuous issue within the beef industry. Consolidation trends among the packing/processing sector are likely the single most tenuous issue within the beef industry. The beef industry is pressured by ever-shrinking margins. In response, it has been forced to become increasingly efficient, productive and competitive. Business consultant Michael Hammer points out that "…too much productivity is a mixed blessing. Increasing productivity does enable a company to lower its costs while increasing its output and that ought to be good for any business. But what is good for any business, it turns out, isn't good for every business" (Fast Company, Nov, 2002).
In response, despite associated difficulties and resistance, increased transition is likely to continue in years to come. New business models will increasingly be transferred back through its respective segments: innovative efforts to maintain profitability will result in further coordination both between and within respective sectors. Transition within any industry, especially as it moves from an adversarial approach to a coordinated arrangement, is a difficult one. "Supply chain integration and the implementation of new technologies must be planned and handled with care because all of the participants in a supply chain are independent entities. Participants tend to resist changing their work practices, especially if the benefits are perceived to be greater for other participants" (National Research Council, 2000).
When it's all said and done, the beef industry is not unique: it is subject to universal business principles. With that in mind, resilience is fundamental to success amidst turbulent business conditions: being informed, remaining objective and embracing versatility are key components going forward to advance through adversity and change.
Fooled again? - Steve Suther, Director, Industry Information, Certified Angus Beef (reprinted with permission from the CAB "Black Ink" publication, April, 2008)
Choice beef is worth more than Select grade. That's because consumers prefer higher quality, and have been willing to pay more for it. So, why did Select beef sell for more than Choice for a few days this spring?
Was it an April Fools market? You could look at it that way--it sure wasn't because consumers wanted more Select beef. Historically, any time Select beef trades even with Choice, something strange is going on.
A couple of years ago, we'd think it wild fantasy to read about corn above $6 a bushel, beans in the teens and wheat that went to the moon on northern spot markets before settling back into mere earth orbit. Unfortunately for livestock producers, this is reality today.
Hay and pasture acres are being plowed under to make room for grain. Yet, we have increased supplies of pork and poultry that rely entirely on grain. Finished cattle this spring came in at record heavy weights. Nobody really knows why quality grade improved along with yield grade.
With a U.S. recession looming, softer demand for beef could be no surprise. It has struggled since 2004, as retail beef prices climbed but average quality remained about the same.
The point is, a lot of unexpected factors came together as the carcass beef prices neared its expected $1.50-per-pound market ceiling. The unexpected will shake up a commodity market, and most beef is a commodity.
Today's big food companies and purveyors manage risk by locking in beef purchases in the price dips. They aren't going to run up the price when they see all the signs pointing lower. In some respects, the recurring $1.50 ceiling is a self-fulfilling market prophecy.
With orders locked in, those big players were unable to take advantage of the 10% increase in Choice beef this spring. Nor could purveyors find new customers overnight for beef that had been predictably scarce. The short-term narrow Choice-Select spread shows us that our market is not so nimble as to reflect true value all the time.
Regardless of the how and why, cattle producers were seeing red, and doubly so if they counted on premiums for Choice beef this spring. In their disgust, some of them were seeing this April Fools market as a new reality. They wonder why anybody should try to produce quality at a discount to the traditional floor price of Select.
They think back to the rock anthem of their youth and vow, "We Won't Get Fooled Again!"
Before we get to Roger Daltrey's rallying scream for revolution, cool it for a moment. Don't read too much into this market, because it is already settling back into more familiar, although lower trends. If Abraham Lincoln was right, then each of us can be fooled some of the time, so take care.
There are challenging days ahead, but let's not compound the stress by shifting so much into a survival mode that we set ourselves up for failure with consumers. The surest way to get fooled again would be to assume that, suddenly, consumers no longer prefer the taste of well-marbled beef.
Our key market indicator, the Choice-Select spread, is becoming less reliable. Ten years ago, commodity Choice beef included much more of the upper two-thirds share of the grade than today. Now that an estimated 85% of Choice is from the lower third, there is less value difference between it and Select beef.
Even with that narrowing advantage, the long-term trend still favors Choice. The growing rewards for quality are more obvious in the market history of premium Choice and Prime beef brands. As an industry, we need to bring all of our ingenuity and technology to bear on producing high quality beef efficiently and profitably.
Genetics: Today and Tomorrow - Scott P. Greiner, Ph.D., Extension Animal Scientist, Beef, VA Tech
At the current time, the beef cattle industry is equipped with more science-based tools for animal selection than ever before. New tools such as DNA genotyping, coupled with enhancement of existing tools such as EPDs, allow cattle breeders to make informed decisions about the direction of their genetics. Most importantly, these tools create an opportunity to design genetics customized to meet the diverse needs of both producers and consumers. At no other time in the history of beef cattle breeding has there been as much information at our disposal to enhance our position among consumers, and at the same time produce cattle which are functional and profitable across many diverse production systems.
Modern Tools: Science has had a profound impact on cattle breeding. We have witnessed an evolution from adjusted weights and ratios to calculation of expected progeny differences, and now application of selection indexes and DNA genotyping. The principles established in collecting performance records many years ago continue to serve as the foundation of our current tools, and therefore we must not forget that the collection of performance records will continue to be vital to our success in this new age of science.
The ability to make dollar and sense decisions utilizing EPDs has been dramatically improved through the implementation of selection indexes. These tools enhance our ability to simultaneously select for favorable responses in multiple traits, and provide a systematic way to combine EPDs related to a common selection goal, and do so in a manner designed to capture the economic influence of each component trait. Additionally, they assist us in striking a logical balance among traits which may be antagonistic, yet important in reaching our goals. As an example, many breed associations provide a carcass value index EPD. These indexes provide a tool for striking a balance between carcass quality grade and yield grade component EPDs. The future will bring more tools such as these, as well as more advanced decision-making and support systems to compliment them.
The mapping of the bovine genome as well as that of other species holds tremendous promise for the future of cattle selection. The ability to select animals for specific gene combinations is a reality today for traits such as marbling and tenderness. The most exciting opportunities in this area are in the works, with scientists mining the genome for genetic clues which will enhance cattle health, measures of efficiency, reproduction, and other economically relevant traits. Most importantly perhaps, efforts are ongoing to incorporate the results of DNA tests into breed databases and include these results in calculation of EPDs. DNA tests hold tremendous promise when they can be used to enhance our current selection tools, and provide selection opportunities for traits that are difficult and/or very expensive to measure.
Opportunities for Producers: The large number of tools at our disposal to make educated decisions is perhaps both our biggest opportunity as well as challenge. New innovations add to the complexity of the decision-making process. Therefore, great opportunity is at hand for producers who communicate with other partners in the supply chain regarding their product offering, and use this communication to effectively enhance the profitability and sustainability of their customers and partners.
We have all been asked- "which is the best bull?" The response to this seemingly simple question cannot be painted with a broad brush, or in a manner which fits all needs. If we consider the question in the context "which is the right bull for my situation?" we are prompted to define the important parameters that warrant consideration. The collective focus should be on effective strategies that allow the right bull to be designed and identified.
Our industry is characterized by diversity in production environment, herd size, and consumer needs. Working to understand herd goals and needs, and designing genetics to fit these needs today and in the future are key. At the same time, one must keep abreast of changes coming in the dynamic, ever-changing global economy influencing agriculture.
Herd goals and objectives serve as the foundation for sire selection and provide guidance as to traits with the most economic relevance. A basic definition of the production and marketing system, along with management strategies and environment are key factors that warrant consideration. Within each of these considerations, an assessment of the strengths and weaknesses will provide more details, with solid record-keeping strategies providing the necessary information from which to build decisions both today and for the future. Priorities should be established based on those factors which stand to have the largest impact on profitability. Performance is a function of both genetics and environment, and therefore compatibility of genetics to forage resources, feed quality and quantity, and management is key.
Our success as an industry is dependent on providing safe, nutritious, consistent products to consumers which are increasingly interested in the processes of the supply chain delivering the product to their plate (production practices, environment, animal care, animal nutrition and health, and others). Beef is a flexible product, with numerous attributes desired in the marketplace. Therefore, not all beef needs to be the same, yet must be produced with a viable target market driven by consumer expectations.
The Future and Beyond: In many ways we are in the midst of the most exciting times in the beef business. Never before has there been more opportunity to derive added value for producing a superior product throughout the supply chain. This is true for the seedstock supplier, cow-calf producer, stocker operator and backgrounder, feedyard operator, and processor. The opportunity to create value by communicating and working together has never been greater.
EDITOR's NOTE: Improving beef herd production utilizing many of the tools mentioned above will be a focus of next week's Ohio Beef Cattle Breeder Conference being hosted on the campus of The Ohio State University by Dr. Tom Turner and staff of the American Simmental Association. Find details in the April 9 issue of the Ohio BEEF Cattle letter.
Forage Focus: Winter Injury in Alfalfa - Mark Sulc, OSU Extension Forage Specialist
Reports are coming in from around the state about winter injury in alfalfa. Reports range from heaving to outright winter kill of plants without heaving. Considering the stressful conditions last year and through the winter and cutting management decisions that were made late last fall, the reports are not surprising.
The 2007 Easter freeze followed by very dry conditions the remainder of the growing season left alfalfa stands in a weakened state going into the winter. Where a late fall harvest was made, no plant cover was left to insulate the crowns and the soil from alternative freezing-thaw cycles. Research in Wayne county demonstrated that early November harvests dramatically increased heaving in alfalfa stands compared with where a late harvest was not made. Furthermore, very wet soils throughout the winter probably contributed to lack of oxygen for alfalfa roots, and wet soils are also known to decrease cold tolerance of alfalfa.
A careful inspection of all alfalfa stands at this point in time is very important. A "windshield inspection" is inadequate to accurately assess the health of alfalfa stands this year. Walk your fields and get a broad view to determine whether spring growth appears uniform. If growth is spotty or nonexistent, it is very likely that plants have suffered severe winter injury or heaving.
Heaving in alfalfa stands has been reported from north to south in Ohio and in older as well as newly seeded fields. Severity ranges from mild to severe, both within fields and between fields. Heaving is usually more severe in areas with less than ideal internal and surface soil drainage.
Plants with crowns heaved up 2 or more inches are already dead, or are in the process of desiccating and will soon die. Plants that are heaved 1 to 1.5 inches above the soil surface or less may on casual inspection appear normal and healthy with decent spring growth. But closer inspection may reveal some moderate heaving, which will likely limit the productive life of the plant. Such plants will desiccate more quickly, be injured by wheel traffic, and crowns may break or be cut off at the first harvest. Some of those plants may survive through the first harvest, but their yield potential is compromised and they will likely disappear from the stand at some point during the growing season.
Plants can also be killed by cold temperatures. Forage agronomists (Cosgrove and Undersander) at the University of Wisconsin describe freezing injury in alfalfa as follows: "Winter killed roots will have a gray, water-soaked appearance early, just after soils thaw. Once water leaves the root, the tissue will become brown, dehydrated and stringy (see Figure 2). If the root is soft and water can be easily squeezed from it, or is brown, dry and stringy, it is most likely winter killed." For a picture of freeze injury, refer to their fact sheet at http://www.uwex.edu/ces/crops/uwforage/StandEvaluationFOF.htm
To evaluate an alfalfa stand, estimate the number of live plants per square foot. The best way to do this is to dig up and count the plants in a 1 to 2-square foot area in several parts of the field. Second year stands (seeded last year) should have 10 to 12 plants per square foot, and third year or older stands should have 5 to 6 plants per square foot for optimal yield potential. When making plant counts, consider only those plants that appear healthy with vigorous shoot growth.
Carefully evaluate the condition of new buds and new shoots for evidence of injury. Healthy plants with no winter injury will show vigorous, symmetrical growth all the way around the crown. Injured legume plants will often show asymmetrical growth caused by injury to part of the crown.
Take a random sample of the plants that were dug up for making stand counts. Split the taproots lengthwise to look for internal discoloration of the taproot tissue. Healthy taproots will be firm and creamy white. Root and crown rot will appear as various darker shades. The degree of root and crown rot affects plant productivity, vigor, and long-term survival. If taproots are watery, tan or yellow, or already desiccating, it is an indication that freeze injury has occurred and the plants will likely die.
Visually estimate the ground cover of desirable forage plants as the stand develops 4 to 6 inches of new growth. Stands with more than 80% ground cover and good vigor will produce excellent yields, stands with 60-80% ground cover should produce fair yields, stands with 40 to 60% ground cover will probably produce yields in the 60% range of normal, and stands of 20-40% ground cover will yield less than half their normal potential. Weeds will become a real problem in the thinner stands, and over seeding with grass or destroying the stand and rotating out to another crop should be considered.
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BEEF Cattle is a weekly publication of Ohio State University Extension in Fairfield County and the OSU Beef Team. Contributors include members of the Beef Team and other beef cattle specialists and economists from across the U.S.
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Fairfield County Agriculture and Natural Resources
