All sectors of the cattle and beef industry have evolved significantly over time, and many producers feel left out of a true market for their cattle.
Addressing those feelings, Agricultural Economists Derrell Peel from Oklahoma State University and John Anderson of the University of Arkansas, penned an article for the Livestock Marketing Information Center discussing cattle markets, price discovery and emerging issues that affect it all. This is a summary of that article.
HOW WE GOT HERE
Today’s controversies related to fed cattle pricing mechanisms have their origin in the profound changes in the beef cattle industry that began in the 1960s and 1970s. Changes generally related to capturing efficiencies of scale.
More efficient production resulted in more beef, even as cattle numbers dropped after the 1975 peak of 132 million head. Technological progress in things like genetics, hormone implants and feed additives resulted in an average annual increase in steer carcass weights of 4.2 pounds, going to 907 pounds in 2020 from 656 in 1960.
But with population growth and increased exports, domestic per capita beef consumption declined as production increased. US beef demand decreased from 1980 to about 1998, then increased with another drop in 2010-2011 followed by general increases over the last decade.
MARBLED VS UNMARBLED
As Corn Belt cattle feeding developed rapidly in the post-World-War II period, interest in carcass grading increased along with consumer preferences for marbled beef. By the 1960s, large commercial feedlots were developing in the Plains, and cattle feeding began to expand rapidly. Feedlot inventory was just under 10 million head in 1965, increased to 12.5 million in 1985 and was 14.7 million in 2021.
The packing sector was evolving rapidly along with the cow/calf and feeding sectors. Boxed beef fabrication technology was introduced in 1967 by Iowa Beef Processors, greatly increasing the efficiency of space and transportation.
As consumer preferences shifted toward lean beef beginning in the 1980s, the consequent move to “close-trim” product magnified fabrication efficiencies by reducing shipping costs further and facilitating markets for tallow and shifting more fabrication to the packer.
The cost efficiencies associated with larger operations in increasingly sophisticated and capital-intensive beef packing and fabrication led to rapid concentration of beef packing in the 1980s.
Through the 1980s, most fed cattle were priced on averages. There was little retail differentiation, so packers did not pay more for certain cattle, and producers had no incentive to produce them.
The “value-based marketing” of the 1990s led to grid pricing for premiums and discounts and formulaic pricing, which did away with weekly negotiations and brought negotiated cash trading down to about 20% to 25%, leading to calls for government mandated negotiation percentages with no real solutions.
CATTLE, BEEF RECAP
The USDA reported formula and contract base prices for live FOB steers and heifers this week ranged from $151.89 to $155.03 per cwt, compared with last week’s range of $150.11 to $153.77. FOB dressed steers, and heifers went for $235.92 to $239.81 per cwt, versus $234.01 to $242.86.
The USDA choice cutout Thursday was up $0.01 per cwt at $257.10 while select was up $0.39 at $231.74. The choice/select spread narrowed to $25.36 from $25.74 with 113 loads of fabricated product and 52 loads of trimmings and grinds sold into the spot market.
The USDA said basis bids for corn from feeders in the Southern Plains were unchanged at $2.05 to $2.25 a bushel over the Dec futures and for southwest Kansas were steady at $1.00 over Dec, which settled at $6.67 1/2, up 2 1/4.
The CME Feeder Cattle Index for the seven days ended Wednesday was $175.39 per cwt up $0.41. This compares with Thursday’s Nov contract settlement of $175.85, up $0.15.