Macro InfluencesMacro Influenceson the Beef on the Beef

BusinessBusiness

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Background Macro Background Macro TrendsTrends

Herd building moves are imminentHerd building moves are imminent Continued moves away from price-Continued moves away from price-

driven systemsdriven systems Demand is growing againDemand is growing again Trade is net positive for the industryTrade is net positive for the industry Be careful with market Be careful with market

interventionsinterventions Look at long run strategiesLook at long run strategies

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The Supply-Side CycleThe Supply-Side Cycle

We We areare back in a cycle mode. back in a cycle mode. Hay and pasture conditions have Hay and pasture conditions have delayed the start. January 1 delayed the start. January 1 numbers will likely be lower numbers will likely be lower again but heifer holding will start again but heifer holding will start in 2004.in 2004.

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Total Cattle InventoryTotal Cattle Inventory

Livestock Marketing Information CenterData Source: USDA/NASS

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Expand your herds if you have the Expand your herds if you have the resources. Look for bred heifers and cow-resources. Look for bred heifers and cow-calf pairs to generate cash flow quicker. calf pairs to generate cash flow quicker. Improve genetics in the process. Check out Improve genetics in the process. Check out the price grids and vertical alliance the price grids and vertical alliance premium programs, and move quality and premium programs, and move quality and size of cattle toward what the new, more size of cattle toward what the new, more consumer-driven marketplace wants.consumer-driven marketplace wants.

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Demand is increasing since Demand is increasing since 1998 after a 20-year slide. We 1998 after a 20-year slide. We allowed beef to diverge from what allowed beef to diverge from what the modern consumer wants in the modern consumer wants in terms of performance and terms of performance and convenience. Some 20 to 25 convenience. Some 20 to 25 percent of Select and Choice cuts in percent of Select and Choice cuts in the fresh beef trade are still too the fresh beef trade are still too tough to chew.tough to chew.

Beef Demand IndexBeef Demand IndexQuarter 1 Quarter 2 Quarter 3 Quarter 4

Year 1980=100 1998=100 Year 1980=100 1998=100 Year 1980=100 1998=100 Year 1980=100 1998=100

1980 100.000 208.336 1980 100.000 188.619 1980 100.000 195.550 1980 100.000 203.752

1981 93.750 195.315 1981 92.901 175.230 1981 101.814 199.097 1981 88.691 180.710

1982 83.420 173.794 1982 90.391 170.495 1982 93.253 182.356 1982 84.881 172.947

1983 82.855 172.618 1983 90.189 170.113 1983 90.941 177.836 1983 81.008 165.056

1984 82.052 170.945 1984 85.929 162.078 1984 82.801 161.918 1984 81.029 165.098

1985 76.309 158.980 1985 85.232 160.764 1985 82.910 162.130 1985 73.105 148.954

1986 72.059 150.125 1986 81.649 154.005 1986 81.413 159.204 1986 71.490 145.663

1987 66.917 139.412 1987 73.815 139.229 1987 74.090 144.884 1987 66.829 136.166

1988 67.028 139.644 1988 73.976 139.533 1988 72.448 141.673 1988 64.780 131.991

1989 63.242 131.756 1989 69.344 130.797 1989 66.528 130.096 1989 64.197 130.802

1990 60.926 126.930 1990 69.910 131.863 1990 65.575 128.233 1990 62.930 128.222

1991 60.385 125.803 1991 67.835 127.951 1991 64.588 126.303 1991 58.533 119.263

1992 57.207 119.183 1992 63.496 119.766 1992 60.843 118.978 1992 56.362 114.839

1993 55.818 116.290 1993 61.711 116.399 1993 59.951 117.235 1993 55.435 112.950

1994 54.459 113.459 1994 59.364 111.971 1994 56.891 111.250 1994 53.733 109.482

1995 52.765 109.930 1995 57.729 108.888 1995 57.320 112.089 1995 52.830 107.642

1996 52.470 109.314 1996 56.953 107.424 1996 52.848 103.344 1996 50.847 103.601

1997 48.373 100.779 1997 54.416 102.639 1997 51.625 100.953 1997 48.606 99.036

1998 47.999 100.000 1998 53.017 100.000 1998 51.138 100.000 1998 49.079 100.000

1999 47.682 99.340 1999 55.053 103.841 1999 53.178 103.989 1999 51.483 104.897

2000 50.428 105.059 2000 56.579 106.720 2000 55.635 108.795 2000 51.413 104.755

2001 52.339 109.041 2001 59.888 112.960 2001 57.357 112.161 2001 54.799 111.655

2002 51.760 107.834 2002 59.795 112.786 2002 55.944 109.398 2002 53.844 109.709

2003 53.371 111.191 2003 61.491 115.984 2003 59.571 116.492      

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Beef Demand IndexBeef Demand Index33rdrd & 4 & 4thth Quarters 1995-2003 Quarters 1995-2003

Quarter 3 Quarter 4

Year 1980=100 1998=100 Year 1980=100 1998=100

1995 57.320 112.089 1995 52.830 107.642

1996 52.848 103.344 1996 50.847 103.601

1997 51.625 100.953 1997 48.606 99.036

1998 51.138 100.000 1998 49.079 100.000

1999 53.178 103.989 1999 51.483 104.897

2000 55.635 108.795 2000 51.413 104.755

2001 57.357 112.161 2001 54.799 111.655

2002 55.944 109.398 2002 53.844 109.709

2003 59.571 116.492

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The key to long run viability The key to long run viability and the chances to make a profit and the chances to make a profit is demand. We need to see a is demand. We need to see a continued aggressive pace in continued aggressive pace in packer-level investments in new packer-level investments in new consumer-friendly product lines. consumer-friendly product lines. Any market intervention that Any market intervention that threatens those investments threatens those investments should be made with care.should be made with care.

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Trade is a major trend that Trade is a major trend that will continue to impact the beef will continue to impact the beef industry in the presence of trade industry in the presence of trade accords like NAFTA, GATT, and accords like NAFTA, GATT, and the new WTO negotiations.the new WTO negotiations.

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U.S. Beef & Veal ExportsU.S. Beef & Veal ExportsAs a Percentage of Production, Carcass As a Percentage of Production, Carcass

Weight, AnnualWeight, Annual

Livestock Marketing Information Center

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U.S. Beef & Veal ImportsU.S. Beef & Veal ImportsAs a Percentage of Production, Carcass As a Percentage of Production, Carcass

Weight, AnnualWeight, Annual

Livestock Marketing Information Center

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Trade Helps in NetTrade Helps in Net

We We dodo import and export, but import and export, but the value of exports is higher. In the value of exports is higher. In net, my research says trade boosts net, my research says trade boosts our cattle prices and supports a our cattle prices and supports a bigger industry than we would have bigger industry than we would have if we shut down our borders and if we shut down our borders and saw retaliation from major buying saw retaliation from major buying countries like Mexico and Canada.countries like Mexico and Canada.

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The tendency toward market The tendency toward market interventions by Congress may be interventions by Congress may be the most important determinant of the most important determinant of the future of the beef business. the future of the beef business. And the net impact on producers of And the net impact on producers of these market interventions is these market interventions is anything but clear when you dig anything but clear when you dig hard and find the unexpected hard and find the unexpected implications which most of the implications which most of the discussions ignore.discussions ignore.

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Market Interventions Can Cut Market Interventions Can Cut Both WaysBoth Ways

Programs that add costs without Programs that add costs without adding price and value at the adding price and value at the producer level will lower producer producer level will lower producer prices. MPR and COOL may fall in prices. MPR and COOL may fall in this category. The “Packer Ban” this category. The “Packer Ban” legislation could have the unintended legislation could have the unintended result of reducing the huge sums the result of reducing the huge sums the larger packers have spent on new larger packers have spent on new products across the past 10 years; products across the past 10 years; especially the past 5-8 years.especially the past 5-8 years.

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Be Be veryvery careful with market careful with market interventions. Cow-calf producers need interventions. Cow-calf producers need investments in new product forms from investments in new product forms from the large packers. If you pass laws that the large packers. If you pass laws that tend to discourage those investments, the tend to discourage those investments, the demand growth we are seeing will falter in demand growth we are seeing will falter in future years. The residual claimant of the future years. The residual claimant of the consumer dollar (the producer), after all consumer dollar (the producer), after all middlemen extract an operating margin, middlemen extract an operating margin, will bear the price pain if demand is will bear the price pain if demand is allowed to falter.allowed to falter.

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Looking Ahead: Strategic Looking Ahead: Strategic PlanningPlanning

Be consumer drivenBe consumer driven Average pricing is badAverage pricing is bad Obsolete grades will not allow Obsolete grades will not allow

price-driven systems to bring price-driven systems to bring coordination and quality controlcoordination and quality control

Look for ways to get individual Look for ways to get individual animal valuations and pricesanimal valuations and prices

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Looking Ahead: Strategic Looking Ahead: Strategic PlanningPlanning

Take advantage of opportunitiesTake advantage of opportunities Contracts and price grids, if they Contracts and price grids, if they

helphelp Vertical alliances, if they fit your Vertical alliances, if they fit your

programprogram Know what the modern Know what the modern

marketplace wantsmarketplace wants

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Looking Ahead: Strategic Looking Ahead: Strategic PlanningPlanning

A conversation I have had with independent A conversation I have had with independent hog producers:hog producers:

““They don’t want my hogs.”They don’t want my hogs.”and I ask:and I ask:

““Are they uniform and consistent?”Are they uniform and consistent?”and they reply:and they reply:

““They are like peas in a pod and They are like peas in a pod and very very uniform.”uniform.”

and I ask:and I ask:

““What if they are uniformly wrong?”What if they are uniformly wrong?”

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Looking Ahead: Strategic Looking Ahead: Strategic PlanningPlanning

Have an open mindHave an open mindThe price system is failing because of The price system is failing because of problems with grades and increased problems with grades and increased sophistication in the industry. To be part sophistication in the industry. To be part of the new quality-assured lines, you may of the new quality-assured lines, you may have to be part of an alliance or see if have to be part of an alliance or see if you can find a price grid that works for you can find a price grid that works for you. To succeed, the industry must find a you. To succeed, the industry must find a way to better serve the consumer and get way to better serve the consumer and get some of the rewards back to producers. some of the rewards back to producers.

purcell@vt.edupurcell@vt.eduRILP website: RILP website: www.aaec.vt.edu/rilpwww.aaec.vt.edu/rilp

Weekly letter: Weekly letter: www.ext.vt.eduwww.ext.vt.edu ((News, Purcell News, Purcell Letter)Letter)

Wayne D. PurcellWayne D. PurcellAlumni Distinguished ProfessorAlumni Distinguished ProfessorDirector, Research Institute on Director, Research Institute on

Livestock PricingLivestock PricingVirginia TechVirginia Tech