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The market impact of bigger beef

Cattle are getting bigger and the effect on the market is clear - so it’s time to focus on how to accommodate the larger carcasses and make the most of this ‘growing’ concern.

By Don Close 0 0

Over the last year or so, when speaking with producers or producer groups, the topic of heavy carcass weights and the impact on market leverage and total beef production has almost always come up.  When the topic is raised, more often than not the conversation focuses on cattle feeders in the northern Corn Belt.  Instead of casting blame and pointing fingers, it may be time to re-evaluate, accept the fact that cattle are getting bigger, and determine what changes are needed to accommodate the larger carcasses.

A second driver in increased weights that has been largely overlooked has been the escalation in the number of formula-based sales.  One of the primary attractions of formula sales has been the opportunity for carcass premiums that are typically determined by cattle that exceed the plant average on quality grading and carcass yields the day of slaughter. The unintended consequence of feeding cattle to capture premiums has also meant feeding to heavier weights.

More of the same

It seems like more often than not, cattle feeders are eager to point a finger at some other group of feeders. Eventually this turns into a giant circular firing squad.

This issue is not a new one; carcass weights have been a topic of conversation for as long as I can remember. The first job I had off the farm in the late 1970’s was as a fed cattle buyer, working in the Omaha Stock yards. At that time, the plant I worked for concentrated on steers that weighed 1100 to 1200 pounds and heifers that weighed from 950 to 1050. I clearly remember the never-ending conversations: cattle were too big to fit into the box and weights have to come down if the industry was going to meet consumer expectations. Well, here we are 36 years later and today’s carcass weights are often in the same weight range as live weights were at that time and the same weight conversations are taking place.

What’s causing the weight increase?

The first driver is simple:  the cattle are just that much better. The genetic improvements made over the last 30-40 years and the genetic capabilities in the pipeline are incredible. The animals grow more quickly and more efficiently with a focus on a variety of desirable traits.  

The second important factor is the technology available today. From feeding knowledge to improvements in pharmaceuticals, the technology is helping producers incorporate practices to optimize size and efficiency. By incorporating ionophores, implants and beta-agonists, we are seeing improvement in daily gains and feed conversions, as well as overall product quality.

Market economics have also been a key driver. The ratio of cost of gain to fed cattle price over the last two years has certainly encouraged cattle feeders to make cattle as heavy as possible in an attempt to lower breakeven prices. Through 2014 and 2015, the feeder to fat swap encouraged cattle feeders to feed existing inventory as long as possible in an effort to lower cost of gain. The fact that feeder cattle prices were so high in relationship to fed cattle prices discouraged cattle feeders from rolling over inventory–resulting in the decline in feeder cattle and calf prices this year. Finally, the most critical component is the fact that all producers from cow/calf to beef processors are paid on pounds produced and if you can’t get the desired dollar return from price alone the only alternative is to produce additional pounds.

What's the answer?

This merits an exploration of the natural conditions that would cap or force a correction in carcass weights. Certainly the first deterrent would be weight caps and heavy packer discounts on heavy carcasses. However, that is a temporary fix.  A second deterrent would be a return of high feed grain prices and—given the current supplies of corn—that doesn’t appear to be likely any time soon. If widespread drought conditions were to return, that would not only force earlier sales and lighter weights of calves and feeder cattle, but would be a principle driver behind higher priced feed. Finally, a measurable change in the steer/heifer ratio could be enough to cause a temporary correction in carcass weights.

As I look at the chart of annual average carcass weights and see a consistent increasing trend line over the better part of 50 years (despite consistent arguments that weights have peaked), it looks inevitable to me that weights will continue to increase.

I then look at the increase in cow carcass weights over the same period of time. The correlation of increased steer carcass weights and increased cow carcass weights has an r square at 95. It tells me the issues with increased weights is a much broader problem for the entire industry than simply trying to focus the argument with over finished fed cattle.

If the history and trend lines suggest carcass weights are not going to peak and that weights will likely trend higher, what can and what should be done? A simple solution that hasn’t seemed to have a lot of historical impact is for packers to place discounts on heavy carcasses. Another possible solution would be for packers to cut primals differently. Keep in mind the focal point with heavy carcasses is with portion sizes of middle meats. 

A third and longer-lasting answer may involve accepting the fact that cattle are, and will continue to be, bigger. Our industry must explore ways to manage cattle differently, even if it means ultimately re-examining tradition-laden aspects of the industry. This may include spreading out calving seasons, it may mean more calves going directly on feed, it may mean the elimination of the stocker business. If you simply look at the history of escalating carcass weights and think that arguing, denying the facts or pointing fingers at different producer groups is going to fix the problem, it isn’t going to happen. It may be time to accept the fact that cattle are continuously getting bigger and have honest conversations within all aspects of the industry and look for ways to change cattle management practices.

 
Don Close

VP RaboResearch Food & Agribusiness, Animal Protein at Rabobank

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