Ranchers often get frustrated over the prices they receive from the next segment of the beef marketing chain, concluding that the buyers are taking advantage of them. In reality, that next step in the chain faces the same pricing challenges created by long-term, decreasing consumer beef demand. No segment is immune.
During the 1980s and most of the 1990s, beef demand in North America fell. It fell partly due to changing lifestyles and human health concerns. But real incomes also declined in the '80s, making consumers more cost- and value-conscious about their meat purchases. Poultry and fish, however, recorded consumption increases due to their lower price and alleged health advantages.
Let's look at beef prices over the last 40 years (Figure 1). Since the mid-1960s, nominal (undeflated) beef prices have trended dramatically upward. This trend masked the true impact of decreasing demand and diverted ranchers' attention away from what consumers were saying with their reduced beef purchases.
Figure 2 presents those same prices for 1949 through 1995 deflated (based on 1982-1984 being indexed at 100). What's striking is the downward trend in Omaha real slaughter steer prices from 1949 through 1995, which reflects the long-term decreasing purchasing power of beef sales over the years.
This decreasing beef demand has had a large impact on ranchers over the last 20 years, but few ranchers really grasp its effect on them. This decrease has put many ranchers out of business, many who weren't necessarily poor managers. They were driven out of business by decreasing profit margins/cow.
North Dakota's Farm Business Management Records show that, after never averaging below zero during a year in the 1980s, average beef cow profits went negative for the first time during the price lows of the 1990s' cattle cycle. Profit margins were dragged ever lower from one cattle cycle to the next by decreasing demand.
As a result of reduced beef demand and the resulting lower beef prices, beef cow producers had to increase production efficiency to stay in business. Introducing Continental cattle breeds (exotics) to significantly increase size and cutability as a means of increasing production efficiency looked like the answer.
This genetic drive of the '70s and '80s increased weaning weights and carcass weights and produced beef more efficiently. Figure 3 illustrates the dramatic increase in weaning weights in the 1980s, while Figure 4 depicts the increase in carcass weights. Even today, carcass weights are still trending upward.
The net effect of increased production efficiency was that as beef carcasses got bigger, we needed fewer cows. Another effect of increased carcass size was that profit margins were forced down farther, putting even more pressure on generating family living from beef cows.
The consolidation of smaller beef ranches into larger, more efficient units was one way to reduce the family living draw/cow. Ranch after ranch was sold and consolidated into a neighboring ranch operation. Each consolidation meant one less family's living draw had to be generated from beef cows.
More Select Beef, Less Choice
The genetic focus on increased weaning weights and carcass weights led to the rise in production of higher yielding, lower grading cattle. For example, in 1986, only 1.3 million lbs./month of Select beef were graded as compared to 30.2 million lbs./month in 1999. During this same period, the production of Choice beef remained stable at around 46 million lbs./month.
USDA beef quality grades play an important role in distributing quality throughout the wholesale and retail marketing chain, and they should provide signals to cattle producers of consumer desires at the retail level. But only 67% of steer and heifer slaughter was quality graded in 1986.
By 1999, USDA data shows that more than 90% of beef from steer and heifer slaughter was quality graded. The increased use of the quality grading system reflects the heightened consumer demand for quality information and segregation at the retail level.
Some recently published research indicates that chicken is only a substitute for Select beef, not Choice; and during the summer, Select is not a substitute for Choice beef. Consumers wanted more Choice beef, but beef producers were producing more Select.
Producers didn't get that signal because cattle were sold based on average prices. As a result of this missed price signal, consumer demand for beef continued to decrease. The breakdown in the marketing system in the '80s and early '90s was the system's failure to transmit consumers' quality desires to ranchers and beef farmers.
Today's beef industry is living with the genetics brought on board in the 1970s and 1980s. In the 1990s, the percent of carcasses grading Choice declined while the percent of those grading Select went up. The net result is that while the market was demanding more Choice cattle, producers were producing more Select cattle.
This demand for quality is the primary force driving the premium for black cattle under the perception that black cattle produce more Choice beef. In marketing, perception becomes reality.
Harlan Hughes is a Professor Emeritus of North Dakota State University. Retired last spring, he is currently based in Laramie, WY. He can be reached at 701/238-9607 or [email protected].