BIGGER & Fewer

Consolidation keeps chugging away in livestock agriculture.

When IBP some years ago got into the direct-to-packer business, it was the beginning of the end of central livestock markets and a spur to the ribs of beef industry consolidation. Today, consolidation is growing in every beef production segment to one extent or another, says Cattle-Fax specialist Mike Miller. But, he adds, the consolidation underway at retail and food service levels promises to have “a massive effect” on how cow-calf producers, stocker operators and feedlot owners do business in the future.

Miller predicts that five to seven retailers will control 70-75% of food sales in the next five years. The driver, of course, is Wal-Mart. The Fayetteville, AR,-based retailing behemoth's entry into the grocery business has piled a lot of pressure on retailers like Safeway and Kroger, Miller says.

“These firms are concerned because of how well Wal-Mart does what it does,” Miller says, and “that will lead to even more consolidation over time.”

Wal-Mart is shaking up the retail business with a whole new approach to retailing, Miller says. “Their goal ultimately is to be the low-cost provider in everything they do,” he adds.

Retailers become more efficient and effective when they work with fewer suppliers, Miller notes. It's an approach that Wal-Mart has relied on heavily to fuel its growth.

Not only are quality, consistency and new products important at the retail counter but, as food safety becomes more of a concern, retailers will want guarantees on quality.

“Right now, the retailer doesn't take the blame for any food safety problems,” Miller says. “They shift blame back to the packer and producer.

“But more will be expected out of everybody in the beef business. Retailers will continue to push their expectations down the line. Because there will be fewer of them, we will have to work with them in a positive way,” he says.

This same consolidation trend is occurring in the food service segment where firms are also increasingly moving toward single-source suppliers, Miller notes. “These firms will demand a consistent, high-quality product, delivered when they want it, from our industry,” he says.

An Industry Funnel

Here are Cattle-Fax analyst Mike Miller's views on consolidation's effects on beef's competition, and some of the interwoven concerns that the beef industry shares with its competitors:

Poultry — Twenty U.S. poultry firms now control 85% of all production from start to finish, Miller says. This segment is highly dependent on exports, as evidenced when Russia, which traditionally accounted for half of U.S. poultry exports, banned U.S. poultry imports in fall 2001. It resulted in nearly doubling the amount of poultry and chicken in storage here in the U.S., he says.

Hogs — Just 7% of hog producers make up 70% of all production today. That could grow to 80% in five to six years, Miller says, all driven by economics.

Dairy — Just 8% of dairy producers account for 50% of milk production.

Feedlots — Some 230-240 lots now market 70% of all fed cattle in the U.S., while the top 25 companies now feed 40% of all U.S. fed cattle. These firms are mostly located in the Southern Plains, while numbers continue to shrink in other areas of the country. Prodding the trend along will be new environmental rules that will particularly impact smaller feeding units, “probably to an unfair degree,” he adds.

A factor in the huge equity loss suffered by the feeding industry since 1998 is a 20% jump in feedlot capacity since 1990, he says.

“There is a lot of competition to keep that feeding capacity full,” Miller declares. “Our industry lost packer capacity, but kept building more bunk space. It's simple economics: if we try to keep all the lots full, we will have periods of problems.”

Cow-calf — The consolidation occurring in the cow-calf segment isn't as dramatic as in other segments, Miller says. Today, 35% of producers account for a third of all cows. “But if you look at [marketing] arrangements out there, it's probably closer to 40%,” Miller adds.

“The main point is that we will continue to have fewer producers. Those in the cow-calf industry will be no different than other segments over the course of time,” he says.

Packers — Concentrated in the Central Plains, near the center of U.S. cattle feeding, the top four U.S. packers harvest more than 80% of all steers and heifers. This geographic concentration, Miller warns, will impact the market over time, particularly in the Southeast and other cow-calf areas, because of transportation costs.

“Loss of packing capacity in feeding states like Idaho and Washington is a constant concern and worry,” Miller says.

Marketing Agreements — As consolidation continues, the percentage of fed cattle marketed under formula contract or alliances will increase, Miller notes. In 2002, more than 50% of all cattle marketed were under formula or alliance contracts. That could grow to more than 60% within a couple of years, he says. He advises producers to learn how these programs fit their individual marketing plans.

Beef Demand — The one encouraging factor for the beef industry has been beef demand growth. As bad as the market's been, it could have been much worse.

“If you hadn't made an investment in the late 1980s [with the beef checkoff] to develop a growth demand base for the industry,” he says, “we would have been selling cattle in the mid-$50s last summer rather than in the low to mid-$60s. That's what demand growth did for us.”

Global Market — With 97 million total head of cattle, the U.S. ranked fourth in the world in 2001, behind India, Brazil and China. Miller expects Brazil, with a total beef herd of more than 150 million head, to conquer its foot-and-mouth disease problems in the next four to six years and become a major player in providing lean, trimmed product to all parts of the world.

Miller's advice: “I don't believe we can compete with Brazil on that basis. We need to stick with what we do best — producing high-quality fed beef. That is our strong niche in the global market,” he says.

Top 5-7 retailers may control 70-75% of food sales in 5 years

What are the implications?

  • Single source suppliers
  • Just-in-time supply management
  • Inventory management
  • Consistency, quality, quantity

Profile of livestock and producer operations

Total number of producers/operators Number of large producers Large producers as % of total % of production from large producers
Broilers Top 20 85%
>2,000 head
98,460 7,125 7% 69%
>200 cows
105,250 8,005 8% 48%
Beef Feedlots
>1,000 head
104,471 2,071 2% 85%
Beef Cow/calf 804,000 28,000 3.5% 33%
>200 cows 72,891 9% 51%