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Shrink and GROW

Live with the proverbial two-ton gorilla in the closet long enough and he starts to blend into the scenery, even though his every flinch and breath alters your life. So it goes with industry consolidation and concentration. Sure, there's still the odd headline or study directed at industry consolidation (the number of players in a segment) and its stepbrother concentration (how big the players are

Live with the proverbial two-ton gorilla in the closet long enough and he starts to blend into the scenery, even though his every flinch and breath alters your life. So it goes with industry consolidation and concentration.

Sure, there's still the odd headline or study directed at industry consolidation (the number of players in a segment) and its stepbrother — concentration (how big the players are relative to the market and competition). More often than not, however, the focus is on the by-product of these realities, such as the move toward grids and formulas, the opportunity to brand beef in volume, or increased development of heat-and-eat beef products.

But, it's the gorilla that is doing the rearranging.

If you go by the most recent agricultural census, there were 796,436 U.S. beef operations in 2002. That's 11% fewer than the census before it (1997), 22% less than the one in 1974, and so on. That's attrition, but it's consolidation, too.

From 1997-2002, the number of operations with 100-199 beef cows increased 5%, those with 200-499 cows increased 8%, and 500- to 999-head operations increased 1%. Just as significant, considering that half the nation's cow herd exists in herds of 100 head or less, is that the number of herds with 1-9 head decreased 18%, those with 10-19 head decreased 14%, herds of 20-49 head fell 9% and herds with 50-99 head slipped 4%.

Fewer cows, more beef

Even with 20% fewer cows in 2003-2004 than in the peak inventory years of the early 1970s, the industry churned out record beef supplies — a testament to the efficiency of U.S. producers.

And, if it weren't for the Consumer Beef Demand Index increasing a heady 25% from 1998-2004, even fewer would be needed. If it weren't for the meager annual population growth in this country (assuming current demand), or the potential for increased beef demand globally — the U.N. Food and Agriculture Organization predicts a 22% increase in global beef production by 2015 — the nation's cow herd today would already likely be the largest producers would ever see in their lifetimes.

Bear in mind, too, that, between pressures on public lands ranchers and international beef export policies that could shrink packer presence in the Northwest and Northeast, regional consolidation of the national herd is expected to continue — more to the center of the nation. Cattle-Fax says that 50% of the nation's beef cows in 2004 were in the Central Plains and that number would expand; 25% were in the Southeast.

The customers to whom commercial producers sell are dwindling even faster. Already, the 25 largest cattle feeding firms account for 40% of cattle fed annually, Cattle-Fax says. And, the merger between ContiBeef, LLC and MF Cattle Feeding, Inc. (owned by Smithfield Farms) in January serves as a crystalline reminder of the speed and degree at which consolidation and concentration can occur in this sector.

ContiBeef was the second largest cattle feeder in the nation, while Smithfield, which wasn't even in cattle feeding until last fall, was the third largest. The new venture's combined one-time feeding capacity of 811,000 head clearly makes it the largest cattle feeding organization in the world — 62% larger than Cactus Feeders (500,000-head, one-time capacity), the longtime leader.

By 2006, the 25 largest yards are expected to account for 45-50%, Cattle-Fax says.

As consolidation and concentration increase in this sector, cattle feeders are selling to four packers that account for 84% of all U.S. fed beef. The four largest firms harvested 70.4% of all fed steers and heifers in 1989, according to the Grain Inspection, Packers and Stockyards Administration.

The border effect

In fact, ongoing trade disruptions caused by BSE already may have set the stage for accelerated packer consolidation and concentration. U.S. packers were already facing historically tight cattle numbers relative to demand before the Canadian border was closed to live cattle trade, snatching away the imports domestic packers relied on to operate at or near capacity. Now, expanding harvest capacity in Canada jeopardizes prospects of regaining this supply, meaning some U.S. packing capacity might be idled permanently.

Earlier this year, Randy Blach, Cattle-Fax executive vice president, estimated that Canada will have the packing capacity to harvest 90,000-95,000 head of cattle/week late this summer. They only need to be able to harvest 100,000 head/week to be self-sufficient.

So, consolidation and concentration become their own self-fulfilling prophecy.

Nowhere is that more visible than at retail, where the 10 largest retailers accounted for 55.1% of all 2004 U.S. food sales, Cattle-Fax says. The 20 largest accounted for 64.7%, up from 52% in 2002. Here again, consolidation and concentration are expected to continue.

Wal-Mart's the driver

That's not news. Nor is it news that much of the concentration has been driven by Wal-Mart Supercenters, now the largest food retailer in the U.S. and growing. The retail behemoth accounted for $103 billion in total grocery sales in 2003, out of total supermarket grocery sales of $432.8 billion, according to the Food Marketing Institute (FMI). Based on sales, Wal-Mart was 92% larger than Krogers, its closest competitor.

From a format standpoint, supercenters — defined by FMI as stores averaging more than 170,000 sq. ft. of space and devoting up to 40% of the space to grocery items — have led the charge.

What is an emerging story, however, is how the retailing industry is responding to Wal-Mart's procurement clout and ability to beat everyone else on price. Paradoxically, some retailers, especially those not playing the supercenter game, are fragmenting their beef offering to consumers in a kind of back-to-basics approach focused on quality and service. It seems to be working.

In March, FMI reported that, for the 2003-2004 fiscal year, smaller food retailers — those with less than $100 million in annual sales — posted the highest net profits (1.45%) and return on equity (20.38%) in six years.

“This is a tough, competitive market. Companies are squeezed by fierce competition and continued double-digit increases in the cost of health benefits, a major expense for an industry as labor intensive as ours,” explains Tim Hammonds, FMI president and CEO.

“Most encouraging, however, is many retailers are finding solutions,” Hammonds continues. “Supermarkets are continuing to find ways to operate more efficiently… The top performers are investing in technology, consumer service and new products that should sustain growth for years to come.”

More cattle needed?

In the meantime, Blach points out America's 0.75% annual population growth means that if current consumer beef demand is sustained — about 67 lbs./capita annually — U.S. producers will need to churn out another 3 billion lbs. of beef by 2015. Cowboy math says on a carcass basis of 800 lbs., that's equivalent to 3.75 million head.

Factor in a national average weaned calf crop/cow exposed of 80% or so, then consider the number of heifers that must be retained just to maintain the national factory's current size, and you're talking the need to increase the beef cow herd by 10%.

What's more, Blach underscores the value stronger beef demand has had to the industry. Since reversing the demand curve beginning in 1998, Blach says, “We've increased the wholesale value of beef more than 30%. That's equivalent to every man, woman and child in this country spending $70 more for beef annually.”

Is this newfound wealth the result of consolidation or concentration? No, but by the same token, most would be hard-pressed to argue that the industry's response to them hindered rather than helped it identify consumer concerns about beef, then improve the eating experience collectively and consistently.

Undoubtedly, folks will continue to debate the merits of consolidation and concentration as ardently in the next 20 years as in the past decade, or for that matter, since the early 1900s when five companies dominated the beef packing business. But thriving and surviving will continue to demand keeping an eye on these twin forces as much as the changes wrought by them.