Industry shifts to higher-quality beefIndustry shifts to higher-quality beef
Market share of consumer spending increases with higher-grading carcasses.
January 3, 2020
A couple of decades ago, at a breed association meeting, an executive from one of the nation’s largest beef packers spent close to an hour explaining what kind of fed cattle had the most value to packers, and why.
Toward the end of that presentation, an earnest producer asked, “But what’s the target, specifically? Just give us target and we’ll hit it.”
“The same as at least the last 20 years — Choice, Yield Grade 2,” replied the clearly exasperated packer.
Producers in the crowd could be forgiven for being just as nonplussed. Value-based marketing and carcass value grids were still in diapers, crawling haltingly and unsteadily forward. Most fed cattle traded in the spot cash market for an average price, or a little on either side. There was little, if any, economic incentive to raise cattle capable of achieving the packer’s dog-eared goal, so lots didn’t.
That’s not the same as saying that producers ignored the consumer, but what they heard ended up being wrong.
Unraveling consumer demand
For instance, the diet-health (cholesterol) scare helped halve consumer beef demand and crush cattle prices from about the early 1980s through the mid-1990s.
“We thought the consumer wanted leaner cattle. We thought the consumer wanted us to take the marbling out of cattle,” remembers Randy Blach, CattleFax CEO. He spoke about the future of beef marketing at the 16th annual Holt Cat Symposium on Excellence in Ranch Management at the King Ranch Institute for Ranch Management in Kingsville, Texas.
Producers added leanness to the national herd via Continental genetics, reducing overall carcass quality along the way. Blach notes that about one out of four steaks failed consumers.
As beef demand and prices faltered, more cow-calf producers lost too much money and left the business. In fact, according to Blach, about 400,000 beef producers exited the business between 1976 and 1996. The drought took another 100,000 producers from 2002 to 2012.
Turns out, consumers really meant they disliked the amount of outside fat they saw on beef cuts. Turns out, the diet-health scare was a sham.
Beef gaining in market share
A confluence of events and realities began swaying the industry back toward more carcass quality.
By the time beef demand was at its ebb, Certified Angus Beef was 20 years old and coming into its own, having established a premium structure for qualifying carcasses that trickled back down the chain. More fed cattle began selling away from the average spot cash market, and in carcass grids and formulas that rewarded and discounted individual carcass merit.
More retail beef was branded, making consumers a promise. Industry structure began shifting to accommodate an increasingly differentiated industry. And so on.
“We’re putting a lot of quality back into the cattle, and consumers are responding,” Blach says.
In 2005, 55.7% of fed cattle graded Choice and Prime. This year, 80.2% did. Select-grading carcasses declined from 36.5% to 16.8% this year.
In other terms, Blach explains that the industry was producing 12 billion pounds of Choice and Prime beef in 2005. This year, it will produce more than 18 billion pounds of that quality.
Compared to 2005, there will be 6 million more head of cattle producing Choice and Prime carcasses, and 6 million head fewer churning out carcasses that grade Select or worse.
Since the beef-demand low in 1998, consumer demand for Choice and higher-grading beef increased 51%, while declining 6% for Select.
“I believe what this is telling you is that our industry is making a major change away from being a commodity market to being a product-driven market. We’re moving from being a supply-driven market to a demand-driven market,” Blach says.
“We’re not fully branded yet, but we’re making a major structural shift in our industry today, and consumers are responding. That’s my belief when I look at the data.”
Widening gap among grades
Even though the volume of Choice and Prime beef basically doubled, the price spreads between Choice and Select, and between Choice and premium Choice (upper two-thirds of Choice) continue to widen over time.
“This is a very strong signal. This is a major shift that’s taking place in our industry. We need to understand the ramifications,” Blach says.
What’s more, the price consumers are willing to pay for beef compared to pork and poultry continues to rise.
Beef’s market share of retail spending increased 7% from the demand low through last year. It was about 46% last year, compared to approximately 24% for chicken and 27% for pork, according to Blach.
Conversely, beef market share of domestic consumer consumption was 40% to 42% in 1979-80. It’s 28% today. Poultry grew from about 30% of consumer consumption in 1980 to near 50% last year.
Since the demand low for beef in 1998, Blach says consumer spending for beef increased by $62 billion. During the same time, consumer spending for pork and poultry combined increased by $57 billion.
“It’s about market share of the consumer wallet, in my opinion,” he says. “We’ve got 28% market share of consumer consumption, and we’ve outgrown those other industries from a consumer spending standpoint.
“We’ve gotten very intentional about what we’re trying to produce, and we’re getting strong enough consumer signals to duplicate that on a regular basis.
“We’ve got a lot of cattle out there today that are grading 90% or greater Choice and Prime. It’s amazing what we can do when we get focused from a selection standpoint with our genetics today.”
Further differentiation ahead
Bottom-line, Blach believes the cattle market is separating and moving away from one of averages.
He explains cattle hitting grid and formula targets commonly can bring a premium of $3 to $7 per cwt, and as much as $6 to $10 with the recent record-wide quality price spreads.
Since about 2013, 71% to 80% of fed cattle traded in formulas and grids or via forward contracting. Of those, 57% to 66% traded on formulas. Blach believes grids and formulas will continue to encompass the majority of fed cattle marketings.
He also sees more premium and discount points based on further segregation and differentiation. Think of things like weaning verification, vaccination certification, age and source verification, performance history, and compliance with specific value-added programs.
“I think all of these things will be boxes that we check that will be part of the new value proposition in the industry,” Blach says.
“We are going to get paid for more of these things, doing things right, being able to tell the story. I’m not sure when, but I believe this is the next step. A very few are already monetizing those things today.”
Of course, the proverbial wheels could jump track, as with the diet-health scare, if the industry misses or misinterprets what consumers have to say.
Think about the current mountain of misinformation pertaining to beef’s impact on the environment, — how it stacks up to a growing list of alternative proteins and all of the rest.
“What is the thing that could have a similar impact as the diet-health scare?” Blach asks the crowd.
“Could it be this situation of not being able to tell the real story to our new consumers, the millennials and Generation Xers? Could it be the same situation if we don’t get aggressive as an industry and take it on?”
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