Aside from raising purebred Herefords, northwestern Ontario beef producer Kimmie Jo Bliss, loves taking photos. At left, are two photos of her niece, Maddie, tending a fairly new calf, while at right, part of the herd watches from the trees. Bliss, operates KJB Herefords at Emo in the Rainy River District of Ontario, which is just on the border of Manitoba and Minnesota.
The last year was very difficult for all sectors of the beef industry. Cow-calf producers, backgrounding operators, finishing feedlots and packers all struggled through the recession. In discussions with producers, I’ve had many questions regarding which segment is making the money in this industry. Each participant appears to be pointing blame at another segment for taking advantage of the market or trying to influence the market. It is important to look at the financial returns for each sector, and some of the economics related to the market structure for each category of participants.
Cow-calf producers are at the bottom of the pyramid and often feel they take the brunt of the economic hardship when the cattle market is in a slump. Many studies by university students, government organizations and private companies, basically all show the same result. The cow-calf producer faces a competitive market when selling calves. There are many buyers and sellers and no participant has any price influence. Participants can easily enter or exit the market and are basically price takers, meaning each individual has no influence of price. The main feature of a pure competitive market is that over the long run, the financial returns are zero because the market drives the price to the least cost producer. Therefore, unless the individual is pushing efficiencies and expanding consistently, in the long run, there is no margin. Having stated the obvious, certain studies show that the returns are about three to seven per cent per year over a 25-year period. Each individual operation is unique and it is difficult to measure on a mass scale.
The next segment is the finishing feedlot. Compared to the cow-calf producer, this is a very quiet bunch as they seldom complain but that doesn’t mean that this segment is more lucrative. It is actually the opposite, while studies show some positive returns in the cow-calf sector over the long run, the feedlot sector is actually negative over the long run. In university, I myself ran various studies buying feeder cattle every week, feeding them to 1,250 pounds and selling them market price. It was very difficult to change variables to get positive results. For example, buying a 700-pound steer or buying a 750-pound steer did not change the end result. This suggests that the market is even more efficient than the cow-calf sector. BSE weeded out the inefficient operators and the ones left are the most efficient. In addition to negative returns, the risk is larger than in the cow-calf sector on a per-head basis. Financial capital inflows are larger and the financial returns can reach positive or negative $150 per head quite regularly.
The final segment is the packing industry. The packing industry has consolidated with four larger companies dominating the North American market and is essentially an oligopoly. While there are few buyers with many sellers, there are two main factors limiting the pricing ability. First, demand is uncertain and has been shrinking the last two years. Knowing your demand is very important for pricing profitability. Secondly, there is fierce competition. A small move by the competitor can have devastating effects on the other players in the market. Excess capacity also suggests that companies cannot extract efficiencies. Packing companies need a network of reliable connections all over the world to market all the products. For example, last year, the world recession in Southeast Asia caused lower export prices for offal, which had a negative effect on the margin structure. Laws in North America prevent collusion, so despite “coffee shop” chatter, this hasn’t been a very profitable sector in the beef industry. There is a reason that there are only four major players.
One positive aspect of the beef sector — when the U. S. economy moves into an expansion phase, this is usually the most profitable period for all sectors of the industry. While the last three years have been quite difficult, periods of low returns are followed by periods of very profitable returns, so I’m quite optimistic looking forward.
Gerald Klassen analyzes cattle and hog markets in Winnipeg and also maintains an interest in the family feedlot in southern Alberta. For comments or speaking engagements, he can be reached at [email protected]or 204 287 8268.