Kay’s Cuts: Technology and innovation transform US industry
Steve Kay, US Cattle Buyers Weekly
via BEEF Central (Australia) - June 7, 2019
A monthly column written for Beef Central by US meat and livestock industry commentator, Steve Kay, publisher of US Cattle Buyers Weekly
The US beef industry has made remarkable advances in the past 25 years to allow it to produce the highest quality and most consistent grainfed beef for consumers at home and abroad.
Most of the advances have occurred, ironically, because the industry for many years previously had struggled to address why beef demand in the US declined every year.
Some of the blame lay with a wide genetic pool at the purebred and commercial cow-calf levels. US producers in the 1960 and 1970s experimented with just about every exotic breed they could get their hands on. The result was a ‘Heinz-57’ hotchpotch of cattle going into feedlots for finishing.
At the same time, the grainfed cattle market was bedeviled by the practice of selling “live, on the average.” Those with higher quality cattle became increasingly frustrated at not getting more for their cattle. This meant there was little incentive for producers or cattle feeders to raise the quality of their cattle.
The result was that beef of widely variable quality found its way into retail supermarket stores and on to restaurant menus. This meant that one in four steaks provided an unsatisfactory eating experience, and was partly responsible for a 20-year decline in beef demand from the mid-1970s to the mid-1990s.
US beef industry leaders recognised this had to change. And it did. Some of the most important changes began at the production level, with more uniform genetics in the cattle herd (in large part thanks to the American Angus Association).
Producers increasingly embraced proven genetics in their bull selections, balanced the need to optimise carcase and maternal traits, and embraced tools such as EPD (expected progeny difference) scores and DNA testing to guide their selections. Cattle feeders began to employ numerous technologies to adjust their feed rations, to gauge optimum time on feed and more.
Move to formula pricing
With all this came a huge change in the way US grainfed cattle were sold. Selling cattle directly to packers by feedlots became the norm, and sales at terminal (auction) markets virtually disappeared. Marketing agreements between cattle feeders and packers led to the widespread use of pricing grids that rewarded higher quality and penalised lower quality cattle.
What evolved was a move away from selling cattle on the negotiated cash market to the use of formula pricing (based on the cash market averages of the prior week). Cash negotiated purchases slipped below 50pc of total purchases for the first time in 2006. Formula purchases that year were 34.3pc of the total. But they grew steadily in percentage terms most years after that. By 2018, 61.1pc of all purchases on a national basis were on formula, versus 57.2pc in 2017. Negotiated cash purchases held steady at 25.5pc, versus 25.7pc in 2017.
These percentages are unlikely to change in the coming years. Most US cattle feeders are comfortable about getting a formula price based on 25pc of weekly sales. Also, cattle feeders agreed to more formula purchases because they guaranteed them ‘shackle space’ at packing plants within a certain time-frame. Also, cattle feeders did not have to tie up time-consuming hours each week negotiating with packers.
This rationale also caused beef buyers at the retail, foodservice and distributive levels to start buying more beef on formula. Packers sold 35pc of all beef (cuts, grinds and trim) on formula in 2002, the year that mandatory price reporting offered a weekly and annual breakdown of the way in which beef was purchased.
Formula sales declined to 32pc in 2004, but steadily climbed after that. They rose above 50pc for the first time in 2014 and peaked in 2015 at 52.5pc of total sales. The percentage in 2018 was 51.2pc.
US beef buyers embraced formula buying for several reasons. As veteran buyers retired, a new generation took their place that had neither the experience nor the appetite for negotiating with packers every day. More important, they did not want to be seen to be “off the market” and having to tell their boss why they had paid more for a certain cut than everyone else.
In contrast, negotiated sales 0-21 days (spot market sales) were at 48pc in 2002, peaked at 54.1pc in 2004 and were at 28.1pc in 2018. This was the lowest number since MPR began.
What’s fascinating about this is that US packers have continued to persuade beef buyers to purchase the majority of their beef on formula, which is based on spot-market prices. Yet reduced offerings on the spot market often increase prices more than if more sales were on the spot market. Buyers are aware of this, but seem unwilling to revert to buying more beef week-to-week, because of the price risk involved.
Forward sales …