Cattle Prices: Questions and Answers

Geoffrey S. Becker
Environment and Natural Resources Policy Division

November 14, 1996

96-115 ENR

SUMMARY

After 7 years of relatively high returns, cattle producers by 1994 were experiencing steeply falling prices--mainly caused by abundant supplies of cattle destined for U.S. feedlots. Record-high grain prices and dry pastures amplified the problem. Because of the lengthy biological cycle governing cattle production, large numbers will be coming onto the market for some time, as producers undertake the slow process of curtailing herd expansion. Meanwhile, low prices could force many higher cost and highly leveraged producers out of business. These difficulties led the Administration and Members of Congress to announce or propose numerous efforts to help the industry. The situation also reignited debate over the extent, if any, to which increased packer concentration and/or imports contributed to the problem.

What's Happening to Cattle Prices?

Prices for beef cattle declined steadily between 1994 and 1996, after 7 years at or near record levels. The 45,000 U.S. feedlots (which finish cattle with grain and sell them to meat packing firms) paid an average of about $68 per cwt. (100 pounds) for the "feeder" steers they placed on feed during 1995, down 15% from the 1994 average of about $80, and down 24% from the 1993 average of about $89. U.S. Department of Agriculture (USDA) and other analysts reported that feeder cattle prices have averaged about $59 per cwt. so far in 1996, posting a low of about $53 in April but climbing back to about $63 by October.

Most "feeder" steers come from cow-calf operators, who breed and then raise beef cattle on pasture and hay for up to one year or more before selling them to feedlots. There are between 600,000 and 900,000 cow-calf operations (many of them family-owned ranches), depending upon which data are used.

Low prices could force many higher cost and highly leveraged operators out of business.

Feedlots also have received lower prices. Meat packers in 1995 paid feedlots an average of $66 to $67 per cwt. for finished (fed) cattle, which is nearly $3 below 1994, and about $10 below 1993 levels. Finished cattle prices have averaged about $64 so far in 1996, after dropping to a low of about $60 per cwt. in the spring and then recovering to about $70 per cwt. in September and October. (Although feedlots often receive less per cwt. than they pay, each head has a higher value due to the weight gained while on feed.)

USDA predicts that both feeder and fed cattle prices will average in the mid 60-dollar range through much of 1997.

Why Have Prices Declined?

They have declined because of large cattle supplies and high grain prices. Regarding supplies, economists explain that the Nation is near the high point of the "cattle cycle," the approximately 10-year period it takes for beef cattle numbers to expand and contract in response to changes in prices and profitability. The total U.S. cattle herd climbed from about 96 million in 1990 to about 104 million by 1996, according to the National Cattlemen's Beef Association (NCBA).

Importantly, pounds of beef produced in 1996 will nearly match, and possibly exceed, the 1976 record of 25.7 billion pounds--and are projected to top 26 billion pounds in 1997. (Although there were 30 million more cattle in 1976, today they are much heavier when slaughtered.)

A 27% drop in corn production in 1995 also contributed to the decline: in 1996, average corn prices reached their highest monthly levels on record--far exceeding $4 per bushel between May and August. The average price for the entire 1995-96 crop year was $3.25, up from $2.26 in 1994-95. When feed prices are high, feedlots pay less for feeder cattle. They also tend to buy heavier animals, meaning a shorter (less expensive) feeding time will be needed to ready them for slaughter. USDA economists estimate that each 25-cent increase in a bushel of corn drives down feeder cattle prices by $1.50 per cwt. Meanwhile, dry pasture and range conditions in 1996 also hurt many cow-calf operators, by making it harder for them to hold animals longer in expectation of higher prices.

Even though the 1996 feed grain harvest was expected to be much higher than last year's, supplies remain relatively tight. USDA predicted in November that 1996-97 corn prices could average $2.50 to $2.80 per bushel, still above the range of $2.12 to $2.50 in the 3 years before 1995-96.

The supply of feeder cattle available to feedlots might not begin to decline for some time. That's mainly a function of biology--it takes about 2 1/2 years between the time a cowcalf operator decides to breed an animal and its beef is ready for retail sale, and about 4 1/2 years if the operator wants to expand production (i.e., add more breeding cows).

Increased cow numbers in recent years, and breeding decisions made in 1995 even as cattle prices were falling, means more calves were still being born during 1996. These calves will continue to enter the market through the next year or more. The paradox is that to cut production, cow-calf operators must reduce herds, causing U.S. beef supplies to increase before they actually begin to decline.

Have Retail Meat Prices Also Declined?

Yes, they have declined to their lowest reported levels since 1990--though the rate of decline was much less than for cattle prices. The average retail price for all grades of beef, including Choice (the most expensive cuts), Select, and ungraded, was about $2.59 per pound in 1995, about a 2% decline from the 1994 average of $2.65 and a 4% decline from the 1994 average of $2.71. Per-pound prices averaged $2.53 from January through September 1996, compared with about $2.60 during the same period in 1995, a 2.6% decline, according to USDA and NCBA.

USDA analysts report that the steeper decline in cattle prices than in store meat prices typifies past trends. Retailers may take longer to lower their shelf prices, and do so less frequently, in part because of concern that they might have to raise them a short time later if their own costs again climb. Retailers want to be certain that a wholesale cost decline is not temporary; they believe their customers prefer stable over fluctuating prices, analysts add.

Also, Choice beef is an important component of the all-grade price, and average 1995 Choice beef prices of $2.84 per pound were nearly identical to 1994 levels. (The average 1996 Choice price through September had declined to $2.78, however.) Thus, reported all-beef prices would have been significantly lower if Choice prices were not factored in, USDA analysts explain. Higher Choice prices were due to especially strong demand for these cuts by hotels, restaurants, and foreign buyers.

NCBA maintains that the retail price for beef sold through advertised specials averaged about $2.40 per pound in 1995 and much of 1996, lower than USDA's reported retail prices. Advertised-special beef averaged $2.72 per pound in 1993, NCBA reports. More shoppers tend to purchase beef at such featured prices--and there were more of these special sales in 1996, NCBA adds.

Has Packer Concentration Caused or Contributed to Low Cattle Prices?

Recent mergers by beef packers into fewer and larger companies have resulted in a highly concentrated industry structure. Three packers--IBP, Inc., ConAgra, and Excel (owned by Cargill)--accounted for 81% of all U.S. cattle slaughtered in 1994, compared with 70% in 1990 and 45% in 1982, according to USDA and industry sources. Many cattle producers have complained that this concentration has enabled packers to pay less for cattle, because producers lack competing buyers to bid up prices. Even if some competition exists nationally or regionally, producers in most localities may have access to no more than a single buyer, they add.

But various government studies have been inconclusive on the relationship between concentration and low cattle prices. Concentration in the Red Meat Packing Industry) released in February by USDA's Grain Inspection, Packers and Stockyards Administration (GIPSA), confirmed high concentration and that it is likely to increase in coming years. However, it could find "no definitive evidence that concentration had an appreciable effect on cattle prices over the period examined," according to an accompanying background paper. The study indicated, among other things, that the relatively low cost of transporting cattle made it more difficult to manipulate prices in isolated regional markets.

However, because the study was based on a one-year period (from 1992 to 1993, before cattle prices declined and also far short of the normal cattle cycle), more information was needed, Agriculture Secretary Glickman declared. He added that other issues, raised since the study was mandated by Congress in 1992, were not addressed--such as market performance between the packer and the retail levels. In February 1996, he named an advisory committee, composed of producer, industry, economics, and other agricultural interests, to review the study as well as other information on structural aspects of the red meat and related industries.

Concentration in Agriculture: A Report of the USDA Advisory Committee on Agricultural Concentration was released by the panel on June 6, 1996. It confirmed widespread producer distrust of the cattle pricing and procurement system, and of packers. The distrust has been spawned partly by a lack of useful information on which to base pricing and production decisions, the panel said. Among its numerous observations is that price information is still based on whole carcass prices and on the incorrect assumption that most livestock still moves through terminal markets where bidding tends to be more open and competitive. Today, meat products leaving the packing house are largely in processed forms; most cattle are now bought directly from feedlots or ranchers, or are part of captive supplies (where packers already own, custom-feed, or contract in advance for their animals).

Among the panel's recommendations are improving and updating the collection of market information; making it more accessible for all segments of the industry, in order to encourage competition; and vigorously enforcing the current antitrust and fair trade laws. A minority report of the panel calls for additional policy changes to address concerns about vertical integration and formula pricing.

In a December 1990 report, Beef Industry: Packer Market Concentration and Cattle Prices, the General Accounting Office (GAO) reported that, during the same period in the late 1980s when packer concentration was increasing, packers were investing in larger, more efficient plants. That created excess plant capacity and "led packing firms to compete more vigorously with one another in purchasing cattle, and this competition led to upward pressure on prices," GAO stated. On the other hand, GAO also noted, various economic studies conducted earlier were inadequate to draw firm conclusions about the link between concentration and low prices.

Investigations of futures markets in 1995 by the Commodity Futures Trading Commission, and periodic monitoring by the Justice Department of antitrust complaints, have been inconclusive, according to USDA and private analysts.

Did NAFTA Cause or Contribute to Low Cattle Prices?

Some cattle producers have questioned whether the North American Free Trade Agreement (NAFTA), which took effect with Mexico and Canada on January 1, 1994, caused a surge in cattle imports from the two countries (which account for most live foreign cattle), exacerbating the price problem. In fact, total Mexican cattle imports from January through September 1995 were 80% higher than for the same 1994 period, reaching nearly 1.3 million head (representing about 1% of the total U.S. cattle herd), according to Commerce Department data. Mexican feeder cattle accounted for most of these imports, and represented 4-5% of total U.S. feeder cattle supplies, according to government and industry figures.

However, analysts attribute the higher imports not to NAFTA but to Mexico's weak economy and devaluation of the peso. Those economic conditions, along with drought, encouraged Mexican cattle producers to reduce or liquidate herds and sell to U.S. feedlots and meat packers. Analysts note that much smaller Mexican supplies, and improved moisture conditions there, subsequently have resulted in a steep decline in cattle imports from Mexico, from more than 1.2 million head during January-August 1995, to just over 230,000 head during JanuaryAugust 1996.

January-August live cattle imports from Canada did increase, from about 771,000 head in 1995 to 1.1 million in 1996--but by not nearly the same number (336,000) as the 1 million-head decrease from Mexico during the same period. According to analysts, NAFTA does not appear to have altered existing cattle trade patterns between Canada and the United States. Imports from Canada were about 874,000 head in 1990; 905,000 in 1991; 1.3 million in 1992; 1.2 million in 1993; 1 million in 1994; 1.1 million in 1995; and a projected 1.25 million in 1996.

What Is the Government Doing?

Earlier this year, President Clinton and Secretary Glickman announced a series of initiatives to address low cattle prices. Among them:

Producers were permitted to graze cattle or cut hay on some land enrolled in the conservation reserve program (CRP) through September 30, in exchange for a reduction in CRP payments. (See Endnote 1.) Opening CRP land provides producers with an alternative to buying costly grain, analysts noted.

USDA's Agricultural Marketing Service (AMS) accelerated its ground beef purchases for the 1996-97 school lunch and other domestic food programs, spending about $70 million to buy another 75 million pounds since May 1996. Further, USDA announced in October 1996 that an additional $30 million in processed beef products were to be purchased.

The Secretary stated he would "use all the tools at his disposal," including existing short- and medium-term export credit guarantees to promote U.S. beef exports. He also will press for favorable resolution of the formal complaint that the United States filed in January with the World Trade Organization (WTO) against the European Union's (EU's) ban on the importation of meat from animals treated with growth hormones. (See Endnote 2.)

Cattle industry representatives and lawmakers from cattleproducing regions generally expressed approval of the steps. However, some consumer activists and retailer groups complained that the initiatives would force consumers to pay more for beef at stores and restaurants. Environmental groups contended that opening the CRP to haying and grazing undermines conservation goals.

An initiative to assist farmers and ranchers affected by severe drought recently in the Southwest and Southern Plains also was expected to provide some relief for cattle producers along with other farmers and ranchers. Both the Senate and House in June 1996 passed a resolution (S.Con.Res. 63) enabling the Secretary of Agriculture to sell feed grains held in USDA's disaster reserves in order to pay for cost-sharing assistance to drought-stricken farmers.

Secretary Glickman announced in October that USDA would publish in the Federal Register a petition that requests rulemaking to restrict certain types of livestock procurement practices. The notice will ask for public comment on issues raised in the petition, submitted by the Western Organization of Resource Councils.

In Congress, various bills were introduced in 1996, but not passed, to address concerns about packer concentration, including H.R. 3424 and H.R. 3794 by Representative Tim Johnson, S. 1758 by Senator Pressler, S. 1939 by Senator Conrad, S. 1949 by Senator Daschle, and S. 1981 and S. Res. 277 by Senator Craig. Among the provisions in one or more of these bills were: encouraging or requiring improved domestic sales and trade data reporting; directing USDA to more aggressively deal with anti-competitive practices; and determining whether federal lending practices have contributed to concentration. (See Endnote 3.)

What Is the Longer-Term Outlook?

Analysts stress that private market forces, more than government actions, are critical to long-term prospects for the industry. According to USDA, expanding beef exports, which could reach three times their level of a decade ago, have kept cattle prices from falling even lower. Analysts predict that the United States could become, in 1997, a net exporter of beef (based on tonnage) for the first time since World War II. Based on dollar value, the United States already has been a net exporter for a number of years; that is because exports are higher-valued products than imports.

Such optimism is tempered by lower-than-expected world demand during the last half of 1996. USDA said that demand has suffered from, among other things, food safety concerns in major beef markets. For example, Japan has had a series of bacterial food poisoning outbreaks; and European beef consumption has declined in the wake of reports that a rare but fatal human brain disease might possibly be linked to cattle with bovine spongiform encephalopathy ("mad cow disease").

Much also depends on the weather. Grain harvests and grazing conditions had improved by late 1996. However, feed grain stocks remain historically low, and a continuation of higherthan-normal feeding costs could accelerate beef herd liquidation beyond current predictions, USDA said. Although cattle and beef prices would decline in the short term, heavy liquidations now likely would push cattle prices much higher by 1999 than otherwise expected (since supplies would again be much tighter by then), according to analysts.

Despite their lag behind farm prices, lower retail beef prices should continue to benefit consumers and place beef in a better position to compete with poultry and pork for retail food dollars.

ENDNOTES

(1) Under CRP, annual rental payments are made to producers who contract with USDA to remove highly erodible or environmentally sensitive land from agricultural production for up to 10 years. About 35 million acres are now enrolled.

(2) The ban, which took effect in January 1989, has sharply lowered U.S. beef and other red meat exports to the EU, costing U.S. producers an estimated $100 million annually.

See The European Union's Ban on Hormone-Treated Meat (CRS Rept. 96-122 ENR), Feb. 8, 1996.

(3) Hearings on livestock market conditions, which included discussions of packer concentration, price reporting concerns, and related issues, were held June 11 before the

Senate Commerce Committee and June 18 before the Senate Agriculture Committee.