1. Macro Influences on the Beef Business

2. 2 Background Macro Trends Herd building moves are imminent Herd building moves are imminent Continued moves away from price- driven systems Continued moves away from price- driven systems Demand is growing again Demand is growing again Trade is net positive for the industry Trade is net positive for the industry Be careful with market interventions Be careful with market interventions Look at long run strategies Look at long run strategies

3. 3 The Supply-Side Cycle We are back in a cycle mode. Hay and pasture conditions have delayed the start. January 1 numbers will likely be lower again but heifer holding will start in 2004.

4. 4 Total Cattle Inventory Livestock Marketing Information Center Data Source: USDA/NASS

5. 5 Expand your herds if you have the resources. Look for bred heifers and cow-calf pairs to generate cash flow quicker. Improve genetics in the process. Check out the price grids and vertical alliance premium programs, and move quality and size of cattle toward what the new, more consumer- driven marketplace wants.

6. 6 Demand is increasing since 1998 after a 20-year slide. We allowed beef to diverge from what the modern consumer wants in terms of performance and convenience. Some 20 to 25 percent of Select and Choice cuts in the fresh beef trade are still too tough to chew.

7. Beef Demand Index Quarter 1Quarter 2Quarter 3Quarter 4 Year1980=1001998=100Year1980=1001998=100Year1980=1001998=100Year1980=1001998=100 1980 100.000208.336 1980 100.000188.619 1980 100.000195.550 1980 100.000203.752 1981 93.750195.315 1981 92.901175.230 1981 101.814199.097 1981 88.691180.710 1982 83.420173.794 1982 90.391170.495 1982 93.253182.356 1982 84.881172.947 1983 82.855172.618 1983 90.189170.113 1983 90.941177.836 1983 81.008165.056 1984 82.052170.945 1984 85.929162.078 1984 82.801161.918 1984 81.029165.098 1985 76.309158.980 1985 85.232160.764 1985 82.910162.130 1985 73.105148.954 1986 72.059150.125 1986 81.649154.005 1986 81.413159.204 1986 71.490145.663 1987 66.917139.412 1987 73.815139.229 1987 74.090144.884 1987 66.829136.166 1988 67.028139.644 1988 73.976139.533 1988 72.448141.673 1988 64.780131.991 1989 63.242131.756 1989 69.344130.797 1989 66.528130.096 1989 64.197130.802 1990 60.926126.930 1990 69.910131.863 1990 65.575128.233 1990 62.930128.222 1991 60.385125.803 1991 67.835127.951 1991 64.588126.303 1991 58.533119.263 1992 57.207119.183 1992 63.496119.766 1992 60.843118.978 1992 56.362114.839 1993 55.818116.290 1993 61.711116.399 1993 59.951117.235 1993 55.435112.950 1994 54.459113.459 1994 59.364111.971 1994 56.891111.250 1994 53.733109.482 1995 52.765109.930 1995 57.729108.888 1995 57.320112.089 1995 52.830107.642 1996 52.470109.314 1996 56.953107.424 1996 52.848103.344 1996 50.847103.601 1997 48.373100.779 1997 54.416102.639 1997 51.625100.953 1997 48.60699.036 1998 47.999100.000 1998 53.017100.000 1998 51.138100.000 1998 49.079100.000 1999 47.68299.340 1999 55.053103.841 1999 53.178103.989 1999 51.483104.897 2000 50.428105.059 2000 56.579106.720 2000 55.635108.795 2000 51.413104.755 2001 52.339109.041 2001 59.888112.960 2001 57.357112.161 2001 54.799111.655 2002 51.760107.834 2002 59.795112.786 2002 55.944109.398 2002 53.844109.709 2003 53.371111.191 2003 61.491115.984 2003 59.571116.492

8. 8 Beef Demand Index 3 rd & 4 th Quarters 1995-2003 Quarter 3Quarter 4 Year1980=1001998=100Year1980=1001998=100 1995 57.320112.089 1995 52.830107.642 1996 52.848103.344 1996 50.847103.601 1997 51.625100.953 1997 48.60699.036 1998 51.138100.000 1998 49.079100.000 1999 53.178103.989 1999 51.483104.897 2000 55.635108.795 2000 51.413104.755 2001 57.357112.161 2001 54.799111.655 2002 55.944109.398 2002 53.844109.709 2003 59.571116.492

9. 9 The key to long run viability and the chances to make a profit is demand. We need to see a continued aggressive pace in packer- level investments in new consumer- friendly product lines. Any market intervention that threatens those investments should be made with care.

10. 10 Trade is a major trend that will continue to impact the beef industry in the presence of trade accords like NAFTA, GATT, and the new WTO negotiations.

11. 11 U.S. Beef & Veal Exports As a Percentage of Production, Carcass Weight, Annual Livestock Marketing Information Center

12. 12 U.S. Beef & Veal Imports As a Percentage of Production, Carcass Weight, Annual Livestock Marketing Information Center

13. 13 Trade Helps in Net We do import and export, but the value of exports is higher. In net, my research says trade boosts our cattle prices and supports a bigger industry than we would have if we shut down our borders and saw retaliation from major buying countries like Mexico and Canada.

14. 14 The tendency toward market interventions by Congress may be the most important determinant of the future of the beef business. And the net impact on producers of these market interventions is anything but clear when you dig hard and find the unexpected implications which most of the discussions ignore.

15. 15 Market Interventions Can Cut Both Ways Programs that add costs without adding price and value at the producer level will lower producer prices. MPR and COOL may fall in this category. The “Packer Ban” legislation could have the unintended result of reducing the huge sums the larger packers have spent on new products across the past 10 years; especially the past 5-8 years.

16. 16 Be very careful with market interventions. Cow-calf producers need investments in new product forms from the large packers. If you pass laws that tend to discourage those investments, the demand growth we are seeing will falter in future years. The residual claimant of the consumer dollar (the producer), after all middlemen extract an operating margin, will bear the price pain if demand is allowed to falter.

17. 17 Looking Ahead: Strategic Planning Be consumer driven Be consumer driven Average pricing is bad Average pricing is bad Obsolete grades will not allow price- driven systems to bring coordination and quality control Obsolete grades will not allow price- driven systems to bring coordination and quality control Look for ways to get individual animal valuations and prices Look for ways to get individual animal valuations and prices

18. 18 Looking Ahead: Strategic Planning Take advantage of opportunities Take advantage of opportunities Contracts and price grids, if they help Contracts and price grids, if they help Vertical alliances, if they fit your program Vertical alliances, if they fit your program Know what the modern marketplace wants Know what the modern marketplace wants

19. 19 Looking Ahead: Strategic Planning A conversation I have had with independent hog producers: “They don’t want my hogs.” and I ask: “Are they uniform and consistent?” and they reply: “They are like peas in a pod and very uniform.” and I ask: “What if they are uniformly wrong?”

20. 20 Looking Ahead: Strategic Planning Have an open mind Have an open mind The price system is failing because of problems with grades and increased sophistication in the industry. To be part of the new quality-assured lines, you may have to be part of an alliance or see if you can find a price grid that works for you. To succeed, the industry must find a way to better serve the consumer and get some of the rewards back to producers.

21. purcell@vt.edu RILP website: www.aaec.vt.edu/rilp www.aaec.vt.edu/rilp Weekly letter: www.ext.vt.edu (News, Purcell Letter) www.ext.vt.edu Wayne D. Purcell Alumni Distinguished Professor Director, Research Institute on Livestock Pricing Virginia Tech