CHAPTER 2

SIZE OF THE BEEF INDUSTRY

To fully understand the nature of the beef industry, it is first necessary to ascertain the overall size of the industry, as well as understand the growth pattern which allowed the industry to reach its present position in the economy. There are three general measures which are useful: Volume of sales, capacity, and value of shipments.

A. VOLUME OF SALES

This figure measures the production output of the beef industry or the total number of head of cattle slaughtered and sold. Table 1 shows the total beef production and consumption by number of pounds for the years 1970 through 1974. These figures show a 6.7 percent increase in production and a 2.7 percent increase in per capita consumption over the period.

TABLE 1.-PRODUCTION AND CONSUMPTION OF BEEF, 1970-74

Source: "Livestock and Meat Statistics: Supplement for 1974." U.S. Department of Agriculture, Statistical Bulletin No. 543, p. 106.

A more relevant measure of growth can be achieved by narrowing the slaughter figures to include only those for the slaughter of steers and heifers. (Steers and heifers are slaughtered for the production of retail beef cuts, excluding ground beef, while cows and bulls are slaughtered primarily for hamburger and utility meat.) Table 2 shows the trend in slaughter of steers and heifers for 1970 through 1974.

Source: "Livestock and Meat Statistics: Supplement for 1974," U.S. Department of Agriculture, Statistical Bulletin No. 543, p. 72.

B. CAPACITY

The extent to which a firm utilizes its potential capacity in actual production may vary according to a number of factors-seasonality, aggregate demand, market imperfections, etc. Accordingly, a more accurate measure of industry growth may be the percent of capacity which is utilized rather than actual sales. Table 3 shows the percent of reported head-per-hour capacity utilized for three years.

TABLE 3-PERCENT OF ANNUAL CAPACITY UTILIZED IN FEDERALLY INSPECTED PLANTS SLAUGHTERING EXCLUSIVELY CATTLE, 1970, 1972, AND 1973

Source: "A Descriptive Analysis of the Federally-Inspected Livestock Slaughtering Industry," p. 75, Allen J. Baker (unpublished).

Growth in the beef industry has been steady. Except for a one-year hiatus in 1973, presumably due to the impact of the meat boycott, both production and consumption have risen consistently. Any change in performance for any one sector of the industry can probably be attributed to problems in the relative structure of the industry rather than aggregate demand shifts which would affect all firms.

C. VALUE OF SHIPMENTS

The gross income of the beef industry can be measured by total cash receipts, or the value of shipments. As table 4 indicates, the industry's income increased 135 percent between 1958 and 1972. Compared to the rate of inflation during this period, this is not a disproportionate increase.

TABLE 4.-VALUE OF SHIPMENTS FOR BEEF INDUSTRY AND MEATPACKING INDUSTRY, 1958-1972

Source: Census of Manufactures, Industry Series: Meat Products, 1972, U.S. Bureau of the Census, p. 23.

CHAPTER 3

STRUCTURE OF THE BEEF INDUSTRY

There are four additional indicators which can be used to analyze the structure of the industry: Coverage ratio, specialization ratio, source of purchases, and relative indicators of small and large firms.

A. COVERAGE RATIO

This statistic attempts to answer the question: How much of the total beef production is accounted for by firms within the industry? If many different industries produce a given product, then the industry in question will have low coverage ratio.

The meatpacking industry has a relatively high coverage ratio, 84 percent. For the specific product, "beef, not canned or made into sausage," the coverage ratio is over 99 percent. This high ratio reflects the fact that beef rarely is used as an intermediate product in other processing industries, or produced as a by-product of other manufacturing processes.

B. SPECIALIZATION RATIO

4

The specialization ratio gauges the percent of an industry's capacity which is devoted to production of the industry's primary product. For the meatpacking industry, this figure has remained consistently high at 98 percent. This figure may be misleading in a number of different ways, however, particularly in analyzing the production of beef. For instance, the 1972 Census of Manufactures provides separate figures for the value of shipments for those firms whose primary product is beef "specialization greater than 50 percent," and for those firms whose specialization in beef exceeds 75 percent. The value of shipments for those firms whose primary product is beef is 19 percent greater than the total amount of beef produced by the meatpacking industry, due to the fact that products other than beef are sold by these firms. A more accurate indicator of beef production may therefore be the figures for those firms whose specialization in beef is greater than 75 percent. Nevertheless, the value of shipments for this segment of the industry represents only 87 percent of total beef production.5

It is important to realize that both an unpublished Economic Research Service study and the Census of Manufactures gathered statistics for individual establishments rather than for firms as a whole. With regard to the specialization ratio, this may obscure the relative importance of those firms that specialize in steer and heifer, or retail beef, production.

A second reason the published specialization ratios may be de

1 Census of Manufactures, Industry Series: Meat Products, 1972, U.S. Bureau of the Census. p. 13.

2 Ibid.

3 Ibid., 1963, p. 11.

Ibid., 1972, p. 12. 6 Ibid.

ficient is the distinction between production of carcass beef and the production of fabricated or "boxed" beef. One of the most important developments in the beef industry has been the advent of "boxed beef" and its implications for cost efficiencies. For instance, by shipping beef primals in boxes rather than the entire carcasses, significant transportation cost savings may be achieved. The data gathered for the beef industry as a whole, however, offer little insight into this division between carcass and fabricated beef, or the extent to which different firms specialize in one or the other product. One extremely rough indicator may be the size of the slaughtering facility. Large firms such as Iowa Beef Processors or Missouri Beef Packers, both dominant in boxed beef production, tend to have heavy investments in large-size facilities. The trend toward industry domination by these larger plants will be discussed below.

The value of shipments for "whole carcass beef" and for "primal and fabricated cuts" in the Census of Manufactures does not provide an adequate information base for qualitative or quantitative analysis either.

In 1967, whole carcass shipments represented 73 percent of total beef shipments while fabricated beef comprised only 15 percent." By 1972, this ratio had shifted to 69 percent carcass and 21 percent fabricated. After adjusting for the increase in the total value of beef shipments, this shift represents a 5 percent decrease in carcass beef's share of the total, and a 43 percent increase in the share of fabricated cuts. A similar trend is evident in the annual Securities and Exchange Commission reports filed by those firms which have heavily invested in fabricating facilities. The figures submitted by Iowa Beef Processors shown in table 5, indicate the degree to which the largest firm in the beef industry has shifted toward "boxed beef" in the past few years.

TABLE 5. PERCENT OF SALES OF IOWA BEEF PROCESSORS, INC., ACCOUNTED FOR BY CARCASS, FABRICATED, AND BY-PRODUCT PRODUCTION, 1970-74

Source: "10-K Report", 1974, submitted to the Securities and Exchange Commission for Iowa Beef Processors, Inc.

A shift to steer and heifer production combined with a shift to "boxed beef" production may or may not represent the actions of a few large firms attempting to gain competitive advantages in the lucrative retail beef market. There is simply no definitive answer which can be supported by available data.

C. SOURCE OF INPUTS

Another measure of the changing structure of the beef industry is the sources of livestock for slaughter. Twenty years ago, the

• Ibid., p. 15. 7 Ibid.

predominant source of all slaughter cattle was auction and terminal markets. Recent trends, though, indicate a shift-especially in the purchase of steers and heifers-toward direct purchases from producers.

This trend was first documented in the National Commission on Food Marketing Study in 1965.8 Recent data from the United States. Department of Agriculture show that the vast majority of cattle purchases are made directly. This trend is especially pronounced for the larger size plants, where 93.8 percent of all purchases were direct in 1970.9 Even for smaller plants, there is an unmistakable dominance of direct purchases. In all size categories, the range of direct purchase percentages includes at least some plants that purchase 100 percent of their livestock in this manner.1 10

The previously stated rule-of-thumb that "mostly steer or heifer” plants may provide a good index of increasing specialization, the same tendency to direct purchases is evident. Although USDA data on "mostly steer or heifer" plants do not provide separate information for the larger size categories (due in part to the relatively small number of plants), even the data provided for firms with capacities for slaughter of "57,376 plus" provides some useful information. The average percentage of direct purchases was 89.2 percent in 1970 and 84.3 percent in 1972. This compares with an average 81.2 percent in 1970 and 77.4 percent in 1972 for the comparable size category in "exclusively cattle" plants, which, explained above, probably tends to be a less-specialized classification."

This information carries unusual importance for analysis of the beef industry. The USDA farm value for beef, on which the entire price spread series is based is calculated from quoted prices at auction and terminal markets. This means that less than 20 percent of total beef sales-most of the relatively small firms are used to determine the most visible statistical measure of the entire industry. Yet, over 80 percent of all cattle purchased are not purchased from these sources.

It seems reasonable to assume that a major factor in the shift to direct buying has been decreased expense relative to auction and terminal market arrangements. This may be due to the lack of marketing charges, a savings in transportation costs, or some other relative cost advantage bestowed by the direct buying system; it is impossible to determine from available data exactly what caused the shift in methods of purchase. Regardless of the explanation, such a decrease in costs would go undetected by USDA reporting procedures-which means that the farm-retail spread for beef may be severely understated. The "farm value" of beef, determined by price quotations from relatively insignificant markets, may actually be consistently less than the figure which finds its way into newspaper headlines each month. If the "farm value" of beef is actually less than reported, the farmto-retail spread for beef or more specifically the farm-to-carcass spread-will understate the margin which will accrue to the meatpacker.

It should be emphasized that although such a conclusion seems logical, it does not necessarily follow from the available data. To be

8 Organization and Competition in the Livestock and Meat Industry, Technical study No. 1, National Commission on Food Marketing, June 1966, pp. 2-6.

A Descriptive Analysis of the Federally-Inspected Livestock Slaughtering Industry, Unpublished, p. 90. 10 Ibid.

11 Ibid., p. 90, p. 100.