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Study Confirms Beef Farmers Not Receiving Fair Share of Consumer Dollar
By Jeanine Moyer
There’s no question, the past few years have dealt Ontario beef farmers some serious blows. From declining margins and constant supply chain disruptions to dealing with a global pandemic, it’s only fair that beef farmers question why they aren’t getting their fair share as the price of beef soars at the grocery store.
“These challenges didn’t start with the COVID-19 pandemic,” explains Richard Horne, BFO Executive Director. “Our industry has been dealing with stagnant returns and rising production costs for some time now. That’s why BFO commissioned an assessment of implications and reasons behind beef sector pricing, beginning in 2016 through to 2021.”
The report, Ontario Beef and Cattle Pricing 2016-2021, An Examination of Price and Margin Trends in the Ontario Cattle and Beef Industry, was finalized in early 2022. “Understanding the relationship between farm, packer and retail pricing will assist BFO in supporting the needs of our members through policy and program development,” says Horne. The report is already being used to support the need for increased risk management coverage from federal and provincial governments and for on-farm risk mitigation strategies to ensure beef farms can remain financially viable. Horne explains the results also provide updated information on the current dynamics of the beef market, “which is particularly helpful for BFO when responding to media and government requests and inquiries about the relationship between the price and margins of beef along the food value chain.”
A Series of Extraordinary Events
As beef prices soared over the past two years, consumers and media have been questioning why beef is so expensive. The answer is hard to explain and requires an in-depth look at industry dynamics and the pricing spread across the beef supply chain – starting at the farm gate, through to the processor and retailer. Kevin Grier Market Analysis and Consulting Inc. was commissioned to help BFO examine the price and margin trends from 2016-2021 to evaluate why producers appear to have deteriorating market power at a time when demand for beef was at an all-time high, retail prices climbed and packing plants were profiting.
Here’s a look at the North American cattle market from 20162022 and the outcomes of the report: Ontario Beef and Cattle Pricing 2016-2021, An Examination of Price and Margin Trends in the Ontario Cattle and Beef Industry. The report is an in-depth study of the Ontario market, but also accounts for activities and trends across North America.
The study followed three objectives to complete the evaluation:
1. Construct monthly price series data sets for retail, packing, feeding and cow-calf sectors of the industry in Ontario from 2016 to 2021.
2. Assemble an Ontario beef-cattle price spread model like the USDA Meat Price Spread data set.
3.Examine margins through the chain in Ontario.
“Historically there’s been a strong correlation between cattle and retail beef prices and the related profit margins along the supply chain, but in recent years, extraordinary events caused lower cattle prices and fantastic margins for packers,” says Kevin Grier, market analyst. “The result is a poor correlation, and to explain why, we need to look at the market context.”
According to Grier, the supply of beef cattle in North America was abundant throughout the timeframe of the study. For example, the market entered 2019 with a large supply of steers and heifers, but the problem was that processing capacity wasn’t keeping up. This was due to capacity cut backs the industry saw across North America from about 2010-2016, when many plants closed or large processors reduced capacity. “So, when we look at the early years of the study, the market was in a period of high supply with constrained capacity that meant producers didn’t have much leverage when it came to the final sale price of their beef,” he explains.
An unfortunate fire at a Tyson Foods beef packing plant in 2019 sent ripple effects throughout the North American beef market, further reducing capacity. The plant, located in Holcomb, Kansas was harvesting approximately 6,000 head per day, accounting for 5-6 per cent of the weekly U.S. fed cattle processing totals. Grier says the plant was down for at least half a year and had ramifications for the industry going into 2020.
The events of 2020 need no explanation. The COVID-19 pandemic caused some of the most volatile market shifts in global commodity markets in recent history, and further reductions to processing capacity as a result of staffing shortages at the plants. Producers found themselves left to cope with the stress of the pandemic, increasing production costs, restricted processing options, and in some cases, profit losses. And consumers started questioning why beef prices were becoming so expensive at the retail level.
“What was really happening was a shift in Ontario beef packer margins, from normal levels in 2016-2018 to very profitable in 2019 and to exceptional profitability in 2020-2021,” explains Grier, noting that the extraordinary estimated margins were enjoyed by packers across North America, not just in Ontario. “But despite the rising cost and demand in beef, the retailers weren’t able to fully pass along the beef cut-out costs. Instead, retailer margins started shrinking.”
While 2021 saw the greatest consumer demand for beef in roughly thirty years, processing capacity was still backlogged as a result of events of the previous year. And continued staffing shortages throughout 2021 compounded the problem.
“The results of these extraordinary events in recent years have directly impacted cattle pricing,” notes Grier. “High demand for the limited processing capacity increased packer margins in the last half of 2020, the consumer cost for beef climbed and prices for fed cattle declined for producers. In other words, everything that could go right happened and packers enjoyed fantastic margins.”
The report analyzed industry events, market pricing, margins and the resulting impact to each player throughout the beef value chain. According to Grier, “the good news is that cattle numbers are declining and more processing capacity is coming to the marketplace, so that means the leverage over the market will change and hopefully in favour of producers.”
Understanding Beef Prices and Market Trends
“This study confirms our assumption that, despite rising consumer prices at retail and strong consumer demand for Ontario beef products, the beef farmers share of the consumer dollar has decreased over time,” says Horne, noting this is not an Ontario-specific issue and the results can be applied across the North American beef supply chain.
Ontario cattle prices
As part of the report, Grier evaluated Ontario cattle prices between 2016 and 2021. The conclusion was that, for each of the calves, yearlings and fed cattle, pricing hasn’t changed. The overall price differential from beginning to end of the study period was lower, but the key takeaway was the flat, or horizontal price movement.
This graph summarizes the trends and movement of monthly fed steer prices in Ontario from 2016 through 2021. Key points – average value: $249, 2021 average versus 2016 average: +2.7%, 2021 average versus 2018 average: +5.2%.
Ontario beef packer prices
To examine the margins and value at the packer level, cut-out prices were used. The cut-out is the weighted average value of all the beef cuts and products sold by packers. The loss of Canadian wholesale boxed beef price reporting at the beginning of the pandemic has reduced price transparency in the beef supply chain, so for the purpose of this project, the USDA weekly cut-out was used as a proxy for the Ontario packer cutout value.
The results showed Ontario beef packer cut-out prices increased by 27% over the research period.
This chart summarizes the trends and movement of monthly average of AAA/AA representative beef cut-out prices in Ontario from 2016 through 2021. Key points – average value: $290, 2021 average versus 2016 average: +27%, 2021 average versus 2018 average: +25%.
Ontario beef retail prices
To evaluate Ontario beef retail prices, the study used Statistics Canada’s Consumer Price Index (CPI) that is generated for Canada, all provinces and some cities. The CPI is generated by surveying prices of a representative basket of typical consumer purchases, including more than 100 food product categories. Included in the meat category for all of Canada are six cuts of beef including: round steak, striploin steak, prime rib roast, blade roast, stewing beef and ground beef.
This research looked at a representative retail beef price for Ontario, starting with the Canadian average retail beef value in 2016, through to 2021. The results showed that, while there was initial volatility of retail beef prices in 2016-2017, there was an explosion in prices in early 2020, followed by another surge in prices in 2021 that was caused by soaring prices at the packer level, largely due to consumer demand. The results show an increase of 10% in Ontario beef retail prices between 2016 and 2021.
This graph summarizes the trends and movement of monthly average of retail beef prices in Ontario from 2016 through 2021 (through November, latest month). Key points – average value: $20.84, 2021 average versus 2016 average: +10%, 2021 average versus 2018 average: +10%.
Evaluating pricing relationships
Ontario cattle feeder margins were poor over the research period. Margins on feeding yearlings were very negative in 2016 and recovered briefly in 2017. From that point, cattle feeding margins remained in a serious loss position. Given the much slower rate of increase of farm prices compared to retail and packer, there is no basis to say that farm prices are the cause of high retail prices at the grocery store. The study also shows that at the same time, there were obvious reasons for high packer prices related to both market supply and demand, along with extraordinary events.
The research shows the packer cut-out had the biggest increase in prices over the research period. Looking back, there was a very close relationship between the cut-out and the fed cattle price from 2010 to 2017. By contrast, from 2018 through 2021 there is a greater gap between the two price levels, illustrating the difference between the farm gate and boxed beef price.
“There were no surprises in the results of this research,” says Grier. “We all know demand for beef was high and cattle prices were low. The study confirms that producers aren’t getting their share of the consumer dollar and quantifies the impact of the pandemic, supply chain disruptions and fluctuations in pricing.”
The Ontario farm share, or producer profits of the retail beef value declined from 41 – 30% from 2016-2021. During that same time period, the packer share increased from 51 – 59%, while the retail share declined from 8% to just 2%. It’s clear that retailers have not been fully passing along the increased beef cut-outs costs to consumers. Instead, retailer margins on beef have likely been shrinking.
TAKING ACTION
“The study results illustrate the importance of robust business risk management programming and its impact on the financial stability of our members,” says Horne, outlining BFO’s action plan to leverage the market analysis information to advocate for changes for BFO members.
First on the list, and already in action, is BFO’s support of the Canadian cattle sector’s request to the federal government to mandate boxed beef price reporting in Canada. “BFO has also advocated for a published farm to retail meat price spread report that would publish the share of the consumer dollar across players in the beef supply chain, similar to what is provided in the U.S. by the USDA,” says Horne.
Next up, is to work with CCA and other counterparts across Canada to identify mechanisms to improve price transparency and information flow up and down the beef supply chain to allow beef farmers to make more informed marketing decisions, and to support government policy and industry services and programs.
“BFO continues to address concerns about the rising cost of beef at the retail level and clarify that these costs are not reflected at the farm gate. While it’s great to see strong demand for Ontario beef, we look forward to a time when everyone along the supply chain can equally benefit,” says Horne.
