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Federal Reserve Bank of Dallas FARM and RANCH BULLETIN May 1972 MANY FACTORS AFFECT CHANGING CATTLE FEEDING ECONOMY Big regional shifts in beef feeding have emerged with the growth of large commercial cattle feedlot operations. The establishment of specialized cattle slaughtering and processing plants near the major cattle feeding areas has facilitated these changes. Other contributing factors include changing con sumer tastes and preferences, a shifting and growing population with an increasing per capita income, and continuing technological advances in cattle feeding and in the slaughter, transportation, and distribution of fed beef. Economic factors important in determining the location and levels of cattle feeding include available supplies of feed grain and feeder cattle and econ omies of size in feedlot operations. According to a COMPETITIVE ADVANTAGE DEFINES C ATTLE FEEDING BELT SO URCE: T e x a s A & M U niv e rs ity study by Raymond A. Dietrich of Texas A&M Uni versity, the best competitive advantage in cattle feeding exists in a belt encompassing parts of the Texas-Oklahoma Panhandle, New Mexico, Arizona, Colorado, Kansas-Nebraska, Iowa-Illinois, the east ern Corn Belt, and Kentucky-Tennessee. Regional price differences Of course, the regional price structure for feeder cattle, feed grains, fed cattle, and dressed fed beef is affected by changes in the location and levels of cattle feeding. Such price structures result from regional surpluses or deficits in one or more of the above factors and the region’s ability to compete for resource inputs and market outlets. Feeder cattle prices in 1968 were generally lowest in the Southeast, East Texas, the Inter-Mountain states, and the Pacific Northwest. These regions pro duce a surplus of feeder cattle for long-distance shipping. By contrast, highest prices were generally noted in Arizona, Iowa, New Mexico, western Okla homa, and Illinois. Regional price differences reflect existing supply-demand conditions and may change as the structure of the industry changes. Feed grain prices tended to be highest in regions that produced less feed grain than was demanded by area poultry and livestock industry. Such deficit feed grain production is found in the West, the South, and the Northeast. As expected, feed grain prices were generally lowest in the Corn Belt and North Plains. Prices for fed cattle were generally highest in Pennsylvania and the Northeast. This can be at tributed mainly to a demand for fed beef in excess of production and to the availability of surplus slaughter capacity. Fed slaughter cattle prices were lowest in West Texas, where, at the time of the study, there was not sufficient capacity to slaughter all the cattle fed there. However, additional slaugh ter plants in or near the Texas-Oklahoma Panhandle have been constructed or planned in recent years. Fed beef prices were generally highest in the Northeast, the South, California, and WashingtonOregon, where there was a feed grain deficit. Nor mally, the lowest prices for fed beef were found in regions such as the South Plains and Colorado, where there was a surplus of fed beef and the major consumption areas were some distance away. Potential adjustments Results of this study indicate that substantial competitive advantage may accrue to regions that adjust to the competitive environment of the cattle feeding economy. Savings may be realized from such factors as economies of size in feedlot opera tions, location of feeding facilities in or near major areas of surplus feed grain production, location of slaughter facilities in the primary cattle feeding areas, and cost advantages in acquiring feeder cattle. A region’s potential depends also on factors such as wage rates, level of management, availability of resource inputs, taxes, and the changing structure of demand. FERTILIZER USE INCREASES STEADILY Consumption of nitrogen, phosphorus, and potas sium (elemental basis) as fertilizer has increased nearly fivefold in the United States since 1950. Led by steady gains in nitrogen, total use reached 13.5 million tons in 1971. Nitrogen’s steady growth was due mainly to declines in relative price—par ticularly of anhydrous ammonia—and to the excel lent yield response on forage and crop production. In recent years, the use of these primary plant foods has grown faster in the five states of the Eleventh Federal Reserve District than in the na tion as a whole. In these states—Arizona, Louisiana, USE OF PRIMARY PLANT FOODS INCREASES (Thousand tons) Area ___________ Nitrogen____________ Percent change 1971 p from 1966 Arizona ................................................. 97.4 Louisiana ............................................. 136.4 New M e x ic o .......................................... 28.9 O klahom a.............................................. 173.7 Texas ................................................... 666.4 Five states ........................................1,102.8 United S ta te s ..................................... 7,904.1 p— Preliminary SOURCE: U.S. Department of Agriculture 35.5% 58.1 75.2 58.9 71.0 63.7 49.2% __________ Phosphorus__________ Percent change 1971p from 1966 32.0 58.3 15.7 94.4 261.8 462.2 4,777.6 32.2% 47.2 37.7 31.8 39.5 38.2 23.0% ________ Potassium________ Percent change 1971p from 1966 2.4 55.2 1.7 33.6 98.3 191.2 4,159.4 100.0% 59.1 30.8 42.4 72.8 62.4 30.1% New Mexico, Oklahoma, and Texas—use of nitrogen and potassium has increased more than three-fifths and use of phosphorus nearly two-fifths. Some of this increase is due to additional use of fertilizer on pastures and forage crops. Rising land prices and increased demand for feeder calves have en couraged stockmen to improve pastures. These im proved pastures allow them to produce more beef per acre with lower unit costs. Compared with prices of other farm inputs, the price index of fertilizer has been fairly stable in the past 20 years, varying from a high of 110 in 1954 to a low of 99 in 1969 (1950 = 100). Preliminary figures for 1971 show a level of 108, the highest since 1955. Fertilizer prices moved up about 8 percent in 1971, due to higher marketing charges and a 17percent rise in the average farm price of potash. Farm prices of most nitrogen and potash fertil izers are expected to level out in 1972. Currently, production capacity far exceeds demand for these fertilizers. On the other hand, phosphate fertilizers —and particularly concentrated superphosphate— may be in relatively short supply. Reports from man ufacturers seem to indicate that most phosphate production scheduled for the first half of 1972 was contracted for before the end of 1971. Supply pres sures from foreign markets can also be expected. A continual increase in the numbers of plants and firms manufacturing ammonia has boosted produc tion capacity much faster than demand. In the 1960’s, production of anhydrous ammonia increased about 72 percent. By 1970, there were 100 plants producing ammonia. Their combined annual capac ity was estimated at 18.5 million tons—more than three times the capacity in 1960. In comparison, total nitrogen consumption for 1971 was estimated at only 8 million tons. A further discussion of the fertilizer industry may be found in the June 1970 Business Review published by this Bank. FAR M ER’S AVERAGE SHARE OF U.S. MARKET BASKET DOLLAR, 1970 CE NTS PER D O L L A R PO ULTRY AND EG GS M E AT PRODUCTS D AIR Y P R O D U C TS FR U ITS AND V EG E TA B LES B A K E R Y AND CER EAL PRODUCTS 10 20 30 40 50 60 SOURCE: U.S. D e p a r t m e n t o f A g r ic u ltu re FARM-RETAIL PRICE SPREAD GROWS In recent years, the spread between prices con sumers pay for food in retail stores and the farm value of these foods has accounted for about 60 cents of each dollar spent in retail food stores. For all of 1971, the marketing margin widened less than 3 percent, a much slower general increase than in 1970, when the farm-retail price spread swelled a little more than 7 percent—the biggest year-toyear increase since 1951. Except for 1960 and 1965, marketing spreads have widened every year for the past two decades. From 1965 to 1971, the farm-retail price spread increased about 24 percent while the farm value of food products increased about 15 percent. Farm value as a percentage of retail cost declined from 40 percent in 1965 to 38 percent in 1971. Farm value averaged half of retail cost from 1947 to 1949. Labor costs account for about half the farmretail price spread. Since 1960, hourly labor costs have increased by two-thirds and unit labor costs by about two-fifths. Gains in productivity appar ently have failed to match increases in wages and fringe benefits. Other costs that have also trended upward include those for transportation, packaging RETAIL, W HOLESALE, AND FARM FOOD PRICES 19 50 = 10 0 1971 f i g u r e s e s t i m a t e d SOURCE: U.S. D e p a r t m e n t o f A g r ic u l t u r e materials, fuel, power, property insurance, and many other goods and services bought by marketing firms. Meat products rank first in retail cost, as well as farm value, in the total market basket of farm foods and account for nearly a third of the retail cost of farm foods purchased by the average U.S. house hold. In 1971, the average household paid $1,244 at the retail market for farm foods. Since 1947, retail prices, farm values, and farmretail price spreads have increased much more for fresh fruits and vegetables than for farm food prod ucts in general. For fresh fruits and vegetables, the farm price is a smaller percentage of retail price than it is for most other products. A lack of im provement in output per manhour has contributed to rises in farm prices of these products. From 1950 to 1970, while output per manhour in all farm pro duction advanced 223 percent, output in fruit and nut production increased only 72 percent. In vege table production, it increased 82 percent. In addi tion, sensitivity to weather conditions causes varia tion in the supply and quality of fruits and vege tables that, in turn, affects both farm and retail prices more frequently and to a greater extent than is the case for many other farm foods. Bakery and cereal products—with their extensive processing—accounted for 21 percent of the farmretail price spread in 1970. Changes in farm values of bakery and cereal products since 1947 have had little effect on the farm value of the total market basket of farm foods. Frying chickens and eggs are among the few farm food products that have shown a decline in retail prices. But farm values have also declined, produc ing a moderate increase in farm-retail price spreads. Automation, changes in the organization of pro duction and marketing, and other gains in efficiency were responsible for most of the price decline. Prepared by Carl G. Anderson, Jr.
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