Market impact of Zilmax ban

The Beef Angle

Without Zilmax, the fed cattle population would likely need to be 2.3% larger to produce the same volume of beef, based on cocktail napkin economics.

Published on: August 16, 2013

WHILE many market watchers are trying to determine the actual impact of the past week’s developments regarding Merck’s Zilmax beta agonist, I’ve been pondering just how sizable the product’s penetration is in the first place.

Industry estimates suggest that more than 70% of the U.S. fed cattle population is finished on a beta agonist; either Zilmax (zilpaterol hydrochloride) or Elanco’s OptaFlexx (ractopamine hydrochloride).

Based on the U.S. Department of Agriculture’s annual livestock slaughter summary released in April, we know that total commercial cattle slaughter tallied 33 million head last year, and steers and heifers accounted for 78.4% of the total, or roughly 25.87 million head. So if the 70% estimate is close enough for economics, that would tell us that some 18.1 million head were finished on a beta agonist.

Cattle feeding at the bunk. Without Mercks Zilmax, fed cattle inventory may need to grow 2.3%. Image courtesy of Colorado State University.
Cattle feeding at the bunk. Without Merck's Zilmax, fed cattle inventory may need to grow 2.3%. Image courtesy of Colorado State University.

Those estimates don’t tell us much about Zilmax specifically, however, and that’s the important question given that no one is making a fuss about OptaFlexx at this point. While Merck would not disclose specific information during my conversations with them last week, they did drop a little tidbit of useful information this morning, when the company announced that it would temporarily halt sales of the product.

According to the company’s statement, Zilmax sales in the U.S. and Canada totaled $159 million in 2012. I decided to do a little of what a former business associate liked to call “fake math,” one of my favorite hobbies.

Starting with their figure of $159 million, I did some Googling to determine the price of the product. According to an archived version of Merck’s product page for Zilmax, “The July 2013 Merck Animal Health Suggested Retail Price for Zilmax (zilpaterol hydrochloride) feed supplement is $8,453.00 per 10kg bag.”

Do some simple division (these are really rough numbers, given that the price was probably different in 2012), we arrive at roughly 18,810 bags of the product sold last year.  My understanding is that a bag, fed according to label, will feed roughly 300 head for 20 days; if that is the case, we can guesstimate that 5.64 million head of cattle were finished on Zilmax.

If that number is anywhere close to reality, 5.64 million head would equate to something on the order of 22% of the U.S. fed cattle population. I don’t have a gut feeling if this is reasonable or not, but given that OptaFlexx was on the market first, and has a different (in other words, cheaper) price structure, Elanco may indeed have the majority of the market in terms of head fed.

So, what does our exercise in cocktail napkin economics tell us? If roughly a quarter of the fed cattle population is fed the additive, we can assume that those steers are coming in with somewhere on the order of 30 pounds of additional carcass weight, based on a 2011 trial conducted by Ty Lawrence, associate professor of animal science at West Texas A&M University (a figure similar to some I heard tossed around during a beta agonist symposium in Denver earlier this month).

Back to the fake math, let’s take 5.64 million head times 30 pounds of hot carcass weight, and we come up with roughly 169.2 million pounds of beef, the equivalent of 129,954 head of cattle, based on the 2012 average live weight of 1,302 pounds.

While Tyson’s decision to bar cattle fed Zilmax may have only directly impacted a quarter of the fed cattle population, the chain of dominos that decision set into motion may be leading toward a fed cattle herd that needs to be 2.3% larger to stay flush with current production. Producers have been reluctant to add to their inventory until they’re confident that feed prices are indeed coming down off recent record highs; will they take the plunge now, or will an already tight cattle supply get even tighter?

Cactus Feeders CEO Mike Engler said earlier this month that if beta agonists are taken off the table, the industry will need 6% more cattle to produce the same volume of beef, or will necessarily produce 6% fewer pounds of beef. Given that estimate, I’d say that our cocktail napkin illustrations aren’t all that far off base.