Things are changing in Kentucky. Tobacco is on its way out as the leading cash crop with the void being filled by cattle. And, in a region where 85% of the feeder cattle are marketed through sale rings, Lexington's Bluegrass Stockyards — by far, the state's premier livestock market — is positioned to become an even bigger player in the Bluegrass State's cattle industry.

Estimates are that while national cattle numbers are slipping 1%-2% each year, Kentucky is bucking the trend to increase its cowherd 12-15% over the next few years.

The 275,000+ head of cattle that moved through Bluegrass Stockyards in 2002 made it the nation's third-largest auction barn and largest east of the Mississippi River. It draws cattle from 90 Kentucky counties and 11 states, trading nearly $114 million worth of animals last year. That's more than one-fifth of all Kentucky cattle income.

This all comes on the heels of some hectic times for Bluegrass Stockyards. In January 2001, the business was sold to eMerge Interactive, Inc., Sebastian, FL. Eight months later, Bluegrass hosted Kentucky's first live Internet cattle auction and sold nearly 8,000 head to cattle buyers nationwide. In June 2002, however, eMerge divested Bluegrass and several other cattle operations to narrow its business focus toward supply chain management services and food safety technologies.

Today, with Kentucky's cattle industry booming, Bluegrass Stockyards' future has never looked better. One of the stockyard's principle owners, Gene Barber, 64, is working on plans to spend $8-$9 million on a new state-of-the-art market facility.

Gene Barber recently visited with BEEF magazine about his business and the Kentucky cattle industry.

BEEF: Kentuckians are serving notice that they're building the nation's leading cow-calf herd. What's behind this and how will it happen?

Barber: Because most of the state's tobacco farmers also raise cattle, the Kentucky Agricultural Development Board (see sidebar, page 16) decided a fair way to distribute tobacco-settlement money was to earmark some of the funds for beef-related projects. Hundreds of people around the state have been working hard to improve the health, genetics and quality of Kentucky cattle.

There's no question this infusion of funds will help make Kentucky a prominent force in the U.S. cattle business. Today, we have as good of cattle as anywhere in the country. Cattle will become our main cash crop in two years.

BEEF: What does the auction market business, specifically Bluegrass Stockyards, mean to the cattle business in this part of the country?

Barber: My job is to find a market the best way I can for the cattle raised here. We work hard for our producers. Most of the calves go west to Corn Belt farmer-feeders and smaller commercial feedlots — mostly to western Iowa and eastern Nebraska and Kansas — and a few still go into Illinois.

We're doing some things different from what we've done in the past. We sold almost 40,000 head through value-added programs like CPH-45 (Certified Preconditioned for Health — Kentucky's premium feeder calf management program).

We've also put an Internet system into our yard. Now, at no cost to them, people can sit in their homes or offices as far away as Oklahoma or Kansas and compete with our local order buyers for Kentucky cattle. This will change the industry once people learn about Internet marketing and gain confidence in the quality of the cattle represented.

In all, we'll move more than 300,000 head of cattle this year. Once we get our new facility, we'll sell a half-million head. That would probably make us the largest auction market in the nation.

BEEF: With the growth in Kentucky's cattle herd, do you think you'll see changes in the structure of the individual herds?

Barber: No. We'll always have farmers with small herds — producers with 40-50 acres and 25-30 cows. There might be fewer big farmers but the smaller producers will always be here, and they'll grow in number.

A good indication of the growth in small herds can be seen in our Monday sale. At one time, the biggest sale day by far was Tuesday. Now, Monday is becoming our biggest sale day. We get many small groups of cattle coming in on Sunday when families have the day off and the time to bring cattle to town. Raising cattle is something these people really love to do, even though they don't depend on cattle for a living.

BEEF: What's your dream for your new market facility?

Barber: It's a bit late in life for me to start a new $8 million venture, but I love the cattle business, I have pride in the cattle business and it's been good to me. I'd like to leave some kind of legacy that says I helped some people out.

We can build a new facility that will be more convenient for our farmers — making it easier to load and unload. And, by hooking up to the Internet and bringing the world to our sales ring, we can bring hundreds of thousands more dollars every year into this region.

I have to say that I'm as optimistic as ever about the cattle business, especially in Kentucky. The cattle we're selling today aren't the Kentucky cattle of 10 years ago. They're yielding more red meat, grading better and bringing more money for the people who feed them. I've traded cattle for a long time and I'm here telling you they don't make them any better.

BEEF: Why do we need auction markets? What are auction markets doing correctly — and what are they doing wrong?

Barber: First, we can't lose sight of the fact that we're working for the consignor. We have to make certain we get the cattle marketed right. I think some stockyards don't focus on that just right.

I remind myself every day that I earn my dollar from the farmer selling cattle, but I have to be fair to the buyer in representing the cattle. In doing so, we make certain we have a competitive market — with enough buyers to make sure the cattle bring enough. You can't do that with one or two buyers — that's where some auction barns get into trouble.

Bluegrass Stockyards is price discovery for the whole state of Kentucky. Whether cattle are selling in another auction or out in the country, everybody looks to see what cattle are bringing at Bluegrass Stockyards.

I don't care who you are, you're not marketer enough to go one on one with an order buyer out on the farm. He knows what's going on in the market every day, while you might be selling your cattle one day a year. You just can't keep up with him. That's why we need a place where eight or 10 different buyers are bidding on the cattle and discovering prices.

BEEF: You said Kentucky cattlemen are very reliant on Midwest cattle feeders. With consolidation in the feeding sector, are you worried you might lose that traditional buyer base for your cattle?

Barber: We've lost a lot of our feeders in Illinois, Indiana and Ohio due to concentration of the big feeders and packers out West. If we didn't have those farmer-feeders, we'd have trouble getting cattle sold. We're too far to ship cattle to the High Plains, and we have the wrong kind of cattle for Texas anyway. A few light calves go to Texas or Colorado but not many.

BEEF: What's your biggest fear?

Barber: I hate that cattlemen have only three or four packers to sell to. The captive supplies these packers hold can be used to manipulate the markets.

One thing that would help is a ban on captive supplies. A lot of people think I'm crazy for saying that — they say we'll lose our bidding competition for feeder cattle. But, I think the opposite will happen and you'll see more feeders bidding on our calves. We need to get the packers out of the feeding business.

BEEF: What about the beef checkoff? Do you see it helping producers?

Barber: That's something I voted for and helped put together. I don't have anything against the checkoff. I think we need to always watch hard to see where and how the money is being spent. There was a time when I thought they were wasting money but I don't think that's the case today.

We need a checkoff — there's no question that advertising pays. It's probably done more good than we realize — we'd be worse off without it. I would be in favor of a vote now and then on the checkoff, however.

BEEF: Do beef and cattle imports bother you?

Barber: Yes, they do. I think imports have done away with some of the cattle cycles we've seen in the past. When numbers are short, we fill the holes with imported cattle rather than increasing our domestic herd.

This Canada thing with BSE (bovine spongiform encephalopathy) is a terrible thing for those producers. But it shows our U.S. prices are hurt by imports.

I know we're selling cattle into markets that were getting cattle from Canada before this BSE thing happened. Don't get me wrong, I feel sorry for those people — I feel very bad about what's happened up there.

We've got to watch out because, down the road, if we start getting cattle and beef coming out of Brazil or Argentina — without tariffs or health controls — it will kill our business.

BEEF: Are you in favor of country-of-origin labeling for beef? Would it be a problem for you as an auction market owner?

Barber: It will be a good thing. I think American consumers will pick USA beef and take it home at a higher price. I don't think labeling will cost near as much to implement as they say.

I'd be happy to go through whatever red tape it takes to get country-of-origin labeling in place. As an auction market owner, I'll do anything to help the price of beef and cattle farmers survive.

The Kentucky Tobacco Settlement

In 1998, the four largest cigarette manufacturers reached an agreement with 46 states to settle lawsuits to recover costs associated with treating smoking-related illnesses. According to the Master Settlement Agreement (MSA), the cigarette industry is projected to pay the states in excess of $200 billion over the next 25 years, in addition to paying $46 billion to four states that previously settled their suits.

The Kentucky general assembly was given the authority to decide how to spend Kentucky's share of the MSA funds. Proposals from agriculture leaders recommended a plan to strengthen agriculture through funding in eight areas: forage and livestock, horticulture, rural development, environmental compliance, biotechnology, marketing and promotion, research and education, and a venture capital fund.

The Kentucky Agricultural Development Board was created by the 2000 General Assembly to distribute 50% of the state monies received from the MSA.

Participating manufacturers were ordered to also address the negative impact that the MSA would have on tobacco growers and quota holders. This resulted in the National Tobacco Grower Settlement Trust fund (Phase II funds) that provide $5.15 billion in compensation over 12 years (1999-2010) to the nation's tobacco quota owners, growers and tenants for lost income caused by the settlement.

Each state's Phase II share is determined by its relative share of the total 1998 basic quota for flue-cured and burley tobacco. Kentucky, the second-largest tobacco state, will receive 30% or $1.5 billion of these funds. Compensation will be adjusted annually based on the rate of inflation and change in U.S. cigarette sales.

Preliminary estimates project Kentucky's adjusted 2003 Phase II funds may total $130 million. Phillip Morris, Inc. (now Altria), Brown and Williamson Tobacco Corp., Lorillard Tobacco Co. and RJ Reynolds Tobacco Co. pay into the trust that is divided among tobacco producers in 14 states.