Caprock Industries' new Sharing Total Added Value (STAV) alliance divvies up added feeding and carcass value, risk-free.

This may be the new math of value-added production and marketing that many producers have been searching for: offer them more incentive to bring a specific product to market without also requiring them to assume more risk.

“Our business model used to be feeding all of these different grades of cattle and averaging it out, and it made sense to feed anything,” says Ben Brophy, manager of value-added alliances for Amarillo-based Caprock Industries. “But, if you're going to produce beef for the consumer rather than as a by-product to feeding cattle, that business model has to be replaced.”

Indeed. Caprock — one of the nation's largest cattle feeders with a one-time capacity of 285,000 head — is trying to become their sole customer's premier supplier. Rather than demand that cow/calf producers retain ownership and risk in the cattle they send to Caprock's feedyards, Caprock is buying the cattle outright through its innovative Sharing Total Added Value (STAV) alliance. Then Caprock shares a percentage of the value-added feeding and carcass premiums that beat their performance benchmarks.

“We know in order for our suppliers to do the best job they can, it has to be good for their bottom line. The way that works in our program is that we're sharing the added value,” explains Brophy. “The inherent promise, therefore, is that added value has to be created in the first place. After all, there's nothing to share if no added value has been created.”

In other words, the STAV alliance represents a business proposition that is straight up. Bring the cattle that make the most money and serve the customer most effectively and you receive more return. Bring cattle that merely tread the waters of average, and there's no extra to share.

“For continued improvement, everyone has to have the chance to share in the rewards,” explains Alan Smith, manager of Caprock's commodity department. “When you look at an alliance, it's not one partner stealing from another, it's everyone sharing in what is created through the partnership.”

Staking A Value Claim

John Duke, who ranches at Darouzett, TX, knows a thing or two about adding value. The first set of cattle he sold to the STAV program earned a $100 premium, $40 of which Duke pocketed.

The STAV program determines created value by measuring feeding and carcass performance and calculating that into a dollar figure they call total added value, explains Brophy.

“We rank all the cattle each month for total added value. Those in the top third are recognized as having created value to what we are doing,” he adds.

Producers of cattle in the top third receive 20% of the total premium, while cattle in the top 20% receive 30% of the premium. Cattle like Duke's that end up in the top 10% earn 40% of the premium.

“One reason I like their format is that you come to an arm's length marketing agreement first. Then, if your cattle outperform the average, you can pick up some additional benefits as well,” says Mitt French, president of San Benito Cattle Co., Hollister, CA. Some of the first San Benito cattle in the STAV program are currently on feed.

Plus, Duke says, “What I'm seeing is that once they know what your cattle will do, and they perform well, they'll give you better than the market on the front end. It's a program a ranch can use to take advantage of their cattle's quality without feeding the cattle themselves.”

To be eligible, cattle have to be at least 50% English, no more than 50% Continental and no more than 3/16 Brahman.

“We're trying to manage out the variation. Each of these breed types contains a number of breeds that allow producers to meet their goals,” Brophy says.

Finally, to be eligible for STAV premiums, the cattle must make at least $5 on the carcass side of the equation and grade at least 40% Choice.

“That 40 percent isn't a goal, it's a threshold,” says Brophy. “We need to produce at that minimum level in order to satisfy our customer. They're selling product two to four weeks out front, and we're delivering the cattle later. So if we come in extremely low, we really mess up their business.”

Wowing The Customer

“Our primary customer is the beef processor, but ultimately it's the consumer. And we want to delight our customer,” says Brophy.

In this case, Caprock's customer is Excel Corp. — the nation's second largest beef packer. Like Caprock, Excel is owned by Cargill. All of the cattle fed at Caprock are marketed to Excel on a value-added grid.

Forget the corporate blood relationship, however. Brophy says each firm operates on its own. The fact Excel relies on Caprock for supply and vice versa boils down to good old-fashioned competition and economics.

For one thing, Brophy says, “If we manage all these cattle for one customer rather than two or three customers and two or three product lines, we do a better job and our efficiencies are higher.”

In fact, he explains, exploiting the efficiencies of fixed cost resources is one reason Caprock has owned all the cattle it feeds for the past six years.

On the other side of the fence, Excel can achieve more efficient production and marketing with a known quantity of consistent product coming through the doors every week.

But to transform the complexities of such a simple concept into the reality of value-added, brand-ready product, Brophy says Caprock realized it had to do more to control inputs up front.

“Historically, we viewed our feeding and carcass results as a product of our management inputs,” says Brophy. “There is now a greater recognition of the genetic input and the fact that producers hold the key to those genetics. In this program the role of producers and the genetics they use becomes magnified.

“We're a 100 percent customer-driven business. In order to be the best supplier to our customer, we need top-notch suppliers. What that takes is giving our suppliers the tools they need,” he adds.

With that in mind, besides the no-risk premium potential, Caprock electronically identifies all cattle in its yards. It then provides group feeding and carcass data back to the producer free of charge.

“At the end of the process, we communicate back with the supplier and give him a scorecard of how well his cattle met our customer's demands,” says Brophy.

Along with that feeding and carcass data comes interpretation of the results so the data can be fully utilized. It's an aspect of the alliance that's as appealing to some producers as the potential premium, he adds.

“I was after the data. I wanted to follow them through,” says Duke. “When you've got a history and have a stable herd, you can go out at some point and feed them yourself if you want.”

In addition, that data can command a higher value for replacements, he adds.

Believing no teacher is as apt as a person's own pocketbook, Brophy encourages producers to feed their cattle somewhere along the way.

“This program offers the progressive producer a platform to trade on, but it also helps producers who really don't know where they stand on feeding and carcass performance… It provides the goals and quantification for them to be more competitive,” he says.

Brophy points out some producers may be exactly where they need to be and not even realize it. “Not every one needs to change, and some producers need to know that they don't need to change,” he says.

However, for those who need to switch genetics based on the data they receive, Caprock offers more than advice. While Caprock doesn't trade bulls, it has forged a relationship with bull suppliers who can provide genetics that fit Caprock's targets, backed by years of feeding and carcass data.

“From our standpoint we're trying to make more of the cattle supply out there available to us,” says Brophy. “Knowing what we do of the cattle population, there's a large percentage of cattle out there we can't use. Changing bulls can be a quick fix. Then, the next step is to select more specifically within breeds.”

All told, Caprock suppliers purchased about 200 bulls this year from Milligan Red Angus, Caprock's primary seed-stock supplier.

Overall, Brophy explains the efficiencies gained and the nonconformance reduced by the STAV cattle will dictate how large it becomes within the Caprock program.

“Initially, we decided we wanted to build the STAV program up to 100,000 head within three years. That's not a big percentage of the cattle we feed, but the information we discover can be leveraged against the others we buy and manage. And, it's a large enough critical mass that I think we can make an impact on what we're supplying the customer,” he says.

Plus, the number is reasonable given the amount of time they plan to spend helping producers understand the data and identify genetic strategies, Brophy says. After all, when it comes to picking their STAV supplier partners, “What you have to answer when all is said and done,” he adds, “is whether or not they'll use the data once they get it back.”

For more information about the STAV program, contact Caprock Industries at 806/371-3711.