In late 1995, Steven Hunt and 20 fellow Kansas ranchers and feeders concerned about per capita consumption of beef made a tough decision: Either drastically change the way they do business or get out.
"In our opinion, the only way we could survive was to overhaul the marketing system and participate in value-added profits. After pursuing a number of alternatives, we decided a joint venture with an entity in the beef business with a label and size of packing plants that had efficiencies and economies of scale was the only viable alternative," Hunt tells BEEF.
They looked at the business structure options and decided to go the closed marketing cooperative route. On July 1, 1996, U.S. Premium Beef (USPB) was incorporated in Kansas as a closed marketing cooperative, the only one in the beef industry.
Producer and feeder Terry Nelson, Long Island, KS, was named chairman. Doug Laue, owner of Black Diamond Cattle Co., a 15,000-head feedlot near Herington, KS, was named vice chairman. Hunt, a fourth-generation cattle producer and feeder from Arkansas City, KS, who had spent a decade in banking and corporate finance, became chief executive officer.
In July 1997, its members struck a deal with Farmland Industries to buy up to 50% of Farmland National Beef Packing with its two beef processing plants at Liberal and Dodge City, KS. More than 700 members in 25 states bought 700,000 shares at $55 each before the board closed stock sales Jan. 23, 1998. Until the board conducts another stock offering, producers can only lease and/or buy shares from willing members to market through USPB.
To get an insight into workings of USPB, BEEF interviewed CEO Hunt in his Kansas City headquarters.
Why did you and your members start U.S. Premium Beef? We saw pork and poultry using vertical integration to take market share away from beef. Vertical integration was providing our competition with increased efficiency. And it gave them a direct link from consumers to producers. We realized this "top down" vertical integration wouldn't happen in the cattle industry. There's too much capital investment at the producer level, over $2,000 per cow in land, livestock and facilities. Additionally, we had no interest in becoming contract growers for the packing industry.
We asked ourselves: "Is vertical integration bad, or is it the way the other industries went about integrating from the top down that was bad?" We looked at closed cooperatives like Ocean Spray Cranberries and Sunkist Oranges, where producers approach vertical integration from the bottom up. We decided that kind of structure would work in the beef industry.
Actually, we became a "designed supply" for our own processing company. We own the company, so we receive the benefits from producing better quality beef and supplying it to our processor. Using this structure enables producers of any size to get the same marketing arrangement, or better, through USPB.
How does a closed cooperative differ from vertical integration or alliances? We were not interested in simply a contractual arrangement between producer and packer. The solution, in our opinion, was to actually take ownership and have governance of our processing company. Instead of just selling cattle, we are selling meat and meals.
USPB is not an alliance. It is a fully integrated consumer-driven beef processing company that purchased a share in Farmland National Beef Packing Co. (FNBP). The primary distinction is ownership and commitment. We do have alliances that don't have access to a brand label or processing plant that market cattle through our system. Typically, alliances supply cattle, but involvement ends at the front door of the packing plant.
Why did you decide to buy into Farmland National Beef? First, Farmland Industries is a cooperative and producer-friendly. More importantly, however, FNBP had some of the best management in the industry. They're the fourth largest beef slaughterer with the size and efficiency to compete in the industry.
Secondly, the Farmland labels have had tremendous consumer awareness and acceptance. In FNBP we could buy brands which already enjoyed great success in the retail marketplace. This was extremely critical in our decision-making process.
If we had started on our own, we would have had to spend hundreds of millions of dollars and at least one to three years of potentially big losses to develop brands this valuable. We could buy a label or brand that had become a great success in both pork and beef.
How does the agreement work? We purchased an ownership interest in FNBP, including plants, labels, foreign sales offices and Kansas City Steaks. Since FNBP is an independent operating company and not a division of Farmland Industries, taking direct ownership was possible.
Under the agreement, all beef operations are to be contained within this company that we own in partnership. At the end of the year, earnings are distributed based on ownership interest.
USPB members sell their beef and byproducts through FNBP as a commodity product and as branded products under the Farmland Black Angus Beef, Farmland Certified Premium Beef and Certified Angus Beef (CAB) labels. Under the agreement, our partnership has exclusive rights to the Farmland logo on beef products and future expansion.
How is USPB working thus far? Better than expected. We attribute our success to several things:
* A value-based system that rewards producers on an individual animal quality basis. Our members sell their cattle on a competitive grid with economic incentives for producing the right kind (Table 1, page 16). We are a great supporter of CAB and offer one of the highest CAB premiums in the industry, currently $4.50/cwt. of carcass for every qualifying carcass they deliver. Because of this, members deliver a lot of English-cross cattle that produce Choice, Yield Grade 1, 2 and 3 carcasses.
* Getting carcass data back on every animal so producers have information and the knowledge to improve their management and genetics. Our members have access to consultations with USPB's director of field operations at Dodge City, KS, to learn more about how they can use their data to improve the quality and profitability of the cattle they produce.
Eventually, members will pull down carcass information on our secured Internet home page (www.uspremiumbeef.com). We have installed radio-frequency ID readers in our plants to allow us to electronically read tags and track carcasses through the plant. We hope to have 20-30% of members using the individual ID tags by the end of the year 2000.
The tags cost $3 each but USPB pays half of that cost for tags used in 1999. We also have several feedlots that are installing electronic ID reading systems so they can track the effect that production practices, vaccinations and health programs have on carcass quality at the packing plant.
Receiving individual carcass data has already helped our members make improvements in the quality of cattle they send to USPB. Since Dec. 1, 1997, more than 800,000 cattle from 300 feedlots in 11 states have been marketed through USPB. For the year through July 17, 1999, members received over $4.9 million in total premiums. That's an average of $14.25/head over the live cash market on 344,000 head, or 12,300/week. The figure was $35/head on the top 25%.
The number of Choice and CAB carcasses are up this year, and the number of outliers are down. Members are using their carcass data to improve the quality and profitability of their cattle.
* Ownership of a value-added product. In other words, selling meat and meals and financially benefiting from doing that instead of just selling cattle.
* Members benefit from stock patronage dividends from USPB. The amount is substantial. It totaled $3,267,228 or $10.14/head for the fiscal year ending Aug. 29, 1998. Forty percent or $4.06 was distributed in cash. The remaining 60% or $6.08 was held back as retained earnings.
This amount is in addition to the $4.9 million in premiums paid from the quality-based grid for the year through July 17, 1999. The $10.14 patronage plus $14.25 average premium equates to a more than 40% return on the $55 investment per share which our members made when they bought USPB stock.
How do you even out supplies to the packing plants? It's an amazing thing. We have a broad geographical diversification of our cattle - from the Northern Plains, California, Virginia and Texas with cattle on grass, pasture and backgrounding programs. USPB is a microcosm of our industry that slaughters a relatively even number of cattle daily. We receive cattle from at least seven states every week.
It's interesting that most members from states like Georgia are in stocker programs with the natural movement of those cattle to the High Plains to be fed. Our program is no different than the rest of the beef industry. Everything our members do has to be economically feasible to work. We didn't want to disrupt the natural progression of cattle coming in from all areas of the country to where most cattle are fed today.
Doesn't USPB just add to the captive supply problem? Is a grain farmer who decides to store his grain on-farm, buy a mill and add value by further processing his product and begin feeding livestock part of a captive supply system? Most would consider it just good business.
U.S. Premium Beef is no different. Our members have decided to add value to their commodity product by buying a processing company. Today, these members sell meat instead of cattle.
Captive supply? We own a business that has paid us more than $10 million in just over a year. Why would we jeopardize our business by putting our profitable superior cattle out on the open market to send them to the competition? I don't think the aforementioned farmer-feeder is going to haul his grain to town and buy it back just to keep from being labeled "captive supply."
For further information, contact the USPB at www.uspremiumbeef.com or the Kansas City office at 816/891-2300.
Measuring beef productivity and quality takes another step forward with the formation of Beef Results Network (BRN), announced in July. The joint venture of Merial, Iselin, NJ; Allflex USA, Dallas; and AgInfoLink, Austin, TX, provides a data continuum on individual animals from birth through slaughter.
Information such as genetic history, weight history, rate of gain and carcass quality can be captured using standard or electronic eartags and compiled in databases. Data is easily transferred confidentially to selected partners throughout the production chain.
The network allows producers to sort and cull cattle based on individual performance, standardize herd health programs and measure net profit or loss on individuals. Each producer owns the data on individual herds and performs the initial data input. There are multiple levels of security and confidentiality, similar to those used in the banking industry, to ensure data integrity throughout the Internet-based transfer processes.
Early Growth "We currently have about 40 feedlots and 12 packing plants that are capable to read and transfer information," says Bob VanSchoick, director, national accounts, with Merial. "We'll expand that network to include more as time goes on.
"Though in its infancy, BRN will help branded programs track and manage the data they need to back up a branded product. There'll be competition among feedlots and better customers are going to be interested in the data whether the retain ownership or sell into a grid. It's simple - in today's beef business, you've got to know how your cattle perform."
BRN isn't limited to larger herds, VanSchoick adds. Small herd owners should band together to invest in the equipment needed, so that they too, can manage animals individually.
Evolving "The uniqueness of this venture is that is was a merger of ideas, not money, nor takeovers," VanSchoick says. "And, it's not a closed network. If other entities can bring in a unique service with value, we want to work with them. The goal is to provide opportunities for producers to improve their herds, thus enhance the bottom line."