There was a time when some in the industry thought alliances — coordination and cooperation between traditionally antagonistic industry segments — would ultimately do everything but fix the fence and cut the calves.
Such folks envisioned alliances as the lynchpins within a vertically coordinated beef industry discovering and retrieving added value in the meat case rather than on the packinghouse rail.
Instead, alliances have generally become what they started out as, no more and no less. They hum steadily along, offering producers additional market access and marketing options, as well as opportunity to gather post-weaning data and insight into what makes the rest of the industry tick.
Along the way, alliances have busted down the doors between segments to make inter-sector communication commonplace rather than novel. They've paved the way for added-value price discovery.
As evidenced by our annual “Alliance Yellow Pages” (inserted in this issue), a few new programs come into the fold each year, while a few established ones go by the wayside. Some merge or become stand-alone supply systems for this brand or that one. A longstanding core group slowly grows or slowly loses numbers.
In sum, Clem Ward, an Oklahoma State University Extension economist and veteran alliance and grid pricing analyst, reckons alliances account for about 15% of the annual fed cattle supply on average year-in and year-out. That's certainly not chump change, but it's not the stuff of revolutions, either.
Inherent limitations continue
Ironically, alliances have become a necessary step toward a potential revolution of vertical coordination, rather than the revolution itself, for the very reasons most began.
First, alliances are designed to aggregate cattle of certain carcass and/or live specifications. But natural variation among cattle, as well as competition for cattle, meant alliances in general broadened their specifications over time, rather than narrowing them, which, in essence, dilutes the value of a given group.
Next, while gaining market access and value-added pricing opportunities are easier for some producers through formal alliances, the pricing grids spawned by alliances are readily available today without participating in a formal alliance. The same goes for gathering carcass data.
“Through alliances, packers — especially the largest ones — got more comfortable talking to the producer. Now they try to do more of it directly rather than go through alliances,” says Jim Norwood, director of procurement for Meyer Natural Angus. He was on the ground floor of managing one of the industries first large alliances.
On the opposite side of the trading fence these days, Norwood explains, “From a buyer standpoint, grids are a tool that can entice sellers and also offer buyers some protection on cattle they have no history with. If you have that kind of protection or history, you don't care what method the seller wants you to use to buy them.”
Plus, Ward points out most alliances today still only involve a couple of industry segments. Consequently, he believes value discovery remains lacking inside and outside of alliances.
“We talk about grid pricing and how it's supposed to communicate economic signals from the producer to the consumer,” Ward explains. “But, there's still quite a disconnect between individual cuts valued in the meat case and the way we value the carcasses producing those cuts.”
Moreover, the market itself dictates participation in alliances. As an example, Norwood explains, “In the past two years when fat cattle got above $80, the number of cattle selling on grids declined.”
Plus, the added days on feed required to make cattle work on a grid, relative to the premiums offered, have encouraged more producers to return to selling in the live cash market. As such, it's remarkable that the total flow of cattle through alliances has actually increased during this period. See “Cattle Economics,” page 11.
Alliance relevance grows
Despite the limitations of alliances, Leann Saunders, vice president of quality services for IMI Global, believes their relevance is increasing.
“Ultimately, it's being driven by branding,” Saunders says. “As retailers have tried to differentiate the meat case, they've branded. To do that, they've had to make a brand claim of the benefits and features that differentiate the product, and doing that has required verification.”
So far, verification has been a by-product of some alliances. However, as demand increases for such things as source and age verification, the opportunity or requirement for providing additional verification will likely increase in and out of alliances.
“Branding today is all about building an emotional connection with the consumer. That requires telling them about things in production agriculture that we in production agriculture may not think about consumers being interested in,” Saunders says.
She explains such information sharing with consumers requires cooperation between industry segments. It's the only way producers can share information with consumers about what happens in each production stage.
In fact, Saunders believes more precise verification of more production processes and product attributes will be the next step in alliance evolution.
“Just saying you're doing something won't cut it anymore,” she says.
Discount low-yielding cattle
And, not cutting it promises to cost producers more in the future. Depending on how you calculate the cost of carcass non-compliance with industry standards, the economic gap grows wider.
Purely on a net grid basis, Ward says neither premiums nor discounts have changed much over time, though specific discounts and premiums contributing to the net fluctuate.
Norwood, on the other hand, believes discounts are growing wider, but not wide enough.
“The biggest problem I see today is that government graders aren't calling the yield grade outliers (YG1 and YG4) like they should,” Norwood says. “The true cost of the lowest yielding cattle isn't getting passed back to producers the way it should. I think there's a fear that if it was there would be too few cattle on the grid.”
Saunders also believes the cost of non-compliance is increasing for the industry. “You're seeing more value-based pricing where the base requirements are being stepped up in the open market,” she explains. “Things will get even more stringent in the future.”
One thing that won't change, according to those cited here, is the need for any producer considering alliance participation to first understand the performance of their own cattle, relative to the targets of the alliance in question.
“Then, you'll either pick an alliance you like and change your cattle to fit the alliance, which comes with a significant investment. Or, you'll find an alliance your cattle fit today or could fit with a reasonable amount of change,” Ward says.
In either case, if change is considered to fit an alliance, Ward cautions, “You have to ask yourself, if you make the changes necessary to fit the alliance, are you truly improving the cattle you're producing?”