To address the problems affecting demand and market share, the beef industry must develop some coordination from seedstock to retail.
This doesn't mean the beef industry should vertically integrate like poultry. But, it is possible to function like them by cooperating to deliver a better product while still retaining segment independence.
Some of these arrangements already exist, evolving in different forms - partnerships, cooperatives, alliances, networks and marketing pools are a few. Various names used to characterize this move towards industry coordination include functional integration, vertical coordination and vertical alignment.
While some highly respected people in the beef industry oppose such structural change, this coordination can be a good thing. Other industries using such coordination have shown that this arrangement can build increased responsiveness to consumer demand, improve quality control, increase efficiency and reduce operational risk.
Noel Estenson, Cenex/Harvest States CEO, predicts that in the future a producer not participating in a coordinated production system may become a producer without a market - except for a low-priced, negative-return commodity market. The major question is "how and where will price discovery occur as the industry becomes more concentrated and coordinated?"
This movement toward industry coordination is bringing about the evolution of a value-based marketing system. As this system matures, several factors become increasingly important.
* A clear definition of specific market targets for live cattle.
* A carcass ID and data transfer system from packer back to producer.
* Accurate characterization of biological types for specific targets.
* A cattle sorting procedure with a specific target every time cattle are sold, rather than selling on the average.
Market Targets There will be four primary market targets for U.S. beef:
* Mid-Choice or higher beef (with a maximum yield grade of 3.9) for upscale domestic trade and export. This product must have exceptional eating qualities including tenderness, juiciness and flavor. Future demand for this product will be 25-30% of the market.
* High Select to low Choice for super markets and mid-scale restaurants (with a maximum yield grade of 2.9). Product must have acceptable eating qualities, and will be 50-55% of the market.
* Young, extremely lean, high-yielding beef with acceptable tenderness - 15-20% of the market.
* Other niche products will garner 5-10% of the market.
Over the past 18 months, support has been building for a universal target for U.S.-fed cattle - called the "70-70-0" target. This means the following: 70% of U.S. beef will grade low Choice or higher, and 70% will be yield grade (YG) 1 or 2. The 0% refers to 0% tolerance for Standard quality, YG 4 or 5, dark cutters, underweights, overweights or other misfits. This universal target comes close to fulfilling the needs of the four market targets described above.
Target Is A Long Way Off The most recent Beef Quality Audit indicates the industry is a long way from hitting such a target. I've seen a significant number of closeouts on pens of cattle this past year, however, that meet or exceed these specifications. This suggests we already have the genetics and management.
Kent Anderson of the North American Limousin Foundation recently predicted that in the future, high-value reputation feeder cattle will have several years of feedyard and carcass data behind them. They'll have been sired by a known bull battery with proven performance and carcass traits, and will be predesigned and managed for specific targeted markets.
To ready themselves for this future, individual cow/calf producers should retain ownership on a representative sample of their calf crop. Feed them out to determine if your genetics are up to speed in feedlot performance and carcass traits. If your cash flow won't permit retaining ownership, work out an arrangement with your buyers to obtain performance and carcass data.
While planning this, remember that year-to-year variation can be influenced by lots of non-genetic factors. These include health, feedyard management, weather, time on feed, implant strategy, packing plants and other factors.
Food marketers say an increase in branded beef products is coming. Developing a brand, however, takes a huge investment in money, time and talent. It also takes a great deal of coordination throughout the beef production and marketing chain.
Of the nation's fed cattle, 10-12% channel through a branded program, but many of these programs brand only the middle meats (loin and rib). The rest is marketed as generic commodity beef. This can be a problem in the high-quality, upscale steak programs that call for a modest or higher degree of marbling because the end meats may be discounted for carrying too much fat.
Profit Drivers For Ranchers Much attention is currently focused on improving our end product. But, we can't forget other critical profitability factors.
SPA (Standardized Performance Analysis) data indicate that high-profit cow/calf herds consistently control costs without jeopardizing cowherd productivity or gross income. They also have consistently lower feed costs, especially harvested feeds. They purchase good bulls and have sound herd health programs.
In contrast, most low-profit herds have consistently higher costs (especially feed), lower weaning percentages and weights.
Genetic selection is a major factor in profitable management. A 1995 analysis by Bryan Melton on the economic importance of various selection criteria concluded that for cow/calf herds selling calves at weaning time, the relative weighting should be 50% emphasis on reproduction traits, 25% on growth and 25% on end-product traits.
Interestingly, Australian researchers conducting a separate analysis gave nearly identical weightings for these three groups of traits. But these weightings are subject to change as consumer and industry needs change.
Profit Drivers For Feedlots Dallas Horton owns and operates a commercial feedyard near Greeley, CO. He says cattle that invariably make the most money in his yard are those that gain the most weight in the shortest period of time and on the least feed.
Thus far, carcass characteristics haven't been as influential because there's been less variation in carcass value than in gain and feed conversion. But, in a recent analysis of closeouts, Horton found that a 20% change in feed conversion, average daily gain and quality grade affected profit/head by $62, $10 and $7, respectively.
Colorado State University's (CSU) Tom Field agrees. He says the industry cannot dwell on carcass premiums and discounts and lose sight of the primary contributor to feedlot profitability: How many pounds can we generate at what cost?
Sick costs can have a significant effect on profit, especially among calf-feds. An analysis of factors affecting calf profitability in Oklahoma, Kansas and Texas shows that sick costs significantly affect profitability in the feedyard.
In an Oklahoma State University survey, High Plains commercial feedyard operators were asked to rate the future importance of feeder cattle traits on a 1-to-10 scale. Interestingly, they ranked carcass traits at the top.
Profit Drivers In Overall Production A 1998 analysis of Cattle-Fax and Gelbvieh Alliance data sorted each production sector - cow/calf, feedlot and carcass - into the highest 25% and lowest 25% in profitability. The range in profitability within each of these sectors was $173, $84 and $40 for cow/calf, feedlot and carcass, respectively.
This suggests that the cow/calf sector currently has the greatest opportunity for changing industry profitability, and the carcass sector has the least. However, if carcass premiums and discounts increase over time, opportunities in the carcass sector will increase.
CSU's Daryl Tatum predicts muscling will become increasingly important due to its influence on red-meat yield. He suggests that instrument grading will increase the focus on muscling, and muscling will become a more powerful pricing tool.
Similarly, Excel's Marcine Moldenauer predicts that discounts for upper YG 3 cattle will increase from the current spread of $1-3 to $8-10/cwt., and that YG 4 discounts could be as high as $30/cwt. in the future.