Never mind the logistics of supplying cattle so that retailers can offer a particular brand of beef every day of the year. Ignore the need to sell enough of each value-added carcass for enough to offset additional costs. Trying to add and retrieve value in a market driven by commodity fundamentals continues to stymie potential of the alliance concept as much as anything.
“Market dynamics have made the original vision of alliances hard to achieve,” says John Butler, CEO of the Beef Marketing Group (BMG) based at Great Bend, KS, a producer-driven cooperative focused on producing value-added cattle and beef. “We have different economic signals for different markets at different times.”
Depending on the degree of coordination within alliances and the structure of their grids that means producers could incur more costs to make cattle eligible for a particular alliance and receive the same as neighbors marketing their cattle willy-nilly.
Moreover, if producers aren't locked into delivering cattle through an alliance, most understandably take the highest price they can get, which in turn undermines the ability of alliances to develop more market leverage.
For purposes here, alliances are defined as vertical cooperation between two or more industry segments aggregating and managing cattle to meet brand-eligible carcass specifications that extend beyond commodity.
Adjusting to expectations
“Early on, I think there was an expectation that if you didn't become part of an alliance soon, you wouldn't be able to stay in business. That hasn't happened,” says Clem Ward, an Oklahoma State University agricultural economist who has tracked alliance evolution, and price discovery through them, since the early '90s when the alliance concept took root.
Back then, Ward remembers, “There were fears alliances would exclude smaller producers. That hasn't happened, either.” Though the load-lots required by some alliances make it difficult for smaller producers to participate unless they pool calves with others, a variety of alliances welcome one and all.
Hopes borne out of industry research fostered other expectations, which were unfairly high in some cases.
The industry's landmark Strategic Alliance Field Study in 1993 estimated the industry could save $2.5 billion (about $96.15/fed animal) if producers, feeders and packers worked together to eliminate waste, duplicate costs and more consistently hit industry targets. Those savings were based on the $280/head losses estimated by the 1991 National Beef Quality Audit (NBQA), stemming from such things as too much external fat, too little marbling, too much carcass bruising and too many injection-sight blemishes.
Subsequent NBQAs indicate the industry has made hefty strides in areas like bruising and injection-site blemishes, but barely held the line or lost ground in areas such as percentage of USDA Choice.
“I think there was an expectation at the outset that alliances would have led to more improvement in quality and yield than we've seen,” Ward says. Depending on how you slice it, Choice percentage is either about the same or actually less than in 1993; the percentage of Yield Grade 1-2 cattle has declined. “The par value in pricing grids is still a Choice 3,” he adds.
As much as anything, Butler believes the industry overestimated the economic value achievable simply by forming strategic alliances that bridged the traditionally adverse segments of the industry.
“Although there's tremendous value to be had in working more closely between industry segments, it's not realistic to think we can extricate a huge amount of money from the system based on increased efficiency alone,” Butler says.
Left to its own devices, the market — again based on commodity fundamentals — is miraculously efficient.
Another challenge grazing the same pasture has to do with partner commitment and trust.
“You have to check your guns at the door for the alliance concept to work,” Butler says. “Our position is that long-term viability in this business is going to mean focusing more and more on consumer-based attributes that have value. We can't give lip-service to transparency between partners and make the alliance concept work.”
On the one hand, more than one alliance bit the dust or had to remake itself because a partnering processor or retailer changed the rules or demand midstream, or simply lost interest in the product. That tends to make producers gun-shy.
On the other, transparency allows each partner to identify the value each one is creating, in turn defining the added value each partner should receive.
Need drives value
It's not like the alliance concept has been a bust, though. Some alliances have grown, albeit slowly, rewarding producers for the value they add, pricing cattle and beef closer to the consumer than possible in the open cash market.
Ward estimates 15-20% of the nation's fed cattle are flowing through some type of alliance. Though the volume of branded beef — usually the product of an alliance system — has grown slower than industry expectations, he believes brand growth over time reflects some retail pull vs. producers (and their alliances) pushing value-added product up the chain. Also, keep in mind, the cattle industry has contracted overall since the early '90s, so there are fewer cattle.
Arguably, the alliances that have survived the challenges and rigors of history are those that embraced the bottom-line potential of alliances to begin with — identify a need consumers are willing to pay for and then deliver it consistently.
That's how “natural” beef became a product category unto itself, as well as the basis to a growing number of beef brands. That's also why other product attributes some alliances tried to market fell by the wayside — feeding vitamin E to cattle for the last part of the finishing period, for instance. There's no question the practice extends shelf life, thus reducing spoilage for retailers, but it has no direct value to end consumers; either they buy the beef that looks fresh or avoid the product that has lost its color. What has value to cattle-producer customers often has different or no direct value to beef consumers.
Alliances also continue to prove their value as a conduit for the increased assurance consumers expect regarding verification of where the cattle came from and how they were managed and treated.
“Verification is about providing consumers with assurances,” Butler says. Whether it's age verification for the Asian market or verifying Non-Hormone Treated Cattle for the European Union, or developing a naturally raised Angus program, he adds, “We can agree with those demands or not, but if we want to meet their needs and extract additional value we have to conform to the demands of those customers.”
Despite strong domestic beef demand, rising costs and continued industry attrition point more urgently to the need of developing international markets.
“The U.S. has a global reputation for producing the highest quality beef in the world, and there's opportunity to capitalize on it. But it will require a pricing structure that recognizes contribution to the value created, which can only be done through a coordinated system aligning the various production segments,” Butler says.
Ward believes both the opportunity and challenge for alliances heading into the future is growing branded-beef volume by increasing carcass quality and the consistency of it. He's quick to add, “I think alliances have offered a platform to look at different retail offerings and improve the product. Though we still don't have all of the answers, we've made tremendous strides, and alliances need to take at least some of the credit for that.”