With skyrocketing production costs and tough consumer economic conditions, the beef industry is facing challenging times. But do those margin-squeezing conditions make a case for or against participation in value-added beef alliances?
Four value-added beef companies — Meyer Natural Angus, Power Genetics, 70:70 Beef and Certified Angus Beef — provide some insight:
Kirk Feddersen is regional manager of fat-cattle procurement for Meyer Natural Angus (MNA, www.meyernaturalangus.com), a consumer-based program in Loveland, CO. It features more than 200 Angus breeders marketing beef products that are “Certified Humane,” naturally raised and 50% Red or Black Angus.
Jason Anderson is owner and manager of Power Genetics (PG, www.powergenetics.com), Holbrook, NE. A cooperative service working to market source-, age- and health-verified calves, PG-marketed cattle are USDA Process Verified Program (PVP)-certified, making them eligible for export to Japan.
Mark Guge is manager of 70:70 Beef (70:70, www.7070beef.com), as well as owner of TwoRivers Cattle. 70:70 is a value-based cooperative through JBS-Swift and the American Simmental Association that offers premiums for cattle combining high marbling with red-meat yield.
Mark McCully is director of supply development for Certified Angus Beef LLC (CAB, www.cabpartners.com), Wooster, OH. The world's largest branded-beef program, it provides premiums for black-hided cattle scoring mid Choice and higher, among other criteria.
Q What are the current trends for value-added marketing alliances?
MNA: The educated consumer is placing a greater demand on marketing alliances. Product attributes are valued more today than in the past, thus presenting growth opportunities for value-added alliances.
PG: Branded programs have lost steam, as there's a lot of uncertainty with high input costs, trends in the economy and a tightened Choice-Select spread.
70:70: Despite the tough times we're experiencing right now, many producers are still seeing value in beef alliances, especially when using PVPs.
CAB: Alliances have increased in popularity because our customer, both domestic and globally, has defined the products they want us to produce — great tasting, consistent and safe. For our export markets, age and source verification have become criteria for market success.
Q Have you seen more or less participation in beef alliances due to high input costs?
MNA: More participation. Quality producers with strong genetics are continually looking to partner with a value-based beef-marketing program where premiums are paid for performance.
PG: We've remained steady. I haven't seen a significant change in our numbers over the past three years, but there's also been no growth.
70:70: The programs I've worked with have remained at a constant level over the last five years, but I do believe producers are interested in using alliances to attempt to capture more dollars.
CAB: With feedlot profitability pretty dismal right now, I suspect feeders will be even more discerning when buying feeder calves this fall and for the foreseeable future. Value-added programs will likely generate more bottom-line profits than the commodity systems of the past.
Q How quickly are producers able to offset the industry's higher production costs? What are the effects of these costs on value-added programs?
MNA: Higher costs may be a contributor to some of the increased participation in value-added programs, as producers see the premiums as a good tradeoff. In regard to passing on higher costs, yearlings are bringing more money this summer, fats are well over $100/cwt., both feedlot and packer margins have improved, exports are up and retail prices are rapidly increasing. High prices have a way of fixing high prices.
PG: With so much uncertainty, it's incredibly hard to make decisions that are best for marketing cattle. I believe producers are still able to pass on additional costs relatively easy due to the premium future markets structure.
70:70: The futures market indicates 2009 will bring higher numbers than we're experiencing in 2008. As a result of higher input costs, I've seen new interest from producers wishing to explore the options for gaining more premiums.
CAB: Historically, cattle producers haven't been able to pass along additional input costs in commodity-marketing systems, but aligning your operation with an end product gives producers a chance to recoup costs and improve margins.
Q What is the carcass utilization rate? What cuts are being merchandised in consumer-based programs?
MNA: There's been an increase in the utilization of carcasses today, with more being merchandized than ever before. The product mix is much improved from five or 10 years ago. We're very close to having the entire carcass sold for a natural premium.
PG: The positive news on an export standpoint is we're seeing utilization rates nearly as high as before the first BSE case. The Japanese market is looking positive. Domestically, we are experiencing less demand for the higher value cuts due to consumers' reduced disposable income. When it comes to purchasing beef, it seems consumers are more price driven.
CAB: Ribeyes, strips and tenderloins all generate significant value to the carcass, but they only represent 25% of the saleable weight on an animal. As an industry, it's exciting to see added value coming from new cuts originating from the chuck and round.
Q What should producers consider before getting involved in a beef alliance?
MNA: Producers need to fit their operation to a sustainable, value-added program. The last thing any producer wants is to change their operation to fit the needs of a program that could become non-existent.
PG: I see no risk for producers getting involved in a beef alliance, especially if they're already utilizing age and source verification. Though the market has been fairly stagnant, the consumer still demands to know the story behind their beef. From a producer's standpoint, this is a great start to marketing your cattle.
70:70: Before aligning with a program, be sure to understand your genetics and their true capabilities. Often, producers market their cattle on a grid and are disappointed when their calves don't make USDA Prime. I try to contract only one load for a producer, see how they sell based on value and then adjust our marketing plan off of how that set actually performed.
CAB: Producers should think about the consumer demand of their product and then analyze the production economics. Will there be market access? Is the target market long term and sustainable? What is required by the program, and does that fit your labor and management situation? And, ultimately, will the returns cover your costs and improve your bottom line?
Summing up the debate
Without question, input costs have created huge challenges in beef production. However, the market still looks promising for cattlemen looking to increase their profit margins through value-added beef alliances.
“The future is still positive for consumer-based programs,” says Kevin Good, a Cattle-Fax analyst. “Producers need to look at all avenues available to increase per-head prices. It's important to maximize on the dollars coming in; in the upcoming years, it will be crucial to look at other options to generate profits.”
What is an alliance?
For the purposes of this article, alliances are defined as cooperative processes or entities that vertically coordinate the aggregation of cattle possessing similar carcass potential with a combination of other industry segments managing the cattle similarly to meet specific carcass goals. The aim is to add and retrieve more value than available in the commodity market.