Value-based marketing may finally be sprinting toward industry rule rather than niche exception. That's thanks to a new, open-to-the-world, fed cattle pricing grid offered by IBP, the world's largest beef packer and purveyor.
The grid itself is the first industry-wide opportunity for cattle producers to negotiate the base price or tie the base back to the actual value of Choice 3 carcasses in IBP's system each week. But, the grid itself is less significant than the fact that the industry's giant has thrust both feet into the value-based mainstream, meaning everyone else swimming in the same waters will have to react.
"This could be the best of both worlds," says Kevin Good, Cattle-Fax market analyst. "Where we take the hide off of cattle and get closer to true value, while at the same time having competition between packers grow keen enough that producers have the option to accept or pass on bids. What we get is price discovery, plus value discovery."
Briefly, IBP's Real Time Market Value (RTMV) program raises the bar on quality, compared to many other industry grids, while offering significant premiums for yield. Where some other grids come with a grading base, there is none in the RTMV grid where par value is a Choice 3 carcass.
In essence, that means any carcass that doesn't grade Choice will be discounted on their grid and no carcass will earn a quality premium until it grades at least in the upper two-thirds of Choice and qualifies for the Certified Angus Beef program. So, as usual, the base price will probably drive user acceptance.
As an example, let's look in the Southern Plains where 55% of the cattle might grade Choice in a given week. Let's say a producer can get $1.08/lb. in the beef on the open market and qualifies for the yield grade premiums (say 15% 1s and 45% 2s). He must negotiate a base price of $1.09 or so on the IBP grid to be on equal footing if the Choice/Select spread is $7.
Cynics might look at the high cost-of-quality admission and claim it's just a peel and steal smokescreen. And, too, if mandatory price reporting takes hold, odds are base prices tied back to company carcass values won't be reportable.
But, no one can argue the clarity of the value signal. Across this grid, IBP leaves no question about the value of non-Choice, low yielding cattle to their system. As well, RTMV premiums and discounts will change each week to reflect the real-time value of different traits to IBP's system, based on customer demand.
"If the market is $65, there are cattle that sell every day that are worth $60 and some that are worth $68. Cattle producers say they are tired of selling on the averages," explains Bruce Bass, IBP vice president of cattle procurement. "People who really want to discover value rather than just price will be able to do so."
What's more, RTMV should answer concerns voiced by critics of captive supplies. With this grid, cattle are plugged into the grid system the week of delivery, not weeks ahead of it.
Plus, Bass points out producers who sell cattle on the RTMV grid will receive group carcass data back free of charge. "We're trying to help everyone adjust to what the value is," says Bass. "We're not trying to slap anybody."
Moreover, when the nation's largest packer, sometimes portrayed as the poster-child for pennies-on-volume commodity production, offers a pricing grid to the world there is little question about where industry pricing is headed.
"This transition toward value discovery has been taking place for the last four to five years and has really accelerated during the past two years," says Cattle-Fax's Good. In fact, the percentage of cattle trading outside spot markets has grown from 18% in 1996 to about 35% in 1999.
As for how this reality might impact overall price discovery, Bass says, "The idea that there won't be any price discovery during your or my lifetime is ludicrous. This (grid pricing) doesn't change the laws of supply and demand, so it doesn't change the market."
Instead, what grid pricing might do eventually is shift risk from value-based marketing to commodity production.
"Risk is probably still the number-one reason people don't participate in grid pricing," explains Clem Ward, Oklahoma State University Extension agricultural economist. "A lot of people don't know how their cattle would do on a grid and a lot of people don't understand them. But, as long as you had an IBP with commodity pricing, you didn't have to worry as much about changing your cattle because you could always find a home for them."
As IBP and other packers compete harder for fewer cattle overall and for more cattle to feed their branded products, the gap between commodity and specification cattle will likely grow wider, faster.