Is integration a way for the beef industry to regain market share, increase productivity and profitability?

Producing and marketing cattle today are as far removed as making and selling an automobile was 30 years ago.

Does this mean the beef industry has to vertically integrate as have the poultry and pork industries? Perhaps so, says Clem Ward, Oklahoma State University Extension economist.

"I think we are going to see some integration in the beef industry and we need to see it," Ward says. "However, the integration in the beef industry won't look like that of the pork and poultry businesses.

"We already have implied and written contracts between packers and retailers as well as between feeders, stockers and cow-calf operators," he says. "But, there will be more contracting arrangements between various stages in the business."

Ward adds that alliances coming on the scene are creating some formality to these contracts.

"We'll see the business move in this direction, but participants will still have independent operations. Some producers won't be involved in alliances at all," he adds.

Advantages "Until we see some of these things in action, we really don't know what they can accomplish, nor what the actual benefits will be," Ward says. However, he concedes there is great potential.

"One of the greatest improvements in an integrated situation is improved coordination between stages," he says. "If we eliminate the adversarial relationships and truly improve coordination, how much better off would buyers and sellers be? Can we equally split those gains? What does it mean to the bottom line of both parties as well as the consumer? Until we try it, we won't know."

Ward says that for the foreseeable future, a vertically integrated beef business will be a small portion of the industry.

Disadvantages Ward cautions this evolution isn't without a potential downside.

"The more cattle that are tied up between the seedstock producer and retailer, the more concern we have about price discovery at points in between," he says. "Are the other cattle moving through the standard marketing channels being presented in a way that true value is discovered? For example, if 30 percent of cattle are tied up in contracts, are the other 70 percent enough to ensure true price is discovered, is the quality the same and so on down the line?"

Ward says the market has been very revealing the last 20 years. "It's told us we'll lose market share if we don't do what needs to be done. If we don't try things, we'll continue to lose market share. We've got to make strides toward more consistent products and put more value in them," Ward says.

Will It Work? Business leaders are trying new methods to produce and market beef. Ward says some of the new alliances, especially ones with a solid distribution system and consistent product quality, may progress well. It may be that alliances are the only way to get that consistent quality now. Some, however, may not make substantive changes in the overall industry picture.

"There will be some restructuring and some alliances won't work," Ward says. "Some will work very well. Now is the time our industry needs some leaders who will probably be criticized for their achievements."

Not everyone concurs with Ward's version of the future. Clark Willingham, president of the National Cattlemen's Beef Association, says a cooperative approach is in order.

"I don't think we're moving toward actual vertical integration. I think we're moving toward vertical cooperation," Willingham says. "The idea of alliances is that we can team up with different industry sectors to work toward specific markets for the future.

"There are a lot of benefits with this approach in that it sends a genetic signal back to the cow-calf producer," Willingham says. "Without the economic incentive in this decision, we simply won't do much to change genetics so we can provide consistent products.

"I hope we never get vertically integrated as an industry, but I do think we need to be cooperating all the way down the line," Willingham adds.

Information Integration Jim Oltjen, Extension animal scientist with the University of California - Davis, says the reasons for integration in a business are profit and information sharing so different enterprises along a production line can work effectively together. Enterprises that are more profitable can pick up slack for those less so, while information sharing can make each of them more efficient.

"Ownership integration works well," Oltjen says. "But it requires so much capital that relatively few large firms will do this in the beef industry. Rather, ways of sharing information and rewards through alliances and other yet-to-be-accepted formats will evolve if the industry is to be successful," he believes.

"Cow-calf producers must look to partnerships, alliances or other arrangements so the value of information feedback to them can be captured and they're rewarded for shifting production to meet demand," Oltjen says.