We’ve all been taught that our industry is a commodity market. The implications of that mindset are numerous – some good, some not so good. It’s kept us focused on production, efficiency and cost management. If we’re truly simply price takers, then you manage your risk, lower your costs and move forward on that basis.
That mindset also has led to an amazing amount of standardization in production practices, though admittedly the cattle industry has seen increasingly less standardization as one moves down the production chain. Cow-calf producers have standardized production practices to a lesser degree than have feedyards, for example. That’s because cow-calf operators have a tremendous amount of environmental variability to contend with.
Commoditization leads to consolidation and concentration, but we aren’t ever going to see the kind of standardization in Best Management Practices that’s occurred in the pork and poultry industries. The variation in environment and production schemes is just too varied in the beef industry.
So, unquestionably, the cattle industry’s structure will remain unique. Understanding that uniqueness will help us understand the changes we will see and the direction it will lead us.
We’ve all seen the diagrams, but I would guess that most of us haven’t really thought about the implications of that structure. We need to look at it in a way that helps us understand the catalysts of change, and to effectively evaluate what it means to each of us from an individual operation standpoint.
The experts always draw the industry’s structure in the shape of an hourglass. The seedstock industry is always at the top or bottom of the hourglass, followed by the cow-calf, stocker and feeding industries, with each segments goals and production schemes progressively narrowing, until it reaches the packing industry at the narrowest point. Once it passes through the narrow specifications of the packing industry, the hourglass opens back up to an ever-widening array of market targets that include the HRI (hotel, restaurant and institutional) trade, retail and, ultimately, the consumer.
We’re seeing more and more market segmentation and differentiation based on a variety of factors from income level, to ethnicity, to age, to even location. We’re also seeing a seemingly ever-increasing number of markets with narrowing target specifications.
The challenge is to match those diverse production schemes with the requirements of the segments above by producing cattle designed for a specific target. Thus, we must make sure those cattle are properly identified, placed into the proper chain, and marketed in a way that they can capture the “true” value they represent for the market for which they are created. The aforementioned statement sounds simple, but it’s proven to be the industry’s greatest challenge, as well as its greatest opportunity moving forward.
The difficulties are many, but the overwhelming hindrance to achieving this goal has been, and continues to be, the commodity mindset. Economists, range scientists, nutritionists and the like love the commodity mindset. It makes it so very simple to construct decision models if cows, labor, market and prices are interchangeable or universally applicable.
Make no mistake about it. This thought process has greatly improved decisions, and helped us understand important relationships, but it’s increasingly obvious that it also is fatally flawed in that the constants in the model are, in fact, not constant. In fact, while the commodity management models can lead to significant improvements in profitability, they also can simply be overwhelmed by the unaccounted-for variables.
The reality is that the only thing truly commodity about today’s industry is our mindset. Even gate-cut calves can be highly differentiated depending on how they’re managed, fed, presented, marketed and delivered. The “cow is just a cow” mentality is just about as absurd as assuming that people are all the same.
In fact, with the improvements in genetic selection tools, the value difference between the above-average and below-average animal is growing. Assuming two black cows that weigh 1,200 lbs. are essentially equivalent is like assuming that two, blond-haired, blue-eyed men are ideally suited for the same job.
Without question, the marketing system is still primarily based on the old commodity models, and the pricing structure remains highly inefficient in differentiating based upon value. The fact that our commodity-ingrained mindsets has prevented the industry from moving substantially away from these highly outdated and inefficient commodity models doesn’t mean that opportunities don’t exist.
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I recently saw the movie “42,” which is the story of Jackie Robinson. Like the commodity mindset, racism was deeply ingrained in our society; it’s taken decades of leadership and action to reduce its impact. While we’ve made a lot of progress in this area, remnants of racism still remain.
Similarly, from the cattle industry’s standpoint, we’re just beginning to see a shift in people’s attitudes and mindsets. The process of moving away from our commodity mindset will likely take far longer than society’s efforts to move away from racism.
Yes, it’s better for consumers and the industry for us to move away from this commodity mindset, but we struggle with accepting a value-based marketing system, if for no other reason than we understand and are comfortable with the traditional commodity system. Those who are successful today have learned to thrive and utilize this system and thus there is significant risk associated with moving away from it.
The move to value-based marketing creates many complications, but, like racism, the commodity mindset is destined for failure.
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