In beef marketing, “change” is a buzzword that elicits both discomfort and dreams of opportunity. To me, the word is actually an acronym for Cattlemen Have A New Great Encore (CHANGE).
This encore is happening before our eyes as the beef industry divides into two distinctly different marketing systems based on two distinctly different production systems.
First, there's the traditional system that produces and markets commodity beef. Then, there's a value-based system that produces and markets high-quality beef designed to meet tight consumer specifications. A critical decision beef producers must make is to which system — commodity or value-based — they target their herd's production.
By definition, commodity beef is a homogenous product with little or no product differentiation. There are no brand names associated with commodity beef.
Commodity beef is based on average prices reported daily by USDA. Since one beef producer's commodity beef is about the same as another producer's commodity beef, lower-cost production is the primary way commodity beef producers compete.
Most commodity beef producers strive to produce beef during periods that best fit their production resources. There's little focus on year-around beef supply or seasonal production and market price patterns.
Simply put, they expect consumers to consume whatever is the easiest for them to produce. In fact, consumer demand is generally ignored in the commodity beef business model.
Typically, commodity beef producers go it alone. Generally, they don't share production or financial performance data with other participants in the marketing chain. Thus, the potential to increase beef cow profits through information sharing and benchmarking is limited.
Commodity beef producers regard production efficiency as synonymous with profitability. They often adopt new genetics, production practices and management tools that will increase their individual herd's production efficiency. The problem is that production efficiency no longer guarantees profits.
The '80s Financial Crisis
In the ag financial crisis of the 1980s, many beef producers found that high production, in itself, did not guarantee financial survival. In the 1980s, many beef producers were betrayed by their on-farm, production management information systems. As a result, bankers were frequently called upon to determine when a business had failed. By that time, all family equity capital had been used up.
On-farm information systems failed to send stressed ranch managers adequate financial management signals. Today, these signals must be provided annually from your on-farm management information system to ensure long-term financial survival.
In the late 1980s, a group of National Cattlemen's Beef Association (NCBA) cattlemen asked USDA's Extension Service to design a management information system for commodity beef producers. These producers wanted a system that integrated financial and production management into a single management information system. The system that resulted is called Integrated Resource Management (IRM).
Using this IRM philosophy, Extension, NCBA and state cattle association personnel in almost every state have made an intensive educational effort the past 12 years to change how cattle producers manage their commodity beef production. All the programs have been based on one common set of IRM Standardized Performance Analysis (IRM-SPA) Guidelines.
Ranchers are learning the IRM way of integrating financial and production management of their beef cow businesses.
IRM data now confirms that production efficiency is a necessary condition — but no longer a sufficient condition — to guarantee profits. Today, profitability also requires financial efficiency.
Profits can and are being made from producing commodity beef. A decade of IRM work has identified that the key critical control point (CCP) for running a profitable beef cowherd is intensified management. The more intensive the management, the higher the profits.
Intensified management leads to low unit costs of production (UCOP). My Northern Plains IRM Database clearly indicates that the economic rewards from commodity beef production through intensified management go to those with the lowest unit costs of producing a cwt. of calf. (See average UCOPs in Figure 1.)
IRM is changing the economics of producing commodity beef. My low-cost IRM cooperators have made a profit each year of the cattle cycle. Yes, IRM is changing the economics of producing commodity beef.
Cattle-Fax says that up to 50% of all beef produced will soon be marketed on some contract, grid or formula price structure. While costs of production are still important in value-based beef production, value-based beef producers spend considerable management energy focusing on adding value to their beef production.
Value-based beef, the newer production and marketing system, is targeted toward consumers' expressed desires. Value-based prices are based on a specified set of quality specifications implemented through some form of a grid pricing system.
Value-based beef producers recognize that consumers have specific quality specifications they desire and will pay a premium for. Consumers also want a year-around supply of that quality product. It is these factors that lead producers to band together in business relationships to meet year-around consumer demand.
In 1996, Kansas State University researchers listed 13 value-based marketing programs (alliances). On page 20a of this issue, you'll find BEEF's latest edition of its “Alliance Yellow Pages.” It indicates that today there are more than 40 value-based marketing programs.
Each of these programs focuses on a different set of quality specifications. The challenge for today's value-based beef cow producers is to match their herd's genetic characteristics to a specific value-based marketing program.
In value-based beef, value is linked to the production practices at each level of the supply chain. What one producer does in the supply chain directly impacts other producers in that chain. Thus, a value-based marketing system must focus on all producers at all levels in the supply chain.
As a result, all participants in the value-based beef supply chain are business partners — not competitors. The marketing challenge is to ensure that the marketing program recognizes these linkages equitably. In other words, all participants must be paid for the value they add to the system.
CHANGE is definitely here — Cattlemen Have A New Great Encore.
Harlan Hughes is a Professor Emeritus at North Dakota State University and lives in Mankato, MN. Contact him at 701/238-9607 or [email protected].
Evaluating Market Alternatives For 2000 Calves
These planning price projections (Table 1) are based on both the futures market price and Western North Dakota sale barn prices for the current week. The price projections in Table 1 were used to evaluate six marketing alternatives for year 2000 calves shown in Table 2.
The “buy/sell margin” in Table 2 is the buying price of animals going into a lot subtracted from the selling price of animals coming out of the lot. Since selling price is normally less than purchase price, the buy/sell margin is normally negative. The negative buy/sell margin represents the marketing loss/cwt. on the purchase weight of the animals. The cost of gain (COG) represents the cost of the added weight while in the lot. Profit/head represents the combined marketing losses and profits from gain.
|Lbs.||Fall 00||Mar 01||Spg 01*||June 22||Fall 01*||Jan 02||Mar 02|
|*Projected week of June 22, 2001|
|1. Sell at weaning||N/A||$0.70||$149|
|2. Bckg high ADG||-$17||$0.49||-$16|
|3. Fin bckg steer||-$15||$0.46||$50|
|4. Grow and finish||-$9||$0.42||$56|
|5. Steers on grass||-$8||$0.45||$26|
|6. Fin grass steer||-$14||$0.45||$28|
|The six marketing alternatives evaluated here are: 1) selling 565-lb. calves at weaning, 2) backgrounding 565-800 lbs. sold after first of the year, 3) finishing backgrounded steers 800-1,200 lbs., 4) growing and finishing 565-1,175 lbs., 5) steers on grass 625-800 lbs., and 6) finishing grass steers 800-1,250 lbs.|
August 9-11 — Developing and Implementing HACCP Plans for Meat and Poultry Plants, Los Angeles, CA; 510/762-1533.
August 26-31 — International Congress of Meat Science and Technology, Krakow, Poland; +48 22 612 46 89.
August 28 — University of Missouri Agricultural Experiment Station Field Day, Graves Center, Corning; 573/882-9181.
August 29 — University of Nebraska-Lincoln Gudmundsen Sandhills Lab Open House, Whitman; 308/532-3611.
August 31 — University of Missouri Agricultural Experiment Station Field Day, Delta Center, Portageville; 573/882-9181.
September 5-6 — Virginia Tech Farm and Family Showcase, Blacksburg; 540/731-1289.
September 6 — University of Missouri Agricultural Experiment Station Field Day, Hundley-Whaley Farm, Albany; 573/882-9181.
September 7 — University of Missouri Agricultural Experiment Station Field Day, Southwest Center, Mount Vernon; 573/882-9181.
September 10-12 — American Feed Industry Ass'n Liquid Feed Symposium, Kansas City, MO; 703/524-0810.
September 11-12 — 62nd Minnesota Livestock Nutrition Conference and Technical Symposium, Bloomington; 800/318-8636.
September 11-13 — Grazing School (advanced) University of Missouri Farm, Linneus; 573/499-0886.
September 13-15 — American Association of Bovine Practitioners Convention, Vancover, British Columbia; 706/232-2220.
September 17-19 — Texas A&M University's Beef 101 Workshop, College Station; 979/845-0435.
October 9-11 — Grazing School (beginners) University of Missouri Farm, Linneus; 573/499-0886.
October 16-17 — American Meat Institute, Meat Industry Research Conference, Chicago, IL; 703/841-2400.