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Down A New Path

Since 1976, the U.S. beef industry has lost more than 25% of its market share to competing proteins. One major contributor, many industry experts feel, is a lack of consistency and quality in beef products due to the commodity-style marketing that dominates the beef industry. That declining market share also affects the livelihood of beef producers as declining demand saps profit potential, particularly

Since 1976, the U.S. beef industry has lost more than 25% of its market share to competing proteins. One major contributor, many industry experts feel, is a lack of consistency and quality in beef products due to the commodity-style marketing that dominates the beef industry. That declining market share also affects the livelihood of beef producers as declining demand saps profit potential, particularly of the most vulnerable segment - the cow-calf producer.

To counter both the quality problem and the profitability issue, beef producers are increasingly banding together in an effort to produce a better product more efficiently at a greater profit and for a price based on the product's value. That vehicle is the beef marketing alliance.

What Is An Alliance? Basically, a beef marketing alliance is a cooperative arrangement between various sectors of the industry. In a sense, it approximates the vertical integration structure that has brought more consumer-friendly products and efficiency to the pork and poultry industries, but retains the independence of operators in each beef production segment.

Cow-calf producers, for instance, can share genetics and pool their cattle for added marketing clout. A feedlot owner can set up an alliance with producers, a processor and a retailer and guarantee that certain qualities will exist in their cattle.

Producers in such systems can retain ownership on all or part of their cattle and potentially gain greater rewards in such a value-based system. The producers and feedlot owners benefit by receiving higher prices for their products, while processors and retailers profit from the premium quality and uniform products.

A new wrinkle this year is the advent of the producer-owned beef cooperative. U.S. Premium Beef of Kansas City, MO, began processing cattle in December 1997, for instance, and essentially takes beef from conception to consumer.

"An alliance is an alliance whether you're talking beef or consumer goods," says Jim Kendrick, a marketing specialist at the University of Nebraska. "When Wal-Mart buys socks they deal directly with the manufacturer. If red socks aren't selling and blue socks are, that information is passed back and the manufacturer produces more blue socks and fewer reds."

The supply and demand swings, and the financial peaks and valleys are removed for both the manufacturer and retailer, Kendrick explains. Information is passed through the alliance so that the involved parties are all working toward providing what the consumer wants. Wal-Mart and the manufacturer both profit from the streamlined distribution system, and consumers get the quality and service they want at prices they consider fair.

In the beef industry, the idea is to change the system from one where cattle are purchased and sold for an average price, to a system where better-quality cattle are bought for a premium and sold for what their quality indicates they're worth, says Mike Miller, analyst at Cattle-Fax.

"All our price discovery today starts with the fed-cattle market and mostly what we do is price almost all the fed cattle that are sold on an average price," Miller says. "Good pens of cattle might bring more than poorer pens but the difference isn't enough to send a strong message about quality to the industry.

"Alliances are saying: 'Some cattle are better than others and so they're worth more. We're willing to pay you to produce that better product,' " Miller says.

That value-based system isn't dominant yet, Miller adds, but as alliances grow and attract more producers and cattle, all operating under a system of premiums and discounts based on individual animal quality, the overall quality of cattle being produced in the U.S. will improve.

The more these quality products come on the market, the worse it becomes for producers selling a commodity product, says Harlan Ritchie of Michigan State University. Under a commodity system, higher-quality animals are mixed with the poorer ones. As those better carcasses are identified and skimmed off, the poorer ones will likewise be identified and devalued.

Alliance participants basically shoot for specific quality targets set by that particular alliance. Participants are paid according to how they measure up to those targets. Practically all alliances pay on a grid basis, where a base price is determined from the cash market. Cattle hitting the target get the base price, those exceeding the target get more. Those falling short are discounted.

"The discounts are always bigger than the premiums and they can be severe," Miller says. "For the most part, if a producer can hit 50-55 percent Choice grade, he'll probably get by. If your cattle grade 70 percent Choice and 70 percent Yield Grade 1 and 2s, you'd have a hard time finding a grid that your cattle wouldn't work on," he says.

What's In It For Producers? * First and foremost is the carcass and performance data on cattle sent through the alliance. "Over time, this data will become increasingly important to you as a cow-calf producer. I think in the very near future, cattle buyers are going to demand this information, particularly if they're selling on some sort of grid themselves," Miller says.

* Secondly, in almost all cases, alliance participants have the opportunity to sell on some sort of a grid basis. For producers who feel they have higher quality cattle, a grid system will reward that quality.

* And, in most cases, retained ownership financing is available through one of the participating feedlots in the alliance. Some alliances, however, provide this service themselves, and producers still receive the performance and carcass data.

Producers who will most benefit from participating in an alliance, Miller says, are those who have an idea of how their cattle measure up. If a producer has never retained ownership or collected carcass data, they're operating from a distinct disadvantage.

Producers, Miller says, must also be realistic in their expectations of what an alliance will do for them and how much of a premium they can achieve selling through such a system.

"Some people will do very well. In most cases, with the right kind of cattle, you could make a $10-15 per head premium to what you would get on the live market. In some cases, it could sure be more than that," he says.

There Are Tradeoffs A higher price doesn't always mean a higher profit. If longer feeding is needed to reach a certain endpoint, a premium could be lost with the increased inefficiency.

"There is an opportunity through alliances for more premiums, but there's also an opportunity for bigger discounts," he says.

In addition, some "natural" programs pay more, but the production costs are higher due to the requirement that no antibiotics or implants be used.

The net effect of alliances, believes Michigan State's Harlan Ritchie, will result in four specification beef markets.

* A high-quality market calling for mid-Choice and higher.

* A high-Select to low-Choice grade but still with acceptable tenderness.

* A lean, heavily muscled product, largely in the Select grade, but again with acceptable tenderness.

* And, a "natural" or organic market, which will remain the smallest.

All other beef produced, says the Extension beef specialist and professor of animal science, will go into the commodity market.

Those producing solely for this commodity market, Ritchie says, will find limited options. Contract production similar to that in the hog industry where independent operators grow or finish hogs according to stipulated genetics, management and inputs, could become commonplace for this sector.

"Fifteen years down the road, I would not want to have the commodity market as my only option. Now's the time to begin to get your house in order," he says.

Harlan Hughes, Extension livestock economist at North Dakota State University, agrees about limited options for producers without a good knowledge of their cattle.

"The beef industry I see coming, and very shortly, will be totally data driven. We're moving away from just running cows to managing cows. That means having the performance, feedlot and carcass data to manage by the numbers rather than by gut feelings."

Producers without performance data on their cattle, Hughes believes, will have a much tougher time turning a profit. "Cost of production will be the only way these people will be able to compete because there will be a price differential between commodity and specification beef," he says.

Getting Started To get started, Cattle-Fax's Miller reiterates the importance of gathering performance data, studying it and then investigating the various alliances available to see which program's targets best fit your cattle.

Producers without any history on their cattle should retain ownership on a representative number of calves from their herd and collect feedlot performance and carcass data on them, Miller advises. This doesn't have to necessarily be done through an alliance, but the information is a must if a producer ever intends to send all his cattle through an alliance with any degree of confidence as to success, he says.

At this point, feeders can truly begin to educate customers about the value of uniform cattle with carcass data and price received. Whether or not that customer eventually joins an alliance is up to him, but it's likely you'll have started him on the road to improving herd genetics.

"And, just because you have a certain breed doesn't necessarily mean you should be selling in that breed's alliance. There are so many alliances and programs out there today that if you're having trouble fitting your cattle to a certain program or a certain grid, go find another one. You should be able to find something that will work for you," Miller says.

He also suggests looking at the fees charged by an alliance. Almost all of them have a fee to offset data collection and distribution. Then, there are the requirements and costs of special cattle handling, such as specific preconditioning requirements, etc.

"In certain cases, participants are required to feed their calves at a certain feedlot. It can be a problem if you're located in California and you have to ship your cattle to Kansas," Miller says.

Crunch the numbers. Will the costs of an alliance be offset by the quality of your cattle? Only your data will tell you.

Are Alliances Here To Stay? In any successful venture, those that get on early reap the most reward. They also take on the greatest risk. In 1985, Maverick Ranch Beef faced 50 competitors in the specialty branded beef market. Ten years later, Maverick is one of only five survivors. The washout likely won't be as severe with beef marketing alliances, but some won't make it, says North Dakota's Hughes. He's convinced value-based marketing in some form is here to stay and will continue to grow.

"Alliances are here to stay," Hughes says. "We'll continue to see growth, but it might slow as this current cattle cycle strengthens." Hughes predicts that 30% of all cattle will be in some sort of a value-based marketing system within five years, 50% in 10 years.

Those are estimates that Michigan State's Ritchie finds very plausible. "We're going to see all sorts of different shapes and forms developing in this industry," Ritchie says. "This is a tremendously exciting time for the beef industry. Alliances are one big wake-up call."

Wayne Purcell of the Research Institute on Livestock Pricing at Virginia Tech believes that beef alliances could control as many as 4-5 million head of cattle within a few years. While he sees it as a positive result for quality and a more consumer-oriented product, it bodes negatively for those producers not in the value-based loop.

Indeed, many industry experts predict that in the future there will be two distinct beef markets. One will be verified, quality-controlled cattle with a known source, animal health history and feedlot and carcass performance histories, which will sell for a premium. The other will be cattle without documentation that will become a discounted market.

"Chance favors those who are prepared," the renowned scientist Louis Pasteur once said. In the case of value-based marketing, that characterization seems particularly apropos. Knowing what kind of cattle you're producing, even if you don't participate in alliances, will be an essential component for survival in the U.S. beef industry of the future.