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eMergence or Divergence?

eMerge hopes to build a national marketing and information exchange network to meet both industry and consumer needs.Up to now, the average beef producer has been more familiar with the term precondition than acquisition. He's witnessed more mirages than mergers. He's spent more hours on the Interstate than on the Internet. And, he's always thought more like Main Street than Wall Street.But, all that

eMerge hopes to build a national marketing and information exchange network to meet both industry and consumer needs.

Up to now, the average beef producer has been more familiar with the term precondition than acquisition. He's witnessed more mirages than mergers. He's spent more hours on the Interstate than on the Internet. And, he's always thought more like Main Street than Wall Street.

But, all that may change in the next five years if eMerge Interactive Inc. achieves its long-range business model. By the sheer scope of its plan, almost every U.S. beef producer could be impacted by eMerge's planned marketing and technological innovations.

EMerge's stated mission is "to enhance the cattle industry's efficiency and profitability while improving the quality and safety of America's beef supply." By acquiring and merging with existing livestock marketing firms across the nation, eMerge hopes to generate a new marketing scheme, infused with the company's style of new-economy technology, to build a national marketing and information-exchange network.

"Today, we already are the largest marketer of cattle in the U.S. via a series of acquisitions," says CEO Chuck Abraham from eMerge's headquarters in Sebastian, FL. "Our capacity today is in excess of 2 million head on an annualized basis. We really haven't implemented the business model we have envisioned yet, but we're gaining the critical mass that will enable us to do it."

Within five years, Abraham says that critical mass will grow to where eMerge hopes to make these fundamental changes in the beef industry:

- One in every three American cattle producers will do some type of commerce with eMerge. Even if they don't sell calves through eMerge's marketing operation, they very possibly will use eMerge's Web site,

Through this Internet-enabled business, eMerge will offer pharmaceuticals, electronic identification (EID) systems, office supplies and leasing options, as well as real-time commodity prices, weather conditions and wire service agricultural news. Abraham sees it as the cattle industry's equivalent of the world's leading Internet retailer,

- Through mergers, acquisitions and partnerships, eMerge will facilitate the marketing of 8 million head of feeder cattle through 35 to 40 high-volume market facilities across the U.S. The cattle will be preconditioned, sorted as to biological types and sold to feedyards.

To put those numbers into perspective, 8 million head of cattle represents more than one-third of the entire U.S. fed cattle marketings in an average year.

- About one-third of these 8 million head will be electronically identified, so eMerge can disseminate genetics, performance and process verification data up and down the beef chain. At this quantity, at least one or more major branded-beef product distributors could have an almost unlimited supply of process-verified cattle with years of data backing it up.

$107 Million In Initial Capitalization In an industry that's chronically undercapitalized, eMerge made a great start there as well. As a public company (NASDAQ:EMRG), its initial price offering in February generated $107 million from Wall Street.

"We're reinvesting that into the beef industry in the form of new technology, new infrastructure and new ways of doing things," Abraham says. "We hope these will be of benefit to the industry, help it be more profitable and, along the way, make a living for ourselves."

EMerge's parent companies are Safeguard Scientific (NASDAQ: SFE) and Internet Capital Group (NASDAQ: ICGE). Both are deep-pocketed, public firms investing in business-to-business Internet commerce.

These companies are among the "most eminent funding sources in the world today," says Abraham. "Safeguard's average hold time in a company is 10 years. ICG is a new company, but it tends to grow its position; it doesn't flip it."

For the beef industry, that track record suggests that eMerge has more than five years to achieve its objectives, if it needs it.

While eMerge's mission is aggressive, Abraham says, it also is reachable. The reason, he added, is that:

- The $40-billion cattle industry has the magnitude to accommodate such a venture.

- The industry's fragmented structure - 1 million independent producers supplying 700 individual feedyards - would benefit from a company that would "help knit this community a little tighter and find efficiencies as we do that," Abraham says.

- Inefficiencies in moving cattle from cow/calf to feedyard offer potential for adding value. These inefficiencies include opportunities to apply existing electronic technology to process verification, preconditioning, sorting, information and benchmarking analyzes, cattle inventory management, health management, food safety management and quality assurance practices.

"The people who will be our constituents - the producer, feeder and packer - are the ones who provide the most value to the beef product," Abraham says. "But, for us to be a major player and sustain our business long term, we have to add value ourselves. We do this by integrating or providing a linkage between those businesses with electronic information and commerce.

"We're fundamentally altering the beef production chain in a way that creates value in a way the current system is unable to realize. We call this process `value chain integration'," he says.

Live Marketing Was The Focus When eMerge's principals studied the beef industry chain for where it could have the most impact, they settled on the live cattle marketing segment.

"There are a lot of buyers under current market dynamics - approximately 1,000 local markets and 4,000 order buyers - but those buyers don't end up with the cattle," Abraham says. "They tend to be intermediaries.

"And, the vast majority of cattle end up in 700 feedyards. So it's the stockers and feeders who buy the cattle. You don't have true national price discovery until you link the ranchers who are selling and the entities that are buying," he adds.

By striving to become that link with a business model that combined tradition with technology, eMerge sought to become a major player in a short period of time. In the last 18 months, it has launched an aggressive program of acquisitions, purchasing seven order-buying and livestock auction firms, to build a national marketing network.

In total, these markets will allow eMerge to market more than 2.6 million head in the next year. Of this amount, 100,000 head already are individually tracked with hand-held computers and EID eartags at the ranch, feedyard and packing plant.

Information on feedyard performance and carcass qualities on these 100,000 head goes back to cow/calf producers and feeders on a proprietary basis. Producers participating in the EID program can access that information via the Internet through eMerge's CattleInfoNet business network.

The company also has placed 150 computer systems that manage information and benchmark services in feedyards. The computers are tied to eMerge's database, the largest single source of performance information in the cattle industry.

This data flow was made possible when eMerge acquired Professional Cattle Consultants, Weatherford, OK. It's one of the oldest cattle industry data compilers in the nation.

More Expansion Is Expected Although expansion has been rapid, Abraham says the company is far from finished acquiring its critical mass.

"If we look out five years with a goal of marketing 8 million cattle, we're probably looking at partnering or owning 35 to 40 facilities with a volume of at least 150,000 head each," Abraham says. "I would also add, we want to partner with and to license technology as well to build that national network.

"We're not hung up on owning everything. We want to build an open platform with people who want to license technology from us, work with us and build a business model that is consistent with how we want it done," he says.

If such a network does become reality, tomorrow's producers certainly might think more in terms of acquisitions, mergers, Internet and Wall Street than they do today. But, Abraham doesn't believe the nature of the industry will change because of that.

"Beef is the number one protein source for this country," he says. "Its utilization is predictable and reliable, and it's a good, steady business even if it's not the most profitable industry in the world."

In the last 18 months, eMerge has launched an aggressive program of acquisitions to build a national marketing network. The list to date includes:

- Eastern Livestock Co. Inc., Louisville, KY, a privately held cattle dealer and marketing company that marketed more than 2 million cattle nationwide in 1999.

- Ed Eden Farms, Okolona, MS, an order-buying business that marketed 150,000 head in 1999.

- Jordan Cattle Auctions, San Saba, Mason and Brownwood, TX, a family-owned business that marketed 180,000 cattle in 1999. Also in 1999, the Jordan family inaugurated a series of premium, process-verification sales that netted up to $60 premiums for participating producers.

- Mountain Plains Video Contract Auction, a subsidiary of Billings Livestock Commission (BLC) Co., Billings, MT. Owner Jack McGuinness, a pioneer in video cattle auctions, sells more than a quarter of BLC's 140,000 annual cattle marketings through video. McGuinness will retain ownership of the main auction market, the state's oldest continuously operated livestock marketing enterprise.

- LeMaster Corp., Gaffney, SC, one of the Southeast's largest order-buying organizations with annual sales of 150,000 head.

- McMahan Order Buying Co., a livestock brokerage based in Austin, TX, which markets more than 200,000 head of cattle annually to large feedyards and stocker operations throughout Texas and the Midwest.

- Robert Thigpen Livestock Co. Inc., Chilton, TX, which markets approximately 250,000 to 300,000 calves and yearlings/year throughout the Southwest.