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Fighting Back--Beef producers counter ailing prices in different ways.

The economic war that pits ranchers and feeders against packers continues without letup. The battlegrounds include the halls of Congress, regulatory agencies and the federal courts. Amid the bloodletting, pork and chicken carry off more of the meat market without firing a shot.Against this backdrop, a band of Midwest feeders and ranchers have taken the radical step of buying a piece of the packing

The economic war that pits ranchers and feeders against packers continues without letup. The battlegrounds include the halls of Congress, regulatory agencies and the federal courts. Amid the bloodletting, pork and chicken carry off more of the meat market without firing a shot.

Against this backdrop, a band of Midwest feeders and ranchers have taken the radical step of buying a piece of the packing industry. To these operators, who go under the banner of U.S. Premium Beef (USPB), the big problem isn't the meat packing industry, but the public's indifference to beef.

'Most economists who look at the pure facts of the issue have come to the conclusion that our problems are demand, demand and demand,' says Steve Hunt, USPB chief executive officer. 'And I would fall in line with that view myself.'

USPB gained a stake of the packing industry through a joint venture with Farmland Industries. The agreement allows them to purchase up to half of Farmland's National Beef Packing Co., the smallest of the Big Four packers.

Many ranchers and feeders think big packers are to blame for dismal beef prices. They say these packers wield immense power because of the huge market share they control. The four biggest packers now control roughly 80% of the slaughter market and a similar share of the boxed beef business.

Is Captive Supply At Work? Among other things, critics say big packers are pushing cash market prices down through extensive use of captive supply. That criticism has become a chorus as cattle prices have fallen.

But, concentration may get worse. Bruce Bass, IBP vice president, recently told the South Dakota Cattlemen's Association that the high cost of implementing federal food safety regulations will be toughest on small packers.

But Hunt says packers aren't the problem. 'Historically, meat packing has been a high volume, low margin business. In a good year, the profit margin has been 1.5 percent,' he says. 'When a cattle feeder loses $100 a head and they start looking at why they are losing that, they won't find it in the beef packing business. In a good year, the margins for packers may be $15 a head.'

What then is the problem? When a group of Midwestern producers examined their industry several years ago, Hunt says, they found a system which promotes mediocrity in beef by setting an average price without regard for quality differences. They also found the system provided incentives for production efficiencies such as faster weight gain, but provided few if any incentives for meat quality.

USPB is resolving those shortfalls by rewarding quality with higher prices, and supplying ranchers and feeders with individual carcass quality data so they can improve herd genetics.

Not A New Idea The idea of going into the packing business isn't new. Some producers have proposed building a packing plant from scratch. 'We looked at that possibility first and decided it wouldn't work. We couldn't compete. It's a mature business with very low margins and very little room for error,' Hunt says.

By contrast, a joint venture with Farmland National allowed USPB to buy a share of existing facilities, experienced management, trained labor and brand name products. The arrangement also allows multiple segments of the indust ry -- ranching, feeding and meat packing -- to work together on the demand problem. This concept, when done under a corporate arrangement, is called vertical integration.

But this instance of vertical integration is 'from the bottom up,' says Hunt. That means producers, 'control their own destiny through ownership.'

Vertical integration has helped chicken and pork thrive at the expense of beef. For instance, all segments of the chicken industry work together to develop and produce items consumers want. A recent article in the Economic Review of the Federal Reserve Bank of Kansas City highlighted the reasons beef has failed to do the same.

The article cited a beef industry consisting of three distinct and very different segments -- a highly concentrated packing industry, the feedlot sector with more than 100,000 operators and a third sector composed of the 900,000 ranches and farms where cattle are raised.

'The ranching industry is too large and competitive to allow for significant coordination with cattle feeders or other downstream links in the production chain,' the article said. 'The moderate link between feeders and packers fails to convey appropriate incentives back to either feeders, or perhaps more importantly, to ranchers. Moreover, there has been essentially no link with retailers.

'To recapture market share, the beef industry must achieve greater vertical coordination to lower costs and convey rapidly changing consumer preferences across the production chain,' the article said.

Still, the demand issue is sometimes lost amid red ink and the fact that the industry still sells huge amounts of beef. But that doesn't equate with demand.

'You can sell a quantity of anything at some price,' says Virginia Tech economist Wayne Purcell. 'And in the case of beef, a perishable product, we consume essentially all we produce.

'It's the price that does the adjusting. And if those prices have to go down a great deal on a day-to-day or week-to-week basis to clear those boxes through the pipelines, producers will eventually get run out of business.

'Selling lots of products this year or any year at low and unprofitable prices certainly doesn't meet intuitive notions of what 'strong demand' should be all about,' Purcell says.

A House Divided As the 21st century nears, the beef industry is a house divided between those who worry that consumers don't want beef badly enough to boost the price and those who believe huge packers are ruining the rest of the industry.

The packing issue is likely never to go away. Though it may slip from sight if and when prices rebound, it will likely resurface when they fall. The issue then becomes where does the cattle industry spend its time and resources? Does it try to break up packer concentration, improve demand for beef, or do both?

Azzeddine Azzam, an agricultural economist at the University of Nebraska, favors strong government mechanisms, such as anti-trust regulation, to keep the market power of the packers in check. At the same time, he warns against focusing too much on meat packers as the cause of low prices.

'When people look at prices, they don't look at all the mechanisms that cause them,' he says. 'They tend only to look at one force. This is not to deny the impact of concentration on prices. But it's only one of many forces that affect prices. The danger of concentrating on one force and not looking at others is that it might backfire.

'If the problem is really demand, but you keep pointing to concentration, you might get a couple of dollars more per head for your cattle,' he says. 'But if you solved the demand problem, you might get a lot more.'

The meat packing industry is now far more concentrated than it was in the early years of the century when meat packing first became a target of federal anti-trust efforts. The Big Four now hold 80% of the meat packing business and a similar share of boxed beef.

For some, that fact might prove government oversight has had little impact. But the University of Nebraska's Azzeddine Azzam, a specialist in meat packing economics, says the ever-present threat of government intervention keeps the packing industry in check.

'The government works as credible threats to the industry,' he says. 'Without them, packers or other concentrated industries might behave quite differently. I think anti-trust laws are probably the best things to ever happen to this country. They represent a check on monopolies.'

Complaints have stirred the U.S. Agriculture Department to take another look at the packers. At the recent National Cattlemen's Beef Association convention, Agriculture Secretary Dan Glickman said his department would take steps to collect additional price information to see if there is evidence of price manipulation by the packers.

Feeders could also take direct action against packers by withholding fed cattle from the market, as some Nebraska producers did recently. A boycott theoretically could disrupt packing lines. However, a short-lived feeder boycott probably would have little impact, and a longer boycott could backfire.

In a holdout of short duration, 'packers always have places they can go on a moment's notice and get enough cattle to finish out the kill,' says Gary Smith, a meat scientist at Colorado State University. 'If you refused to sell for four months and you had 30 percent of all the feeders, you would really screw things up,' he says. 'You'd also be screwing yourself.'

A group of 10 ranchers and feeders are seeking to strike a blow against captive supplies in a federal court lawsuit against IBP. The suit charges IBP, the nation's largest meatpacker, illegally uses its captive supplies to manipulate the cash market. A trial is set for late this year in U.S. District Court in Montgomery, AL.

IBP has denied the allegation. 'Unfortunately, some cattle producers have been wasting their time blaming packers for depressed market prices when the real reason is basic supply and demand,' says IBP Vice President Bruce Bass. 'Basic supply and demand are the only forces controlling the market.'

The extensive use of captive supplies has been a sticking point with some ranchers and feeders. Captive supplies include feeder cattle owned outright by packers and cattle purchased under certain special marketing arrangements. In 1980, captive supplies made up 4% of the market. Today, they control more than 20% of the market in some states, and at certain times, considerably more.

Randy Beard, an attorney for the plaintiffs, says producers contend IBP used captive supplies to force cash prices down, enabling them to buy fed cattle on the cash market for an unreasonably low price. Because IBP has ready access to captive supplies, they don't have to buy on the cash market.

In the meantime, a feeder who is unable to find cash market buyers must continue to feed his cattle, Beard says. However, since the animals are already finished, the feeder faces discounts for overweight cattle. After two weeks, 'he must then sell the cattle at any price,' says Beard.

The plaintiffs are seeking unspecified damages and a court order that would block IBP from using captive supplies to depress cash market prices in the future.