Girding The Grid

Put a bunch of cow-calf producers, stocker operators, feeders and a packer in a room at the same time and fireworks are likely. Or are they?Cooperation was the spirit as more than 400 industry people met in September to review progress of the Great Nebraska Formula Grid Out. The Grid Out is an agreement originally signed by 140 feeders who agreed to sell cattle only on negotiated prices for a two-week

Put a bunch of cow-calf producers, stocker operators, feeders and a packer in a room at the same time and fireworks are likely. Or are they?

Cooperation was the spirit as more than 400 industry people met in September to review progress of the Great Nebraska Formula Grid Out. The Grid Out is an agreement originally signed by 140 feeders who agreed to sell cattle only on negotiated prices for a two-week period.

The group contends that a steady supply of formula cattle keeps packers from bidding aggressively on the cash market. The lower cash prices result in lower formula cattle prices, which in turn keeps cash prices down. These feeders want packers to bid on pens of cattle, rather than calling for delivery under prearranged deals that determine price at a later date.

Now known as United Cattlemen for Negotiated Marketing (UCNM), the group strives to educate producers about eliminating non-negotiated live cattle marketing practices.

"Every industry has a watershed moment," says Alan Janzen, president of Nebraska Cattlemen and owner of Circle 5 Cattle Co., in Henderson and Brewster, NE. "I think a lot of us are at that moment. We want to focus on non-negotiated selling. Non-negotiated prices result in inventory we give up to the packer for a period of seven days."

While non-negotiated selling is a common practice, Janzen says it isn't the only marketing tool available.

Chris Dinsdale, president of Dinsdale Brothers, Palmer, NE, says nothing is more important than the discovery of live price and feeders have to work to get it. The fourth generation cattle producer emphasizes cooperation among feeders and packers to achieve a recognized market price.

Producer's Share Drops There's been a 20% drop in the producer's share of the total beef retail dollar in nearly 20 years, says Les Messinger, a commodities broker and member of the Chicago Mercantile Exchange. Citing USDA statistics, the 25-year cattle feeder says producers received 64% of the retail dollar in 1979 and just 44% in 1998 (see Table 1).

"In other words, if market steers sold in August at $58/cwt., there are $1,582/head total beef dollars available," Messinger says. "The producer receives just $696 per head. This drop can be traced to early 1994, when captive supply kicked in."

"Every segment of the cattle industry is controlled by the packer price," Messinger says. "Participating in captive supply is a selfish, self- destructive, long-term move."

If a packer begins a month with 30-50% of supply on hand, it can depress the market $5-7/cwt. in a tight market and $5-12/cwt. in a burdensome market, Messinger says. "These drops can help create up to $14 million more profit per week for the packer," he adds.

While packer profits have historically been high, retailers are now squeezing packers the same as packers squeeze producers, Messinger believes. However, he suggests that if these final two segments of an industry are making record profits and the others are hurting, something is very wrong.

Reduction in live cattle price is mainly a function of the loss of market share of the total beef dollar, Messinger says. For example, the total fluctuation of overall retail beef prices since 1990 has been $0.19. During the same time, live cattle prices have dropped from $78.70/cwt. to $58/cwt.

Packer profits may be getting squeezed, however the Big 3 packers' share of slaughter has increased dramatically, growing from 36% in 1980 to 84% today.

"Formula pricing gives no price protection at all," Messinger says. "You can use futures contracts to gain protection. In fact, the main foundation of the futures industry is providing price protection."

Government Not the Answer The efforts of UCNM haven't gone unnoticed by elected officials. Nebraska Senator Chuck Hagel encourages creativity among all commodity groups.

"Government isn't the answer to this situation," Hagel says. "It's far better for the industry to come together to find creative ways to market cattle. Practices established by this initiative could well be a model for other commodities to use."

This self-repair approach isn't unlike the method Brett Gottsch, partner of Gottsch Feeding, Elkhorn, NE, proposes.

"Your customer is relying on you to get the highest possible price you can for his product, not the high compared to everyone else," he says. "We cannot let the packing industry inventory all the cattle we have for sale every week. Show half or one third of your show list to one packer and if his bid isn't high enough to buy that list, that's all he sees. Keep them out of your yards except to look at those specific pens.

Gottsch believes the U.S. beef industry chose the easy route down the road of value-based marketing. "We've given no incentive to the packing and retail sectors of our industry to help us develop the product the consumer wants," he says.

"Instead, we gave them an easier way to create margin by using the inventory we've given them in the name of value-based marketing to increase the farm-to-retail spread. There's nothing wrong with value-based marketing - we have to negotiate a base price first," he says.

Gottsch says that prior to the Grid Out, there were as many as 45,000 head of non-negotiated cattle movements. Three weeks after the Grid Out started, the number dropped to less than 7,000.

Captive Supply Scary Selling cattle almost exclusively on cash bids is the norm for Wagonhammer Cattle Co., Albion and Bartlett, NE. Jay Wolf, president, says the formula or the grids that he's investigated result in premiums too small to be part of a true value-based system. In his view, they're small premiums for captive supply."Undoubtedly, cattle marketing has changed - for the worse," he says. "It's hard to raise the price when a packer has several days' supply on hand.

"Captive supply remains a powerful allure in our industry," Wolf adds. "It allows managers to say, 'I got a premium on the cattle,' despite the fact the market is depressed by their own marketing practices."

Wolf suggests producers not give their business to yards participating in or contributing to captive supply. He also recommends that cow-calf producers not sell directly to feedyards that participate in these practices.

"It's our responsibility," he says. "Peer pressure works in this industry. The government isn't going to help us, and I don't think we want it to."

However, there are some benefits to feeders and packers in a captive supply situation, according to Dick Monfort, The Monfort Co., Greeley, CO.

"Forward contracting does give the packer room to shift inventory around and more easily meet the demand of a specific week," Monfort says. "And there are benefits to feeders. You've always got a home for the cattle, it's a way to get paid a premium and it simplifies marketing."

Monfort doesn't sell his cattle on a formula, but rather on a cash basis. "Captive supply didn't get us into the trouble we're in today," Monfort says. "But, it may keep us there."

It's Not Easy Extra value and marketing on a carcass merit basis enticed John Roberts, vice president of Roberts Cattle Co., Lexington and Lincoln, NE, to try formula pricing.

"Initially, we liked it," Roberts says. "Then we became somewhat satisfied and gradually got to the point we totally disliked formula pricing."

Having sold cattle on the cash market the past several weeks, Roberts is convinced the Grid Out significantly helped his company's efforts. He says they've obtained competitive prices and hope to sell on carcass basis soon.

"The return to the cash market isn't easy," he says. "In fact, it's a lot more work. But, selling in the cash market is the right thing to do."

Feeders comprising the United Cattlemen for Negotiated Marketing (UCNM) have clear goals. The UCNM mission statement outlines the group's agenda:

"To identify a means by which to affect changes that lead to a restoration of a healthy level of competition between buyers and sellers in the fed-cattle marketing arena, while still allowing carcass merit pricing of cattle and access to data that will allow producers to continue genetic improvements that will lead to enhancements in quality and consistency of beef products."

The group has outlined alternative marketing mechanisms. These include:

* Maintain a competitive bidding environment including as many packers as possible on week-to-week basis.

* Establish a competitively bid grid marketing mechanism where numerous packers bid a base price (as well as premiums and discounts) with none being assured of acquiring a given feedyard's market-ready inventory on a week-to-week basis.

* Aggressive enforcement of the customary seven-day time frame that buyers have to take delivery on cattle (including weighting cattle over to packers and billing for expenses incurred if cattle aren't shipped within seven days.

* Use Chicago Mercantile Exchange Live Cattle futures and options contracts for risk management purposes in lieu of forward contracting cattle with packers.

* Report prices to any National Cattlemen's Beef Association-sanctioned marketing reporting service.

For additional information contact Nebraska Cattlemen at 402/475-2333. l