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Growing The Pie

Farmland tries to grow the branded beef supply by sharing performance information with both retainers and sellers of calves.In the beef industry's specification renaissance, chance is a luxury reserved for the wealthy. The rest of us have to hedge our profit potential with cold, hard genetic facts."You can't take bad grapes and make good wine," says Greg Johnsrud, coordinator of the Farmland Supreme

Farmland tries to grow the branded beef supply by sharing performance information with both retainers and sellers of calves.

In the beef industry's specification renaissance, chance is a luxury reserved for the wealthy. The rest of us have to hedge our profit potential with cold, hard genetic facts.

"You can't take bad grapes and make good wine," says Greg Johnsrud, coordinator of the Farmland Supreme Beef Alliance (FSBA) and manager of Supreme Cattle Feeders, LLC at Liberal, KS. "In the future, it won't be just a matter of how many cattle we can feed but how many good cattle we can feed. We've already discovered that there is at least $200-250 (USDA) difference in the value between the cattle in a pen."

Johnsrud says genetic potential and proof - a hallmark of the FSBA program since its value-added inception in 1996 - is the primary reason the 250,000 head of cattle trading across its value-grid have averaged a premium of $15.40/head thus far.

"You can cause problems for good genetics with poor management, but you can't do much to fix poor genetics with good management," Johnsrud says.

"As producers at all levels continue to get more savvy about management - and some have been in front of the curve for years - some managers will always be better than others, but that distance may not be as great," explains Art Wagner. The vice president of procurement for Farmland National Beef Packing (FNBP) says that, over time, solid management becomes more of a ticket to play than a point of value differentiation.

Moreover, this diminishing-return logic is starting to shift every segment of the beef industry.

"Just looking at the trends of the last few years, the market is definitely moving away from price discovery toward value. It's obvious from what retailers and consumers are asking us to produce," Wagner says. "It's leading us to change the way we do business, and it will lead the industry, based on what consumers are asking for, to change the way business is done."

Consumer demand for consistency, coupled with rapid retailer consolidation, is leaving progressive retailers and food service organizations hungry for consistent quality branded programs, Wagner says. In the beef case, that means most stores have at least one branded product and, depending on the store, a single case may boast several different brands.

"With the consolidation of the retail business, any edge we can have over another is significant," says Wagner. After all, in this high-stakes consumer chess match, even a ripple of preference can create a tidal wave of impact. The growing reality of fewer, larger retailers only fuels the storm.

Farmland currently offers three different branded premium programs in addition to Certified Angus Beef (CAB) and Prime. These are Farmland Black Angus (at least 51% black-hided and representing the bottom 50% of Choice grading cattle), Black Canyon Select (at least 51% black-hided and representing the top 30% of Select grading cattle), and Farmland Certified Premium (the top 20% of Choice grading, non-breed specific cattle).

On the other side of the branded coin, commercial producers like Bill Donald of Cayuse Livestock Co., Melville, MT, are having to choose their future by taking stock of what they can offer today, relative to the evolving opportunities.

"As producers, I think we have the responsibility to know what our cattle will do all the way to the meat case," says Donald. He's retained ownership in some of his calves through FSBA the past few years. His rationale is to get more information about his cattle and take a swing at more dollars.

As Donald says, "We have the responsibility to know what we're producing, but we also have the right to get a better price for better cattle."

Tying Up Independent Ends The Farmland Beef Connection (FBC) is a source-verified feeder cattle supply system. It's a comprehensive effort to build supply for the company's burgeoning branded beef products by sharing information throughout the production chain and rewarding producers for their effort.

"Farmland Beef Connection provides the link between the cow/calf producer and the feedlot. We offer marketing options to the producer, along with information feedback on their calves' feedlot and carcass performance," says Doug Stanton, FBC coordinator.

"For the feedlot, we are making available source-verified calves with known genetics through our weekly Feeder-Fax program. We also provide them previous feedlot and carcass data if it's available," he says.

Up front, feeders have the opportunity to identify cattle that have a high probability of making the grade in at least one of several FNBP marketing programs. This includes FSBA and U.S. Premium Beef (USPB).

In the FBC program, producers can retain any or no interest in their cattle yet still receive the feeding and carcass information. Group data costs $4/head in the FBC, and individual data runs $7, including the cost of an electronic identification tag.

In the FSBA, data runs $2.50 and $4, respectively - no electronic tags are provided at this time - and are sold on a different value grid.

So far, Greg White, manager of Pfenniger Cattle Co., Scott City, KS, says the FBC is accurately identifying the outcome of cattle on the front end. At least 90% of the cattle on feed here are black, virtually all marketed to Farmland or USPB. Few are purchased without verification of what the cattle are and what they can do.

"We're able to actually get paid more for the better kind of cattle, depending on how you look at it," says White. He explains, along with the discounts that go part and parcel with any value grid, at times the Choice/Select spread conspire to make cattle worth more on a particular grid worth less.

The dynamics of the industry's current market structure is one reason Donald doesn't believe producers have a shot at equitable premiums in any pricing system today. While it's a step in the right direction, he explains, "I'm not sure the grid pricing system rewards the genetics, either. I'm getting a premium over the cash market, but the cash market is based on mediocre cattle."

Donald's contention - backed by common sense and some university research - is that as more top-shelf cattle are pulled into value systems away from the cash market, the average of the cattle left to establish the cash market is lower. At the same time, as more cattle enter value systems, they raise the average there, making it tougher to beat.

"I think our market system is sick if not broken," says Donald. "But I think Farmland's a good program because if we can't measure it, we can't fix it. I appreciate the information. If it's a wash economically, I'd rather have the information than not have it."

Informed Ownership Indeed, Wagner explains, "What's unique about our program is that producers, regardless of their size, know if they no longer own the calf or that if they retain full or partial ownership in it, they are still tied into the communications loop and will get the information back.

"Any of us can sell cattle on a grid to a packer, or market specially tagged calves through a sale. But, once cattle in those systems walk out of the gate, the producer has no sense of participation with them," Wagner says.

As an example, Donald tried for several years to gather feeding and carcass information on the cattle he sold, but he had hit-and-miss results. Once he could track his cattle from year to year via FSBA and FBC, he says, "My genetics surprised me in that they're gaining more, there's more performance in them, and the window to get into a high-value carcass is narrower than what I would have thought."

Wagner says "It's one thing to get the producer to meet the specifications of a program, but it's probably even more important to maintain a longer-term perspective and get the information back to the producer.

"The most frustrating thing to me is that the information is out there. Trust is a tough thing in this business where producers and packers are concerned, but the information is there. They just have to ask the question."

Wagner says the company's most unique feature is that it's an open cooperative owned by producers (Farmland Industries and U.S. Premium Beef.) "They can participate in the financial and emotional ownership of the product the whole way through," he adds.