Picking Partners

Sorting through the growing number of coordinated production and marketing systems - alliances - at the cow/calf level can be like sifting through a grab bag of bolts at a farm sale. Although similar, you won't find any two alike, and whether any or all of them will help you depends on what it is you're trying to do."If I'm a cow/calf producer, I'm making sure I'm doing everything right at home before

Sorting through the growing number of coordinated production and marketing systems - alliances - at the cow/calf level can be like sifting through a grab bag of bolts at a farm sale. Although similar, you won't find any two alike, and whether any or all of them will help you depends on what it is you're trying to do.

"If I'm a cow/calf producer, I'm making sure I'm doing everything right at home before I worry about alliances," says Don Schiefelbein. He's executive director of the American Gelbvieh Association, which has marketed approximately 175,000 head of cattle through its Gelbvieh Alliance since it started in 1995. Cattle are marketed via a value grid with Monfort then sorted into one of five different branded beef programs.

"Once I'm sure I have the right breed combinations that are doing what I need at home, then I evaluate the alliances and determine which one offers me the most value for the least risk," says Schiefelbein.

Bob Hough, executive secretary of the Red Angus Association of America (RAAA) agrees. "There are a lot of good viable alliances out there, and I think producers should start with a well-balanced breeding program that fits their environment and management, then determine what alliance they fit after that."

RAAA began formal partnering with other segments in 1995 when it launched its Feeder Calf Certification Program (FCCP). Hough explains this was the first USDA approved and audited genotypic, source-verified program in the nation; cattle certified through the program must be progeny of a registered Red Angus sire or dam.

Cattle are then eligible for a value-based grid with Excel; cattle sold here go toward one of two Excel branded programs. FCCP cattle also help supply four other brands produced by other RAAA partners. Besides source-verification, RAAA maintains strict product quality control procedures for each brand specification it provides cattle for.

Given the current value of reproduction, relative to economic opportunity in the feedlot and on the rail, Schiefelbein encourages producers toying with the notion of retained ownership to look for opportunities that allow them to share risk with feedlots and alliances.

"The last thing you want to do is convince producers to take all of the risk beyond the cow/calf level, no matter how good it seems," Schiefelbein says. "And, I think right now there is hidden pressure on producers to do that."

If not pressure, at least plenty of allure. Who wouldn't want to be part of the industry solution by giving consumers what they want, adding value to an existing herd and boosting economic returns along the way?

Many of the current alliances can deliver these benefits, but none can magically transform bovine trash into consumer crown jewels. That's why producers must know where their cattle fit the industry before they can find an alliance that fits their cattle.

"It's critical that beef producers sell some cattle on a grade and yield basis to learn what quality of beef their genetics and management are producing," says Bill Miller, director of communications for U.S. Premium Beef, Ltd. (USPB). USPB is a closed cooperative that owns Farmland National Beef Packing Company in partnership with Farmland Industries. So far this year, USPB members have moved over 400,000 head through this value-based company which uses a pricing grid to reward Choice, Yield Grade 1-2 carcasses.

"Producers who have carcass data can then analyze how their cattle might perform on a value-based grid," explains Miller. "That will help them decide if they want or need to change their management or genetics to maximize returns on a specific grid."

Essential Considerations Then the fun really begins.

First, producers contemplating an alliance must understand up front that there are tradeoffs.

"I don't think they have to take on more financial burden or risk, but they definitely have to step up and take more responsibility," says Don Knore, vice president of cattle procurement for Laura's Lean Beef (LLB).

LLB is a privately held branded beef program that favors muscle, leanness and demands cattle fit all-natural specifications. They pay cow/calf producers a premium for calves that fit the program, reward feeders and retained ownership producers based on a value grid, then pay a bonus back to cow/calf producers if the cattle sold to the feedlot beat grid averages. The company posted $50 million in sales last year and has grown 40% each of the past several years.

"As you move toward objective-based specifications and toward value-based, then all of the segments take responsibility and risk for their segment as well as each segment down stream," Knore says.

He explains cow/calf producers entering these programs must assume responsibility for the performance of their cattle in the feedlot, on the rail, and ultimately on the consumer's plate. The same goes for all other partners in the chain.

"It's commodity versus specification, says Charlie Peters, LLB regional procurement director. "If you have commodity genetics and commodity management, you're probably tied to a commodity market. If you have specification genetics and specification management, then the opportunity exists for specification marketing."

Various alliance components and requirements offer producers a tangle of considerations worth pondering. Most offer a market target tied to a pricing mechanism designed to reward cattle that hit the target, while discounting those that don't. Considering grid discounts, relative to premiums, many alliance veterans say chasing premiums, rather than a target that fits an existing herd, is fool's poker.

Most alliances today also offer varying degrees of feedlot and carcass data (individual, group or both) and different levels of data interpretation. Some have strict genetic and management requirements. Some demand formal commitments, while others are as easy as making a phone call when cattle are ready to harvest. Some include specific source-verification requirements for specific reasons. Each has its own goals and objectives.

Moreover, producers should consider the organizational structure of alliances. Privately held companies, cooperatives and member-owned organizations each have their own business strengths and weaknesses.

And, alliance participation costs money. "Besides the actual participation fee, there is the added cost of doing business in an alliance," says Schiefelbein. He explains added costs come in the trade-offs. As an example, weaning and pre-conditioning, required by some alliances, is an added expense some producers don't currently incur. Likewise, making a genetic swap in the cow herd could mean trading improvement in one trait for improvement in another.

Sorting It Out Harlan Ritchie of Michigan State University believes producers must ask a number of essential questions to evaluate these tradeoffs. For instance, "Which practices are called for in a given coordinated system, and am I willing to adjust my program to fit those?"

Along with extensive alliance research, Ritchie and his colleagues helped develop the Eastern Corn Belt Alliance. It currently markets 100 head each week on a value grid, aimed at a branded product distributed by Gordon Foods.

While each alliance includes a different mix of components, Peters of Laura's Lean Beef explains, "If vertical cooperation will be analogous to vertical integration, then the people and the segments partnering with each other must act like one entity, and all of these components end up being essential."

In return, many alliances offer producers the chance to learn more about their product and boost economic returns. But Hough cautions, "We have to realize there must be give and take between industry segments. The cow/calf producer first has to fine tune the cow herd to his environment, then fine tune it to market specifications."

Of course, this partnering between segments has existed for years. Ritchie points out, "If a producer is already getting top dollar from a perennial and loyal feedyard customer every year, and is receiving full feedyard and carcass data, he may not need a formal alliance." These producers may already be getting the goody.

Bottom line, Peters explains, "Each alliance has been created for a different reason. Producers need to find out why an alliance was created, who is running it and what the goals of the alliance are, then make sure those fit with the direction of your program."

"Number one, determine the goals for the cattle operation, what you want to do with your cattle, then find an alliance those cattle fit into," emphasizes Knore. "Once you define your goals and the cattle you have, the next step is getting proactive and talking directly to the alliances. The more effort you put into the process, the more you will get out."

Whether a producer finds an alliance that fits the herd today, odds are economics will spawn more partnerships in the future. Ritchie says, "What we're seeing in the beef industry is the changing structure of agriculture; for that matter, the changing structure of all industries."

Likewise, Miller explains, "Where we're (the industry) at today is simply one step in an evolutionary process. The beef industry is moving from a commodity-based production and marketing system to one driven by more consumer demand for specific products. It will require more cooperation between production and marketing segments."

Harlan Ritchie of Michigan State University lists these essential questions for cow/calf producers to consider when considering a coordinated system.

* What can I gain from the system?

* What attributes in my business that I am weak on could the coordinated system help me sharpen up? For instance, if your specialty is production but your weakness is marketing, can the alliance help you improve that area of your operation?

* Can I get information from the system? Everything from overall management, to herd health, to feeding and carcass data. What kind of information does the system provide, and will it help me in my enterprise? And how adept is this system at sharing this information? Is it freely shared up and down the chain?

* Can I access new technology in the system? If new technology comes along, does the system have it or can I get it?

* Can I get financing in the system? Will it help me with financing in the case of retained ownership?

* Can I intensify my management and focus just on the parts of my business I'm especially good at? Every producer does certain things well and they'd like to focus on those things.

* What are the costs of joining the system, both direct and indirect? What are the fees for joining and participating, and what is the cost of the required management tradeoffs?

* What kind of market target do my cattle fit? Potentially, they may not fit any of the market targets that are part of these systems.