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There's Still Time

For all that's uncertain today regarding the U.S. beef business, one thing seems a lock. Value-based marketing — a system that rewards or discounts cattle according to how they perform against certain performance and end-product value specifications — is here to stay.

In fact, Harlan Ritchie, Michigan State University distinguished professor of animal science, predicts that by decade's end, 80% of all fed cattle will be moving outside the spot cash market. It currently hovers near 45%.

And, with more technology certain to come on stream that will enable beef processors to more accurately determine the true value differences in the cattle they buy, the net result will be less market opportunity for producers whose calves don't measure up.

That doesn't necessarily mean the demise of those producers, Ritchie points out. They'll just be forced to compete in a shrinking commodity market on a lowest cost of production basis. For the most cost-efficient producers, the commodity market could actually be a profitable niche, he says.

“Low-cost producers will survive. There's no doubt about it. A ton of data out there that shows that's the case,” Ritchie says. “But even that low-cost segment will benefit from doing some of the networking required of those participating on the value-based side.”

For producers wishing to compete in the value-based system, Ritchie says there's still time to gear up and get into the game.

“Big or small, any size operation can take part,” Ritchie says. “It's not too late, particularly if you can join in with one of the horizontal systems or the various cow/calf cooperatives that have formed and are building a database cooperatively.”

Start by contacting your area Extension personnel, producer organizations, producers involved in such programs, your veterinarian or local auction. BEEF publishes a listing with background and contact information for 40 value-based marketing programs each year (see August 2001 BEEF for the Alliance Yellow Pages).

Ritchie stresses that participation in such programs will entail a higher level of interdependence than most producers have known before, both within segments and between.

That's a good thing, says Burke Teichert, general manager of the Rex Ranch, Ashby, NE, part of one of the nation's largest cow/calf operations. He's convinced that cooperation between and within beef sectors will become more necessary for survival — not just in marketing but for improved operation management as well.

“One of our industry's big problems is that we don't interact enough. We don't take advantage of our combined brainpower,” Teichert says. “The competition has gotten so keen in our industry and the margins so narrow that none of us are smart enough to do this alone.”

Particularly in the case of smaller operations, Ritchie says networking and cooperation is indispensable in overcoming the marketing advantages of larger operations.

There's a distinct advantage, for instance, in offering calves in 50,000-lb. truckload lots, Ritchie says. Groups of small- and medium-sized operations can pool resources and build load lots of uniform calves by sharing genetic selection, weaning and vaccination programs, then sorting them prior to marketing.

To get started, two basic types of information are needed, says Jerry Stokka, formerly of Kansas State University and now a senior veterinarian with Pfizer Animal Health. You need to know what it costs you to produce a calf and the quality of that calf.

“Without knowing your costs of production, you're shooting blind,” Stokka says. “And without knowing what the performance is of your calves in the feedlot and in the meat, you can get in trouble fast.”

Nearly all states have systems in place to help producers benchmark production costs, Ritchie says. Land-grant universities and Extension personnel, as well as some veterinarians, are places to start. Ranch management or marketing clubs — groups of producers who come together to learn by sharing and discussing information — are others.

Homer Buell, who along with his brother Larry and their families own and operate the Shovel Dot Ranch in Rose, NE, can attest to the value of a ranch management group. Running 1,500 commercial cows in a cow/calf, backgrounding and yearling operation, Buell says he's found tremendous benefit in participating with seven other independent ranchers in a management club he helped form 15 years ago.

All located within a 100-mile radius of each other, the members gather on a quarterly basis to eyeball and study each other's operations. The purpose is to share ideas, review individual management and production information and offer constructive advice and discussion. More recently, they've invited outside experts, such as bankers and university specialists, to their meetings.

Over the years, the group's mission has evolved to the point that almost two years ago they began sharing financial, as well as production, information. Buell says the experience has sharpened their operation's focus and reinforced the importance of managing costs and long-term business planning.

Teichert, who even as a leader in one of the nation's largest cow/calf operations — one with the presumed resources to be self-reliant — testifies to the value of such group programs.

“I've made it my work to find good operators and learn from them, whatever their size, so that I can get better. Homer is one of the folks I try to regularly spend time with,” Teichert says. “If I were a family rancher, I'd be trying to get my neighbors to join me in trying to put together something like his ranch management club.”

Cow/calf benchmarks
  Average producer Top 25% based on net income
Calving percentage 86.3% 88.1%
Calf crop percentage 83.1% 84.8%
Feed costs/cow $86.64 $61.40
Total cash costs/cow $362.63 $307.48
Total cash cost/cwt. $85.26 $55.48
(Source: Cow Calf SPA Database Texas A&M)

Basic Costs Of Production

To get a handle on cost of production, Ritchie suggests producers start by evaluating feed cost — the single biggest cost of maintaining a cowherd. This includes purchased feed, pasture and harvested feed. Try to keep it below industry average for your region.

“On the performance side, I like to look at pounds of calf weaned per cow exposed to breeding because it combines fertility, calf survival and calf growth into a single figure. Try to keep it at or above average for your particular environment,” Ritchie adds. “However, remember that pushing performance to a maximum can increase production costs to a point that seriously jeopardizes profitability.”

To get started on post-weaning performance records, Stokka suggests participating in steer feedout programs offered in most states through cattle organizations and land-grant universities. The programs compile feeding performance and carcass data on calves consigned to the program by individual producers. The resulting data is useful in breeding selection.

“You don't have to feed out your whole calf crop, though the more calves you have data on, the clearer the message will be,” says Stokka. “Just select five steers that represent the direction you think your herd is taking. They can be five from one sire group, particularly if you're trying to go one direction and you have identified one particular sire as the one that will take you there.”

In benchmarking a set of calves, understand that year-to-year variables can make the same set of calves look different from a performance standpoint. One year's data provides a benchmark but no trend. Feeding calves over multiple years at the same yards under as nearly the same conditions as possible, however, allows you to begin establishing trend lines.

A good understanding of your costs will allow you to focus management on areas of inefficiency. An understanding of how your calves measure up allows you to target your production to the best value-based program suited to them.

All the specialists stress that every management decision should be viewed in its context to the health and sustainability of the overall operation. Good cost and performance records will illuminate the potential antagonistic effects of a management change in one area on other areas.

In the preceding article, Teichert lists his five basic traits for survival in the new beef industry:

  • Using a systems approach to management that's both integrative and holistic,

  • Striving for continuous improvement in key resources — land, livestock and people,

  • Using good planning and decision-making tools — something that begins with good production and financial records,

  • Waging war on unit cost of production, and

  • Placing strong emphasis on marketing.

“The basis to all of them is to make holistic decisions — to make sure that the land, livestock and people are all considered and one doesn't suffer at the expense of the other,” Teichert says.

That holistic philosophy essentially describes the workings of Integrated Resource Management (IRM), a program in which both Teichert and Buell are active participants and current or past leaders. Many states offer IRM programs. They offer a number of management tools to help producers identify ways to increase efficiency and cut costs while considering the long-term sustainability of the larger operation.

“I think it's impossible to take a holistic or IRM approach without outside help. You have to be bigger than yourself,” Teichert says. “With the cow/calf business being what economists define as a purely competitive business where average price tends to have the average rancher just break even on the average year, none of us are smart enough just in and of ourselves to do it. We have to go beyond ourselves for help.”