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The Future Of Cash

Cash markets in the beef business are becoming a thing of the past. So what will be the foundation of new-era cattle pricing?

Daily cash transactions in the cattle trade are riding off into the sunset. With the proliferation of innovative marketing agreements, alliances, formula pricing and forward contracts, cash transactions are fewer and becoming less representative of the cattle trade.

With nothing on the horizon to reverse the trend, what are the alternatives to the cash market quotes that have served as the foundation of cattle pricing?

"For years the livestock industry relied on cash price quotes as the barometer of the market," says Ted Schroeder, Kansas State University (KSU) agricultural economist. "But fewer animals every day are sold via simple cash market negotiation."

Schroeder says new-era marketing, especially formula pricing, can offer advantages to both buyer and seller. These agreements, however, mean fewer cash trades and less public price information.

"The situation is complicated further by the fact that many formula-priced cattle sales rely on an external reference price for establishing a base price," explains Schroeder. "Many of those external prices are built upon cash market prices - the very prices that are becoming more thinly quoted."

With cash prices less indicative of trade - particularly in fed cattle - market participants are often left searching for other external pricing references. Suggested choices for these "transfer" prices include: average dressed or live prices from beef processing plants, retail beef prices, live-cattle futures prices and prices of wholesale boxed beef and beef by-products.

- Prices from processing plants are poor candidates for use as external reference prices, says Schroeder. They reflect varying quality levels over time and can lead to perverse pricing results.

- Retail prices might yield the same perverse results because of the vast difference in the product form from farm to retail levels.

- Futures prices are appealing because they rapidly reflect a large volume of new information. "They also are a viable source of price expectations, provide readily available price quotes and are closely monitored to avoid manipulation," says James Mintert, KSU Extension agricultural economist.

In addition, futures price-based formulas fix the basis level, which greatly reduces the risk of hedging.

But, there are concerns about using futures prices as external reference prices.

"Futures have a `time-matching' problem - they represent specific delivery or expiration dates that don't necessarily match the cash market transaction date," emphasizes Mintert. Basis (cash price, minus futures price) variability needs to be accounted for if futures prices are to be used as a reference price source.

Schroeder says futures markets must have a viable underlying cash market. "If viable cash market prices disappear, futures markets will also struggle to survive."

- Wholesale boxed beef and by-product prices are another possible source of external reference prices as they reflect the prices meat processors are receiving for beef products from retail, food service and export markets. However, using wholesale prices as a cash price alternative has its drawbacks.

"Direct wholesale cash trade is diminishing much like cash livestock trade, and meat sales are increasingly done on a non-cash basis," says Mintert. Consequently, the USDA wholesale beef prices are based on a small percentage of all beef traded and may not represent the animal's true wholesale value."

Also, as slaughter and processing costs change, the relationship between wholesale and farm level prices also changes, he adds.

Long-Term Implications The long-term trend in the relationship between wholesale and live cattle values may have more implications to the price discovery process than short-term fluctuations. In the early 1990s, the fed steer value typically averaged 90-95% of the wholesale value. However, this ratio has trended downward and increased in variability. By the late 1990s, the live animal value ranged from 80-90% of the wholesale value, Schroeder says.

"This doesn't necessarily indicate that packer margins are increasing," he points out. "Rather, cash fed-cattle markets could be representing progressively lower-quality cattle, as higher-quality cattle get marketed using grids and marketing agreements."

The key here, according to Schroeder, is that using wholesale beef prices as external reference prices will result in lower fed-cattle prices today than would a similar formula just a few years ago.

Jim Holzer, vice president of Chicago-based Frontier Risk Management, says there's no question "transfer pricing" gives market power to the middlemen, primarily meat packers.

"Whether they use that power to the detriment of the beef industry is up for debate," he says. "But, non-cash pricing is the direction the industry is going, and there's really not a whole lot that can be done about it."

Holzer adds that large cattle feeders who are selling cattle every week can maintain a say in how the cash market is established, but it involves some added risk.

"If you have five lots of cattle ready to sell, take one lot and negotiate it on the open market," he says. "Odds are you're sending the bulk of your cattle to the same plant anyway. At least then you can test the validity of the cash market and still sell the bulk of your production on the formula. Otherwise, when you're not in the cash market, how do you know how valid or representative the reported markets are for your cattle?"

Holzer adds that the reason the industry is moving to formulas at the expense of cash markets is the consolidation in every beef production sector, as well as in retailing. "These guys want their supplies guaranteed nationwide, consistently and a year in advance," he says.

Is There A Panacea? So, there looks to be no panacea for replacing cash prices in the real world of today's cattle marketing picture. In a world of spotty price quotes, scanty trade volume and fewer buyers and sellers, Schroeder says the negotiation of the formula should not be taken lightly.

"Be careful of settling for a formula based on plant averages," he advises. "In the long run, formulas using wholesale and/or live cattle futures prices as a reference appear to hold the most promise."

To address livestock pricing problems and force more pricing information into the system, some segments of the livestock industry have pushed through mandatory price reporting (MPR) laws. Proponents believe MPR has the potential to reduce variability in prices between transactions.

"Some producers believe MPR will mean a significant difference in the amount they're paid for their animals, but it's doubtful this will do much to change price levels," says Ted Schroeder, Kansas State University agricultural economist. "It will not shift either the livestock supply or demand, which are the underlying driving forces in determining prices."

Schroeder says he's an advocate for price transparency and believes more pricing information is better. But, he says it has to be meaningful information - information that's somehow going to influence a producer's ability to negotiate a particular transaction.

"The cash trade is still `thin and lumpy,' with or without MPR," Schroeder says. He just doesn't see MPR doing much to change the trading environment.

Especially as the industry moves into value-based pricing, the vast mixture of transactions in the cattle industry will tend to complicate and confuse the market reporting system.

"Some transactions are long-run joint ventures, some are forward price contracts set months previous, some are marketing agreements with formula prices," he says. "Each transaction may contain pricing attributes that we'll never see in a price report."

To make price reporting truly transparent, a whole paragraph will have to be written explaining the parameters and pricing details of each transaction, according to Schroeder. "Otherwise, we're prone to a lot of misinformation."

Schroeder says it will take quite an effort for USDA to come up with a meaningful and timely price reporting system. Providing such a vast array of data in a condensed form that is useful to buyers and sellers in a cost-effective manner may be nearly impossible.

"It's clear this will be a very costly activity for the industry," says Schroeder, adding that the on-going costs will be passed back and forward from the packers. "It will be reflected in slightly lower fed cattle prices and possibly slightly higher beef prices," he says.

His other concern is that such public information could benefit processors more than producers.

"It reveals to them more clearly what each other is doing. As soon as a packer does something innovative with an alliance, for example, it will be reported. Suddenly, other packers will know what the competition has done.

"It's almost like we are mandating that packers get together and share price information," he says.

Jim Holzer, vice president of Chicago-based Frontier Risk Management, isn't sure MPR will offer much to the industry. He says it might be useful in capturing any discrepancies there may be in premiums and discounts.

"It may allow a formula seller to evaluate whether he's getting what his competitor is getting as far as premium structures," he says. "That's the only benefit I see.

PC Crib Sheet

Some pointers to succeed with preconditioned calves.

Preconditioning (PC) and process verification for stocker/feeder calves can minimize sickness and death in calves as they move from the home ranch into the beef production system.

That same emphasis and an eye toward quality can also help producers sell calves in large groups of like kind, weight, condition and quality for higher prices than those same calves sold individually. It also allows producers to build a reputation for quality among buyers and produce a quality end-product for consumers.

The program includes:

- A minimum 45-day weaning period.

- A series of two modified-live respiratory complex (IBR, PI subscript 3, BVD, BRSV) vaccinations 14-21 days apart (preferably, the second vaccination will occur at least 14 days prior to sale).

- A series of two, 7-way clostridial vaccines on the same schedule as above.

- A Pasteurella vaccine given during the first round of vaccinations.

- Treatment for internal parasites (and external parasites if present).

It's recommended calves be held in the pen at least three to five days after weaning. Offer a high-quality PC ration twice daily. Have cool, fresh, clean water available.

The remaining 40-plus days of the program will likely be most economical and efficient if done in small or improved pastures and grass traps. Supplementing cubes, cake or a grain-meal mix may be needed to achieve the desired gain of 1-1.5 lb./day.

Remember These Considerations - Know the market price needed to cover your costs. If it's more than $5-$8/cwt. greater than the value of the calves at weaning, visit with commission company personnel or other market experts before proceeding with a PC program.

- Realize that a PC program won't change the muscle or frame score of feeder calves. If they're medium frame, # 2 muscle (M2) at weaning, they will still be M2s on sale day. Accurate assessment of the quality of the calves is critical to predicting their sale performance.

- Sort off any calves that won't fit load lots on sale day - color, quality, size, age, condition, weight, disposition, phenotype, tail shape or whatever - and sell them at weaning. Calves sold as individuals at the end of the sale typically sell at a discount to herd mates.

- Calculate realistically what the PC program will cost. Vaccines + anthelmintic = $6-$10/head minimum.

If you accept the minimum medicine cost above and want to keep the total per head cost of the program (before pasture cost, interest, labor, capital equipment, depreciation, etc.) at or below $25, you can spend no more than $15-$19/head on pasture, hay, supplement and/or feed. That equates to spending less than 35›/head/day. To put that in perspective, if a supplement is fed 40 days and costs $200/ton, maximum amount allowed (daily) is 3.5 lbs.

Realistically, $25/head is about the minimum a producer can expect to invest. On a 500-lb. calf, that is a $5/cwt. investment (ignoring postweaning gain).

- Evaluate realistically the magnitude of potential premiums. In a very strong feeder calf market, it might not be realistic to expect an additional $5-$8 premium on backgrounded calves.

Evaluate The Potential Pitfalls Timing - The minimum acceptable weaning period is 45 days. Longer periods won't necessarily bring additional premiums. Plus, days beyond 45 cost you more and increase risks of accidental death. So, plan your program as close to 45 days as possible. Precaution: long weaning periods have the potential to move weaned calves into a yearling market. There is very little (if any) demand for PC yearlings.

Sickness - Calves weaned and backgrounded on their home ranch typically experience few or no health problems. But if sickness occurs, the additional medicine costs and reduced performance could eat any potential premiums on sale day.

In addition, any fatalities quickly eliminate a PC program's profit. Facilities (corrals, pens) need to be in good working order before attempting this program.

Nutrition - Most producers spend too much on feed, hay and supplement. The 45-day gain target is 1.5 lbs./day. Few producers can realize this gain on grass alone, so supplementation is usually warranted. Contact an Extension specialist or beef cattle nutritionist for help. But, in general, remember that:

- Hay is expensive when you consider its efficiency of use to the gain it yields.

- Confinement feeding is seldom economically feasible.

- Forage quality is paramount; nutrient requirements as a function of body weight are at their lifetime high.

Freight - Carefully evaluate freight expense. Freight rates are cheaper ($/head transported) for trucks than pickup and trailer. Typically, truck rates are $2/loaded mile (50,000 lbs./load). Gooseneck trailer rates are $1.25-$1.50/mile for a 14,000- to 21,000-lb. load. Pooling calves with a nearby producer can fill a load and reduce freight expense.

Shrink - Backgrounded calves typically exhibit less shrink than fresh weaned calves, but predict the shrink and use it in your calculations. (If you've always sold at weaning and never weighed a calf on the ranch, you don't realize what shrink is doing to you.) Check with the host commission company about how they will handle shrink.

The sort - A heavy sort at the commission company can result in too many calves being sold individually, usually at a discount to the load lot price. Discuss your calves and the sorting procedure with the host commission company personnel.

Market slide - If the market is expected to drop during the 45-day PC period, proceed with caution. Even market declines of $2-$4/cwt., when added to the $5+/cwt. investment in the postweaning program, can become significant profit stealers.

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eMergence or Divergence?

eMerge hopes to build a national marketing and information exchange network to meet both industry and consumer needs.

Up to now, the average beef producer has been more familiar with the term precondition than acquisition. He's witnessed more mirages than mergers. He's spent more hours on the Interstate than on the Internet. And, he's always thought more like Main Street than Wall Street.

But, all that may change in the next five years if eMerge Interactive Inc. achieves its long-range business model. By the sheer scope of its plan, almost every U.S. beef producer could be impacted by eMerge's planned marketing and technological innovations.

EMerge's stated mission is "to enhance the cattle industry's efficiency and profitability while improving the quality and safety of America's beef supply." By acquiring and merging with existing livestock marketing firms across the nation, eMerge hopes to generate a new marketing scheme, infused with the company's style of new-economy technology, to build a national marketing and information-exchange network.

"Today, we already are the largest marketer of cattle in the U.S. via a series of acquisitions," says CEO Chuck Abraham from eMerge's headquarters in Sebastian, FL. "Our capacity today is in excess of 2 million head on an annualized basis. We really haven't implemented the business model we have envisioned yet, but we're gaining the critical mass that will enable us to do it."

Within five years, Abraham says that critical mass will grow to where eMerge hopes to make these fundamental changes in the beef industry:

- One in every three American cattle producers will do some type of commerce with eMerge. Even if they don't sell calves through eMerge's marketing operation, they very possibly will use eMerge's Web site,

Through this Internet-enabled business, eMerge will offer pharmaceuticals, electronic identification (EID) systems, office supplies and leasing options, as well as real-time commodity prices, weather conditions and wire service agricultural news. Abraham sees it as the cattle industry's equivalent of the world's leading Internet retailer,

- Through mergers, acquisitions and partnerships, eMerge will facilitate the marketing of 8 million head of feeder cattle through 35 to 40 high-volume market facilities across the U.S. The cattle will be preconditioned, sorted as to biological types and sold to feedyards.

To put those numbers into perspective, 8 million head of cattle represents more than one-third of the entire U.S. fed cattle marketings in an average year.

- About one-third of these 8 million head will be electronically identified, so eMerge can disseminate genetics, performance and process verification data up and down the beef chain. At this quantity, at least one or more major branded-beef product distributors could have an almost unlimited supply of process-verified cattle with years of data backing it up.

$107 Million In Initial Capitalization In an industry that's chronically undercapitalized, eMerge made a great start there as well. As a public company (NASDAQ:EMRG), its initial price offering in February generated $107 million from Wall Street.

"We're reinvesting that into the beef industry in the form of new technology, new infrastructure and new ways of doing things," Abraham says. "We hope these will be of benefit to the industry, help it be more profitable and, along the way, make a living for ourselves."

EMerge's parent companies are Safeguard Scientific (NASDAQ: SFE) and Internet Capital Group (NASDAQ: ICGE). Both are deep-pocketed, public firms investing in business-to-business Internet commerce.

These companies are among the "most eminent funding sources in the world today," says Abraham. "Safeguard's average hold time in a company is 10 years. ICG is a new company, but it tends to grow its position; it doesn't flip it."

For the beef industry, that track record suggests that eMerge has more than five years to achieve its objectives, if it needs it.

While eMerge's mission is aggressive, Abraham says, it also is reachable. The reason, he added, is that:

- The $40-billion cattle industry has the magnitude to accommodate such a venture.

- The industry's fragmented structure - 1 million independent producers supplying 700 individual feedyards - would benefit from a company that would "help knit this community a little tighter and find efficiencies as we do that," Abraham says.

- Inefficiencies in moving cattle from cow/calf to feedyard offer potential for adding value. These inefficiencies include opportunities to apply existing electronic technology to process verification, preconditioning, sorting, information and benchmarking analyzes, cattle inventory management, health management, food safety management and quality assurance practices.

"The people who will be our constituents - the producer, feeder and packer - are the ones who provide the most value to the beef product," Abraham says. "But, for us to be a major player and sustain our business long term, we have to add value ourselves. We do this by integrating or providing a linkage between those businesses with electronic information and commerce.

"We're fundamentally altering the beef production chain in a way that creates value in a way the current system is unable to realize. We call this process `value chain integration'," he says.

Live Marketing Was The Focus When eMerge's principals studied the beef industry chain for where it could have the most impact, they settled on the live cattle marketing segment.

"There are a lot of buyers under current market dynamics - approximately 1,000 local markets and 4,000 order buyers - but those buyers don't end up with the cattle," Abraham says. "They tend to be intermediaries.

"And, the vast majority of cattle end up in 700 feedyards. So it's the stockers and feeders who buy the cattle. You don't have true national price discovery until you link the ranchers who are selling and the entities that are buying," he adds.

By striving to become that link with a business model that combined tradition with technology, eMerge sought to become a major player in a short period of time. In the last 18 months, it has launched an aggressive program of acquisitions, purchasing seven order-buying and livestock auction firms, to build a national marketing network.

In total, these markets will allow eMerge to market more than 2.6 million head in the next year. Of this amount, 100,000 head already are individually tracked with hand-held computers and EID eartags at the ranch, feedyard and packing plant.

Information on feedyard performance and carcass qualities on these 100,000 head goes back to cow/calf producers and feeders on a proprietary basis. Producers participating in the EID program can access that information via the Internet through eMerge's CattleInfoNet business network.

The company also has placed 150 computer systems that manage information and benchmark services in feedyards. The computers are tied to eMerge's database, the largest single source of performance information in the cattle industry.

This data flow was made possible when eMerge acquired Professional Cattle Consultants, Weatherford, OK. It's one of the oldest cattle industry data compilers in the nation.

More Expansion Is Expected Although expansion has been rapid, Abraham says the company is far from finished acquiring its critical mass.

"If we look out five years with a goal of marketing 8 million cattle, we're probably looking at partnering or owning 35 to 40 facilities with a volume of at least 150,000 head each," Abraham says. "I would also add, we want to partner with and to license technology as well to build that national network.

"We're not hung up on owning everything. We want to build an open platform with people who want to license technology from us, work with us and build a business model that is consistent with how we want it done," he says.

If such a network does become reality, tomorrow's producers certainly might think more in terms of acquisitions, mergers, Internet and Wall Street than they do today. But, Abraham doesn't believe the nature of the industry will change because of that.

"Beef is the number one protein source for this country," he says. "Its utilization is predictable and reliable, and it's a good, steady business even if it's not the most profitable industry in the world."

In the last 18 months, eMerge has launched an aggressive program of acquisitions to build a national marketing network. The list to date includes:

- Eastern Livestock Co. Inc., Louisville, KY, a privately held cattle dealer and marketing company that marketed more than 2 million cattle nationwide in 1999.

- Ed Eden Farms, Okolona, MS, an order-buying business that marketed 150,000 head in 1999.

- Jordan Cattle Auctions, San Saba, Mason and Brownwood, TX, a family-owned business that marketed 180,000 cattle in 1999. Also in 1999, the Jordan family inaugurated a series of premium, process-verification sales that netted up to $60 premiums for participating producers.

- Mountain Plains Video Contract Auction, a subsidiary of Billings Livestock Commission (BLC) Co., Billings, MT. Owner Jack McGuinness, a pioneer in video cattle auctions, sells more than a quarter of BLC's 140,000 annual cattle marketings through video. McGuinness will retain ownership of the main auction market, the state's oldest continuously operated livestock marketing enterprise.

- LeMaster Corp., Gaffney, SC, one of the Southeast's largest order-buying organizations with annual sales of 150,000 head.

- McMahan Order Buying Co., a livestock brokerage based in Austin, TX, which markets more than 200,000 head of cattle annually to large feedyards and stocker operations throughout Texas and the Midwest.

- Robert Thigpen Livestock Co. Inc., Chilton, TX, which markets approximately 250,000 to 300,000 calves and yearlings/year throughout the Southwest.

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Irrigated Pasture Profits

Nebraska family starts custom grazing business.

Teri Edeal and her family turned some heads last summer when they converted 160 acres of newly bought irrigated corn and soybean ground into rotationally grazed pasture. But the Edeals, who expect to net $120/acre from custom grazing in 2000, know they did the right thing.

"I think more people are beginning to recognize the growing demand for pastureland and the reduced risk it can offer over constant fluctuations in commodity prices," says Teri.

Teri, husband Brian, their sons Trent and Travis and Travis' wife, Nikki, farm more than 2,000 acres near Overton, NE. Teri is also a resource conservationist specializing in pasture and rangeland for the Natural Resources Conservation Service.

The family grazed 1,500 stockers and 300 ewes on the irrigated pasture this year. They began renovating the 160-acre parcel shortly after buying it last year. Late last summer, they disked the ground twice, packed it and then seeded 80 pure live seeds/square foot with a no-till drill.

Of the seed, 75% was a combination of five grasses - creeping foxtail, intermediate wheatgrass, tall wheatgrass, Russian wildrye and orchardgrass. The other 25% was dedicated to two legumes - birdsfoot trefoil and alsike clover. To date, the Edeals have made three 40-lb./acre nitrogen applications.

The family carefully selected the species they seeded to complement one another. For example, creeping foxtail matures around May 1. Wheatgrass matures next, followed by orchardgrass and timothy. Selecting grasses and legumes that mature at different rates makes the forage supply more consistent throughout the grazing season, Teri explains. "If you manage the grass, the cattle will take care of themselves," she says.

Intensive Management The pasture is divided into 14 paddocks ranging from 8.5 to 17 acres. Cattle are moved to a fresh paddock every 12 to 36 hours, with cattle grazing on the smaller paddocks for shorter periods. Each paddock is grazed approximately once every 14 days.

After the cattle have been moved out of a paddock, the ewes are moved in to graze leftovers and provide low-cost weed control. A llama, borrowed from a friend, grazes with the ewes for predator control.

"Initially, we wanted to custom-graze the ewes simply for weed control," says Travis, who charges $3/ewe/month. "But we'll pay the taxes on the land this year with what we make from the sheep."

From May to mid-June, the Edeals applied 6.6 in. of water from their center- pivot irrigation system. Through late July, they irrigated less because rainfall had been more plentiful.

With assistance from the University of Nebraska Weather Center in Smithville, they calculated the evapotranspiration rate of the forages. "Every day they're taking about one-third of an inch of water out of the soil that we need to replenish," says Teri.

Adds Travis: "The water needs of the pasture are similar to alfalfa. If you need 4 in. of water to grow a ton of alfalfa, then you need that much to grow the same amount of grass on a dry matter basis, especially if subsoils are depleted."

The Edeals will custom graze three groups of stockers this year. Each group of about 500 head arrives weighing 500-550 lbs. each and leaves around 75 days later. The animals gain an average of almost 2 lbs./head/day and are returned to the owner at an average weight of 700 lbs. The Edeals charge 35›/lb. of gain and are paid monthly.

"I bill monthly for one pound of gain per day per animal and make up the balance when the cattle are shipped," says Travis. "It's nice to have cash flow, which covers irrigation expenses, fertilizer costs, labor, etc., along the way."

He says the family doesn't have trouble finding cattle to custom graze. "After we were set up this year with one customer, who has a 10,000-head feedlot in a nearby town, we got eight more calls from potential customers," says Travis. "We have immediate access to more cattle as we need them."

Information is the only lifeline

Only two things are certain about being atop the renegade mustang that is the beef industry's new value-based economy: the scenery will change fast, and information is the only extra handhold available.

"You can't ever know too much about your cattle," says Paul Hitch, president and chairman of Hitch Enterprises, Guymon, OK, one of this nation's largest cattle-feeding outfits. "Even if you're not retaining ownership, it behooves you to find out about your cattle because I'm going to know what they do. If they don't perform, I won't be back."

And, Hitch has plenty of company. He is also chairman of the board of directors for Consolidated Beef Producers Inc. (CBP), a new cooperative of about 40 Texas, Oklahoma, New Mexico and Kansas feedlots that have already committed 936,500 head to its negotiated-base pricing grids starting next year.

Now, add to CBP's cattle - two-thirds of which represent cattle currently trading in the cash - at least 3.5 million head that traded through grid and branded programs last year. Next, tack on the numbers tossed around by new, silent or expanding value-systems and the number of cattle trading away from the cash markets. The number of cattle that buyers are discovering specific information about could quickly double from the 35% of all fed cattle USDA reported as trading outside cash markets in 1999.

In fact, one Texas Panhandle feedlot manager recently remarked that the transition to value is occurring so rapidly that anyone looking to buy cattle this fall with the notion of selling them in the cash next year had better be buying them way back of the market.

Driving The Value Wedge "I think the industry is in a state of great transition, and Consolidated Beef is just one example of that," explains Hitch.

CBP, like many other value discovery systems, has grown from producer frustration with how the industry values cattle.

"In my mind, the cash market is withering away," says Hitch. "Today, you'll sell 63,000 head of cattle in an hour, and they'll all bring 66›. We all know it's not possible all of those cattle are worth the same money."

Actually, producers are not only fed up with averages. Some are also concerned about current grid-pricing systems that seek to reward and discount cattle based upon true value, but start with a base price that is tied, one way or another, to the cash market price.

"It's apparent to me that the cash trade in live cattle (localized cash prices) has declined for several years now, relative to futures and wholesale beef prices," says Ted Schroeder, a livestock economist at Kansas State University (KSU).

For perspective, he and fellow KSU economist James Mintert found that western Kansas fed steer prices were typically 90-95% of the wholesale value during the early '90s. From 1996 to 1999, however, live animal values generally ranged from 80-90% of wholesale values and even dropped below 80% at one point.

At least in part, Schroeder believes cash market decay stems from the fact that more homogeneous cattle are being traded in value systems, leaving fewer heterogeneous cattle to determine the cash price.

In fact, Clem Ward, professor and Extension economist at Oklahoma State University, believes at some point cash cattle prices will go the way of the dinosaur and the live bird prices the poultry industry once used.

Hedging The Future Even though it comes with its own set of challenges, Ward says, "I've been arguing that we need to go the wholesale market and use it as the center of price discovery." In the meantime, he believes negotiating the base price for grids is a step in the right direction.

With CBP, Hitch explains, "We've told the packers: `We presume the grids you put up accurately reflect the cattle you want and the cattle you don't want. What we want to do is give you the cattle you want and not give you the cattle you don't want. We want to be able to deliver the right cattle to the right plant at the right time.'"

But, CBP also wants to start with a negotiated price. They hope the numbers they bring to market each week will give them the leverage to do that, as well as dilute the added transaction cost that accompanies negotiated pricing.

Of course, switching gears from, "Buy low, sell high and keep the overhead down," to the simple charge, "Know your cattle or go home," is easier said than done.

"We're talking about a very big industry with a lot of players, a lot of vertical segmentation, and it's an immense problem," explains Ward.

Whichever direction the mustang jumps, though, Ward says, "You need to know how your cattle perform because someone else is likely to know what your cattle do, and it gives them a competitive advantage if they know more about your cattle than you do."

Next five years will tell the tale

The next five years will be a "prime determinant of the future of the beef and pork sectors." So says Wayne Purcell of the Virginia Tech Research Institute on Livestock Pricing (

Purcell says that over the next five years, the market will determine how buyers and sellers are able to do business. But, pending legislative proposals that would limit such practices as processors owning livestock will determine how alliances and other non-price coordination will evolve.

Purcell says the changes are coming "in response to a failed pricing system where the inability of public agencies to fix the grades and move us to high-tech descriptions blocked any possibility that the price-driven system would offer the vertical coordination and capacity for quality control so necessary to a consumer-driven marketplace." He adds that alliances and contract arrangements have been critical to the developing industry with its modernized product offerings.

He says some groups do not like the changes. Their reaction is to promote regulation of the marketplace to somehow protect the position of the independent producer.

"I wish the voices had been equally loud in encouraging developments in grades, in high-tech monitoring systems and in adequate budgets for market news so the price-based system would have had a chance to compete. But, the `big is bad' and the anti-corporate sentiments got in the way of the need to think through the issues, and we are where we are in mid 2000 - moving rapidly away from price-driven systems," he says.

A database of DNA fingerprints of bacteria that infect livestock and companion animals is in development. The Texas Veterinary Medical Diagnostic Laboratories (TVMDL) and BarCodes Inc., a Houston biotech company, are cooperating to develop the database that will allow the identification of bacteria with a high level of accuracy and in a fraction of the time of comparable methods.

The database, scheduled for completion in 2002, will be developed from bacterial samples already collected by TVMDL from animals submitted by veterinarians and animal health researchers around the world. Each bacterial substrain has a unique rep-PCR DNA fingerprint, a molecular version of the UPC barcodes used in grocery stores.

CAB goes north of the border. Certified Angus Beef (CAB) LLC, a subsidiary of the American Angus Association, recently licensed plants for both beef harvest and fabrication to produce CAB product in Canada. Licensees in Canada sold 14 million lbs. last year in Canada, ranking second only to Japan in overall sales. Some Canadian foodservice and retail licensees say they could double sales if CAB were processed in Canada. The total Canadian beef herd is about 10% of the U.S. beef herd, and about half of the Canadian herd is Angus or Angus-type.

Some type of mandatory nutrition labeling for beef is on its way. Mary Young, executive director of Nutrition Strategy and Research for the National Cattlemen's Beef Association (NCBA), says the proposed rule is currently being examined by the Office of Management and Budget, but it hasn't yet been published. She says the labeling may be placed on pack or at the point of purchase and would include fat, calories and cholesterol content. The cost to the retail industry is estimated between $45 million and $125 million to implement the mandatory program.

Increasing numbers of farmers and ranchers are doing business over the Internet. More than 600,000 U.S. farms and ranches accessed the Internet in 1999, with 15% conducting e-commerce transactions, new USDA Economic Research Service data indicates. Mitch Morehart (202/694-5581 or [email protected]) reports that of these farms, more than 40% reported purchasing crop inputs online in 1999, while a third reported purchasing livestock inputs, and a quarter reported selling livestock.

A lightning-caused blaze in southern Idaho's Magic Valley claimed 586 head of cattle on one operation alone, while more had to be destroyed later due to injuries sustained in the blaze. More than 20,000 acres were burned in the Aug. 19 fire that consumed an average of one square mile every six minutes. Human injury was avoided, but damages are estimated to be at least $500,000. An account to benefit the affected ranchers has been created at First Security Bank, P.O. Box 388, Gooding, ID 83330.

In addition, the Magic Valley Cattlemen's Association (MVCA) is also finalizing plans for a donation cattle drive later this fall. Interested ranchers will be able to donate heifers or cows to help the affected ranchers rebuild their herds. For additional details, contact MVCA president Bill Lickley at 208/324-7975 or Idaho Cattle Association board member Dan Danos at 208/934-5911.

McDonald's has ordered its egg producers to comply with strict guidelines for humane treatment of hens or be dropped as a supplier. Some think the guidelines could affect management practices industry wide and even the livestock industries. The guidelines specify a minimum space for each hen as well as an end to "debeaking" and the practice of withholding food and water as a way of promoting a hen's productivity. The egg industry has warned that the edict could lead to higher egg prices at retail.