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FMD Update No. 13 (Week 26 of Outbreak)


Picking A Winner

In just six years, the list of beef production and marketing alliances has risen to more than 40 programs. Each year, some come and some go. But, which programs have the best odds of survival and how do you pick the programs that are best for your production system?

The listings included in this insert number more than 40, and a review will illustrate that there's an alliance to fit nearly any production and management environment.

Cattle-Fax estimates that 15% of the cattle in the U.S. are now marketed through some sort of alliance or integrated program. In addition, more than 50% of fed cattle are marketed on a contract, grid or formula structure.

Spurring this growth is the evolution of the nation's beef industry into two distinct systems. The traditional commodity beef system in which cattle are traded based on average pricing is being replaced by value-based marketing. In this latter system, the value of cattle is determined by their performance against a set of quality specifications.

Livestock economist Harlan Hughes, Mankato, MN, emphasizes that as value-based beef producers shop for a program to become allied with, they need to proceed with care. Not all value-based programs are equal, and not all will survive.

Thus, the natural reaction might be to hang tight and let the inevitable shakeout occur. But, take a little over-the-fence advice from some cattle marketing experts if you want to join in the value-based beef production game, don't wait until the players sort themselves out. On the other hand, don't panic and jump in blind the train is not going to leave you at the station just yet.

Sorting Out The Differences

With the move toward objective marketing, it is critical that the value differences between cattle are identified. The successful alliance will focus on measuring and compensating for value.

First, though, we'll need better tools and technology in place to measure things like red meat yield and tenderness, says Randy Blach of Denver-based Cattle-Fax. We'll keep our present grading systems, but we'll lay some objective measurements over the top of them that will give us a better idea of the true value of each animal.

The best situation is one in which producers get a significant share of the premium pool associated with high-quality cattle, says Wayne Purcell, a Virginia Tech livestock economist. There are vertical alliances that are offering a share in those premiums.

Once a pricing structure is in place, there is a need to help reduce the risk inherent in the cattle business.

An alliance will succeed if it provides adequate risk management tools, Blach, the head of Cattle-Fax says.

It's going to be critical to learn what the risk management tools are and integrate them into your alliance, he says.

Cattle feeder and marketing guru Harry Knobbe, West Point, NE, agrees that risk management is a big part of a good alliance.

A good alliance will work with people who know how the markets move and can take advantage of the highs and lows, he says. But even more, the good alliance will offer a producer a means to be part of something bigger than you are.

The trade-off might be the loss of some independence, says Knobbe. A rancher or feeder might have to follow some kind of production protocol and depend on someone else to do part or all of your marketing.

Setting The Specs

Most alliances have preset quality specifications. The challenge for today's value-based beef producers is to match their herd's genetic characteristics to a specific value-based marketing program, says Hughes.

Harlan Ritchie, professor of animal science at Michigan State University, adds that most alliances and programs generating higher-end beef will tend to migrate in the direction of ¾ British breeding and ¼ Continental breeding. Some alliances will look at the feed conversion and cost of gain advantages associated with half-and-half British and Continental breeding.

These breed combinations will hit the targets of most programs and alliances, Ritchie says.

Before you get too deep into an alliance, take whatever steps to find out where your cattle fit, advises Bob Kropp, Oklahoma State University's beef cattle management specialist. He's seen time and again how important it is to first get good performance and production data.

Then use that information to find an alliance that will work for your cattle, Kropp says.

No one grid, contract agreement or alliance will fit every producer's resource base and opportunities, Purcell adds.

The alliances will recognize geographical and other influences on genetic mixes, he says. Purcell adds that individual identification and feedback is essential and will continue to be an important part of a successful alliance.

A Better Way

The bottom line for cow/calf producers is that there has got to be a better way of doing business, Blach says.

If you produce average cattle, you break even that's the definition of a commodity market, he explains. The reward, says Blach, will be price differentials between commodity and branded beef.

We're going to see an increasing amount of beef sold under branded names. In five years, one-third of beef sold will be sold under a brand name, Blach says.

Blach lists some basic characteristics of alliances that will be successful:

  • Vision Short- and long-term objectives must have clear-cut motivations and objectives.

  • Flexibility They have a plan but are willing to adjust to the cattle cycle and changes in beef demand.

  • Leadership Strong leaders with a stable well-trained staff will be critical.

  • Capital Financial stability is a key to making sure the alliance is not going to be run on a shoestring.

  • Communication The successful alliance will work closely with the producer and share information.

We are going see a number of these alliances evolve. There will be several that will make it, and make it very well, Blach says.

The Keys To Success

Successful alliances will:

  • Focus on the middle of the road cattle.

  • Communicate effectively with all partners.

  • Have strong quality control specs and procedures.

  • Provide adequate incentives to hit alliance targets.

  • Will provide risk management tools and profit sharing.


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