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Making The Grid

Last year, 50 producers from a five-county area near Jackson, selling cattle via a marketing pool through U.S. Premium Beef (USPB) at Dodge City, KS, produced carcasses with 85% Choice or better and 50-55% Yield Grade (YG) 3 ratings, says group organizer Gerry Shinn. Plus, the pool produced 9% Prime carcasses and 22% Certified Angus Beef carcasses, with only 7-8% YG 4s.

Their formula combines artificial insemination (AI), expected progeny differences (EPDs), individual animal ID, and a lot of data sharing.

Logical beginnings

Shinn and son Geoff operate their Performance Blenders feed business near Jackson. Their livelihood focused on hog production until the demise of the area's smaller farrow-to-finish operations gravitated them toward the beef side.

Shinn began talking to producers about retaining ownership of their calves. Above all, he says he wanted to help customers capture performance data to help them make more informed management decisions that would hopefully lead to premium prices.

Shinn made the marketing effort possible with the USPB shares he began buying and leasing in 2002. The shares allow him to send a set number of head to the plant each year. USPB's pricing grids are premium-carcass grids and pay best for carcasses grading better than Choice and YG3.

With the industry consolidating, Shinn knew some area farmer-feeders were beginning to see the writing on the wall. Jackson farmer-feeder Glen Birk was one.

“I kept telling Gerry I needed individual carcass data on my calves,” says Birk, who was feeding his own calves but had just one packer calling. He was sure he had the quality to sell fed cattle by carcass value, but needed data to confirm it.

Shinn's formation of the pool and USPB's willingness to deliver individual animal ID and carcass data gave Birk and others the feedback to better select the genetics needed to fit the grid.

When Shinn went looking for cattle feeders, among his first calls was to University of Missouri Extension livestock specialist Roger Eakins. Eakins already had a group of people producing high-quality calves for the Missouri Show-Me-Select Heifer Sale, many of whom were using AI and timed heat synchronization.

Eakins says the participants were great candidates for the feeding/marketing pool. These were high-quality cow herds able to produce high-quality, consistent offspring. The feedback is what's primary responsible for the marketing pool's success, he says.

Most of the bulls selected initially have been close to the target, though a few had to be discarded. Most of the sires are Angus, with a few Simmental. The cow herds are mostly British-based.

“We've seen more than a $200/head difference from using two sires in some herds, and on cows very genetically similar,” Eakins says.

Eakins reports a $450 spread in some herds, with some bulls producing more than 50% Prime carcasses on multiple cow herds with calves under similar feeding management.

Most successful Performance Blenders feeders select for moderately positive EPD rankings in performance, carcass and maternal traits. It seems to work.

Data provided selection direction

Before Birk began feeding cattle for the USPB grid, he selected bulls on maternal traits, milk production and calving ease, with an eye always to moderation. He also emphasized bulls with relatively strong performance-trait EPDs, especially high yearling weight and moderate frame size.

His data told him to add more marbling, which he did, while keeping an eye on frame size. He aims for a mature frame score of 6 on commercial cows and 6.5 on purebreds. His commercial cows produce the bulk of his Show-Me-Select heifers and feedlot cattle.

As he's amassed more carcass data, Birk has made minor adjustments, but not on cow type. He found many cows that produced good carcasses were good cows anyway.

Birk says he'll “double up” on genetics from high-producing bulls, something he's done in his purebred herd. His commercial herd, however, has been so profitable with current prices that he's retained few heifers.

Jim Wallis, another Performance Blender feeder, uses similar selection standards.

“When I first started feeding, my marbling scores were a little low,” Wallis says. More emphasis on marbling and ribeye area brought him the profits he sought.

He also chooses slightly plus numbers on maternal trait EPDs, but in moderation. The one exception is in choosing calving-ease or light birthweight bulls for his heifers.

Like others in the program, Wallis found some bulls produce poorer carcasses, but the efficacy of timed AI lets him move away quickly from unprofitable genetics.

Above all, the group members put a lot of emphasis on the combination of age and predictability rankings for bulls they use.

“Just because a young bull has good accuracy doesn't prove anything,” Wallis adds. He also examines pedigrees of bulls he uses to see if his preferred “foundation” bulls appear more than once.

Such attention to detail, and openness toward change and technology, has put this group of feeders in a higher-profit zone. Eakins recalls how the system's value was shown when the marketing pool first started.

One producer, who had just sold a load of fed cattle to the nearest packer, was paid a single price for 100% Choice, YG3, he says. After Eakins convinced him to sell a load through Shinn's marketing pool based on actual performance, his next load went 30% Prime and 48% CAB. The net premiums totaled $128/head.

Alan Newport is a freelance writer based in Carnegie, OK.

Feeding counts, too

One more factor appears to help these Missouri cattle feeders produce top-quality carcasses. University of Illinois research shows early weaning and adequate energy intake between 500-700 lbs. helps cattle marble while holding fat cover to a reasonable level.

The Champaign-Urbana researchers say getting calves on a high-energy diet as early as possible is critical. They say the practice has shown to be more important than the calves' genetic merit for marbling. They also found calves fed a low-energy diet after development on a high-energy diet for some period of time may loose the initial marbling and grade poorer.

When Bill Ellis, Southeast Missouri State University cattle operation manager, began placing university calves into Performance Blenders' marketing pool, he found this to be very important.

They got a jump to higher quality grades when they switched to the right bulls, he says. But the first year, even with the same bulls they use today, their calves didn't grade as well as they do now. When they added earlier weaning and supplemented a high-energy ration to their already-good pastures, the calves went from averaging 53% Choice and Yield Grade (YG) 3.34 in 2001 to 82% Choice and YG 2.94 in 2002.

The number of Prime carcasses increased 5-6% that second year, but jumped to 17% and 12%, respectively, the next two years.

One caveat from the Illinois research — heifers showed decreased milk performance when fed a high-energy diet early in life. Thus, heifers intended as replacements shouldn't be fed energy at these levels.

The magic of timing

One wrinkle making artificial insemination (AI) functional for these Missouri cattlemen is new timed synchronization products and techniques. Both heifers and cows achieve high first-service settling rates based strictly on timing, with no heat detection necessary.

All three producers interviewed for these stories use timed synchronization with great success. Jim Wallis, who's used AI for 30 years, says timed synchronization is much easier. And, Southeast Missouri State University's Bill Ellis says student crews settled 62% of cows and 70% of heifers on first service this year using timed protocols.

Call for an explanation

I feel you missed the point in the article, “Keeping Case No. 2 In Perspective,” in the June 24 special issue of BEEF Cow-Calf Weekly. You say: “Now is not the time to use this issue to… try to strengthen or weaken the position of any group within the beef industry.” Having sat through an R-CALF fundraiser highlighted by their so-called “expert” veterinarian, I can tell you unequivocally that now is the time to ask R-CALF, “What now?” and demand some accountability for the fear-mongering they've fostered.

I listened to this person talk of the horrors of death from BSE, the disgusting, debilitating wasting of the brain, the ease of transmission from meat to humans, the infectiousness of the disease — possibly being spread through urine, the substantial risk of death from eating beef from countries with BSE. All this was done in an attempt to further R-CALF's position of a closed Canadian border.

The public needs an explanation from R-CALF on how it plans to undo the damage it's done now that we have a domestic case of BSE.

I sent Leo McDonnell (R-CALF founder and president) an e-mail asking for some accountability. He sent me back an e-mail saying I was the hypocrite along with an article about how the futures markets actually went up on the Monday after the BSE announcement — like R-CALF had something to do with it! The markets are strong despite R-CALF's past rhetoric, not because of it.
Nathan Sanko
Pittsburg, KS

We need less government

With the current tested and retested inconclusive BSE brain sample that is doing its best to resurface, is there any doubt we need less government intervention than ever? If we can test individual cattle like Creekstone Farms wanted to do and send Japan at least some beef and work on agreeing on science and limited testing at a later time, why not?

We can't continue to have preliminary or inconclusive tests announced and completely lose our futures markets and any chance of price protection. If this is how the government handles these situations, what will they do with national ID? A national database must be confidential to prevent calculated bids based on individual numbers of cattle on feed available that would defeat our current pay them what they are worth cattle.

If there was ever a time for cattle producers to unite, this is it. NCBA, R-CALF, and all their members, along with cow-calf producers, feeders, and our packing plants, need to take this unpolled bull by the horns.
Kris Folland
Halma, MN

From Niche To Norm

Price premiums are signals of what markets value. In the beef production business, like other industries, consistent price premiums become incentives to provide the market with animals treated in a particular manner or having a desired set of traits.

In recent years, there's been much discussion about whether preconditioning, for example, adds to the price or value of calves. Extensive university research in the mid-to-late 1990s indicated vaccination programs resulted in ranchers receiving higher average prices than those received by sellers of unvaccinated calves.

Colorado researchers reported premiums as high as $3.89/cwt. for vaccinated calves. An Oklahoma State University study conducted in late 2000 though, found price premiums were received for preconditioned calves weren't enough to cover its added costs.

While many factors influence cattle prices, those influences are often interactive. We hear today from many ranchers that there's no longer a premium market for vaccinated calves — yet most still vaccinate.

Recent University of California research is shedding light on this price conundrum faced by today's cattle rancher found important changes in the calf market since those earlier analyses and, as a result, very different signals for ranchers.

The market majority

“We focused our attention on whether or not price premiums were still received for value-added calves at weaning time,” says Steve Blank, University of California-Davis (UCD) Extension economist. “In the process, we discovered the market has changed in an important way.”

First, none of the value-added programs received a consistent price premium when using only simple average price data that can be observed by ranchers when watching the market. Each program has premiums and discounts in different years, thus no pattern exists.

“It appears the market isn't really paying attention to the value-added characteristic when setting prices,” Blank adds. “But, clearly there's much more to the story.”

Buyers were expressing a preference for preconditioned calves during the 1990s, but few sellers, at first, were aware of this change in demand. Thus, few ranchers were supplying preconditioned animals to the market.

In the case of vaccination and preconditioning, the cattle industry as a whole responded to the market. Early on, the share of calves sold as preconditioned was less than 10%, says Larry Forero, livestock advisor, Shasta/Trinity County Cooperative Extension, University of California (UC). By 2001, that share included a significant amount of calves sold.

“Preconditioned cattle have represented a majority of the market since 2001,” Forero says. “The catalyst is the dynamics of competition — sellers responding to the market.”

Clearly, that message got out to ranchers. Starting in 2001, they were supplying the market with mostly preconditioned calves, says Glenn Nader, UC livestock advisor for Sutter/Yuba/Butte counties. “In other words,” he says, “the market niche became the market norm.”

Now, say the California research collaborators, the higher supply of preconditioned calves has led to the price premium seen earlier being competed away in most years.

“In a competitive market, sellers must supply a product with the characteristics demanded by buyers, or risk selling at a discount, or in a worse case, not being able to sell at all,” Blank says.

The end result is early adopters of value-adding programs may benefit by receiving a price premium. That premium will gradually disappear, however, as more sellers join the market, increasing the supply of product with the desired attribute.

Preserving the niche

Livestock auction operators usually try to standardize the products being offered for sale whenever a buyer preference becomes transparent. In such a case, if cattle sale operators know buyers want only preconditioned calves, showcasing preconditioned cattle might be a way to attract more buyers to the sale.

“Our study did find two characteristics that consistently received a price premium over the data period,” Nader adds. “First, increasing the length of time since weaning boosted average prices.”

For every 30 days in the length of time since weaning, the average price increased about 1.3¢/lb. Cattle producers have responded to the market and are delivering more calves weaned for a longer period. As a result, they're receiving a price premium over the average price received for freshly weaned calves.

Second, calves meeting the requirements of “natural” beef programs received a premium in each of the five years that sales of natural cattle were made in the video auctions. The amount of the price premiums was influenced by other factors such as breed and sale location.

During the UCD research period, the share of sales that were “natural” was zero (0.00%) in 1997-98 — steadily increasing to only 13% by 2003.

“Thus,” Blanks says, “natural beef is still very much a niche.”

The future is here

The future amount of natural beef premiums, if any, will depend upon the competitive response within the cattle market.

“If buyers continue to expand their demand for natural beef, price premiums may exist,” Blank says. “However, as ranchers respond and provide increased supplies of natural beef to the market, the natural niche may become the norm and producers could see premiums competed away.”

The same can be said for premiums granted the weaning niche if it grows to become a larger share of the market.

The irony of the natural niche, Blank notes, is that in the early 1990s beef buyers were moving toward more standard use of preconditioning programs involving more “value-adding” use of medications.

Now buyers are beginning to reflect consumers' preferences for more cattle that are free of rancher interventions. “Natural beef” free of hormones and antibiotics could be considered a move back to the simpler production practices of the past.

“Thus, in a sense,” Blank says, “the cattle industry's future may involve discovering ways to go back to old production methods and finding a way to make them pay.”

Cattle markets are dynamic, so ranchers need to carefully watch price trends to see what characteristics are valued.

“If the premium isn't consistent across years, it may be a false signal that mixes the market effects of more than one pricing factor,” Blank says. “Knowing what is truly being valued by the market can save ranchers time and money.”

Merged, Morphed & Static

There was a time when some in the industry thought alliances — coordination and cooperation between traditionally antagonistic industry segments — would ultimately do everything but fix the fence and cut the calves.

Such folks envisioned alliances as the lynchpins within a vertically coordinated beef industry discovering and retrieving added value in the meat case rather than on the packinghouse rail.

Instead, alliances have generally become what they started out as, no more and no less. They hum steadily along, offering producers additional market access and marketing options, as well as opportunity to gather post-weaning data and insight into what makes the rest of the industry tick.

Along the way, alliances have busted down the doors between segments to make inter-sector communication commonplace rather than novel. They've paved the way for added-value price discovery.

As evidenced by our annual “Alliance Yellow Pages” (inserted in this issue), a few new programs come into the fold each year, while a few established ones go by the wayside. Some merge or become stand-alone supply systems for this brand or that one. A longstanding core group slowly grows or slowly loses numbers.

In sum, Clem Ward, an Oklahoma State University Extension economist and veteran alliance and grid pricing analyst, reckons alliances account for about 15% of the annual fed cattle supply on average year-in and year-out. That's certainly not chump change, but it's not the stuff of revolutions, either.

Inherent limitations continue

Ironically, alliances have become a necessary step toward a potential revolution of vertical coordination, rather than the revolution itself, for the very reasons most began.

First, alliances are designed to aggregate cattle of certain carcass and/or live specifications. But natural variation among cattle, as well as competition for cattle, meant alliances in general broadened their specifications over time, rather than narrowing them, which, in essence, dilutes the value of a given group.

Next, while gaining market access and value-added pricing opportunities are easier for some producers through formal alliances, the pricing grids spawned by alliances are readily available today without participating in a formal alliance. The same goes for gathering carcass data.

“Through alliances, packers — especially the largest ones — got more comfortable talking to the producer. Now they try to do more of it directly rather than go through alliances,” says Jim Norwood, director of procurement for Meyer Natural Angus. He was on the ground floor of managing one of the industries first large alliances.

On the opposite side of the trading fence these days, Norwood explains, “From a buyer standpoint, grids are a tool that can entice sellers and also offer buyers some protection on cattle they have no history with. If you have that kind of protection or history, you don't care what method the seller wants you to use to buy them.”

Plus, Ward points out most alliances today still only involve a couple of industry segments. Consequently, he believes value discovery remains lacking inside and outside of alliances.

“We talk about grid pricing and how it's supposed to communicate economic signals from the producer to the consumer,” Ward explains. “But, there's still quite a disconnect between individual cuts valued in the meat case and the way we value the carcasses producing those cuts.”

Moreover, the market itself dictates participation in alliances. As an example, Norwood explains, “In the past two years when fat cattle got above $80, the number of cattle selling on grids declined.”

Plus, the added days on feed required to make cattle work on a grid, relative to the premiums offered, have encouraged more producers to return to selling in the live cash market. As such, it's remarkable that the total flow of cattle through alliances has actually increased during this period. See “Cattle Economics,” page 11.

Alliance relevance grows

Despite the limitations of alliances, Leann Saunders, vice president of quality services for IMI Global, believes their relevance is increasing.

“Ultimately, it's being driven by branding,” Saunders says. “As retailers have tried to differentiate the meat case, they've branded. To do that, they've had to make a brand claim of the benefits and features that differentiate the product, and doing that has required verification.”

So far, verification has been a by-product of some alliances. However, as demand increases for such things as source and age verification, the opportunity or requirement for providing additional verification will likely increase in and out of alliances.

“Branding today is all about building an emotional connection with the consumer. That requires telling them about things in production agriculture that we in production agriculture may not think about consumers being interested in,” Saunders says.

She explains such information sharing with consumers requires cooperation between industry segments. It's the only way producers can share information with consumers about what happens in each production stage.

In fact, Saunders believes more precise verification of more production processes and product attributes will be the next step in alliance evolution.

“Just saying you're doing something won't cut it anymore,” she says.

Discount low-yielding cattle

And, not cutting it promises to cost producers more in the future. Depending on how you calculate the cost of carcass non-compliance with industry standards, the economic gap grows wider.

Purely on a net grid basis, Ward says neither premiums nor discounts have changed much over time, though specific discounts and premiums contributing to the net fluctuate.

Norwood, on the other hand, believes discounts are growing wider, but not wide enough.

“The biggest problem I see today is that government graders aren't calling the yield grade outliers (YG1 and YG4) like they should,” Norwood says. “The true cost of the lowest yielding cattle isn't getting passed back to producers the way it should. I think there's a fear that if it was there would be too few cattle on the grid.”

Saunders also believes the cost of non-compliance is increasing for the industry. “You're seeing more value-based pricing where the base requirements are being stepped up in the open market,” she explains. “Things will get even more stringent in the future.”

One thing that won't change, according to those cited here, is the need for any producer considering alliance participation to first understand the performance of their own cattle, relative to the targets of the alliance in question.

“Then, you'll either pick an alliance you like and change your cattle to fit the alliance, which comes with a significant investment. Or, you'll find an alliance your cattle fit today or could fit with a reasonable amount of change,” Ward says.

In either case, if change is considered to fit an alliance, Ward cautions, “You have to ask yourself, if you make the changes necessary to fit the alliance, are you truly improving the cattle you're producing?”

Nebraska Grazing Conference set

The 2005 Nebraska Grazing Conference, Aug. 8-9 in Kearney, features presentations by national grazing experts and Nebraska producers.

Set for the Holiday Inn, registration is $90 and includes two lunches, evening banquet and materials. One-day registrations are also available. For more info, contact the Center for Grassland Studies at 402/472-4101, or visit www.grassland.unl.edu.

Don't let Uncle Sam do it for you

My friend, Cal, was a lawyer who counseled hundreds of farm families on legal matters. One of the issues he pushed hardest was the need for a will.

“Here's a typical scenario,” he once told me. “A son has been working with his father on the home farm or ranch for a number of years. It's understood he'll inherit the ranch when the old man dies, but they have nothing on paper.

“At some point, the son's wife asks him what they have if his dad dies. The son tells her he'll get the farm. She points out there's nothing on paper, so legally they have nothing.

“The boy talks to the dad, who asks: ‘What's the matter, don't you trust me?’ The boy assures the dad he trusts him, so the dad says: ‘Oh, you think I'm going to die.’ The boy says, ‘Oh, no, dad… you'll never die.’ He then goes home and climbs the walls. He's trapped. He can't get his dad to put their agreement in writing, so he can't provide his family with any real security.”

No will, what happens?

People get funny ideas about wills. Some think planning what to do about their estate somehow will cause them to die. Others don't know how to divide the assets among their children, so they put it off. Cal said such people would tell him: “They'll figure out how to divide it after I'm gone.” He says nothing could be further from the truth.

Many families have been torn apart by disagreements over who should get what. In addition, such families don't always have much say in what happens with the estate anyway. The government decides for them.

When a person dies “intestate” (without a will), the government in most states appoints a trustee to oversee the allocation of assets. It's expensive and often very unsatisfying for all family members. Cal used to say: “You wouldn't invite your neighbors to divide up your estate after you're gone, so why would you let the government do it?”

Why make a will?

If you died tomorrow, who would take over your ranch? Does your wife have all the information she'll need to deal with the legal and tax obligations she'll face? It can be hard enough under normal circumstances, but when she's grief-stricken, leaving her with an accounting nightmare and no knowledge of the ranch's business dealings is nothing short of cruel.

Is one or more of your children involved in the ranch? Do you have written, legally binding agreements with them? If not, stop reading and do it right now. It's that important.

Feel uncomfortable talking with your family about who should get what when you die? Hire a facilitator. Check the phone book business pages or the Internet for “meeting facilitators” or “family counselors.”

When Elizabeth and I got married, we had five children between us (my three and her two). We talked at length about what should happen with our stuff if we were to die; then we got a lawyer to help us write a will. (Don't write a will on your own. It's too easy to make simple mistakes that nullify it.)

We've updated the will three times in the past 15 years as our estate changed. We'll continue to update it as needed.

We believe it's important, and Cal would agree. He once told me of a couple who wrote their will when their oldest daughter was a baby. They left everything to her at that time.

They later had a son, who worked with his father for 20 years with the understanding he would own the farm when the dad died. They had no written agreement. When the parents died, the daughter got the farm because they'd never updated their will.

Don't you be like that!

Edmonton-based Noel McNaughton lectures to groups on “Farming/Ranching at Midlife — Strategies for a Successful Second Age.” To learn more, call 780/432-5492, e-mail [email protected], or visit www.midlife-men.com.

Book Corner

“New Concepts Of Cattle Growth” available again

The classic, out-of-print book, “New Concepts of Cattle Growth,” by Berg and Butterfield, is now available free online at Internet First University Press: http://dspace.library.cornell.edu/handle/1813/1008?mode=full. A print-on-demand version can be ordered for $17.27, plus shipping.

The book's concepts on growth and development of cattle are as new now to most cattle producers, and even to many animal scientists, as they were when it was first published in 1976. The book is an essential component of the reference collections of agricultural scientists and livestock farmers who rely on data to make decisions about the value of animals for meat.

Reproductive strategies workshop

The North Central Region Bovine Reproduction Task Force will host intensive workshops on reproductive strategies for beef cattle this fall.

“Applied Reproductive Strategies in Beef Cattle” is intended for those interested in beef cattle reproduction and estrous synchronization (ES), including producers, veterinarians, AI technicians and Extension specialists. Workshops are planned Oct. 27-28 in Reno, NV; Nov. 1-2 in Lexington, KY; and Nov. 12-13 in College Station, TX. Each location also will feature a trade show.

The workshops are designed to improve understanding of the physiological processes of the estrous cycle, currently available procedures to synchronize estrus and ovulation, and the proper application of these systems. Sessions also will focus on improving understanding of methods to assess male fertility and of its effects on AI program success.

For info and links to all three meetings, visit http://westcentral.unl.edu/beefrepro/, or contact Ron Torell on the Nevada meeting at 775/738-1721, John Hall at 540/231-9153 for the Kentucky meeting, or Gary Williams at 361/358-6390 for the Texas meeting. The North Central Region Bovine Reproduction Task Force includes members at land-grant universities in Illinois, Iowa, Kansas, Minnesota, Missouri, Nebraska and South Dakota.

Shrink and GROW

Live with the proverbial two-ton gorilla in the closet long enough and he starts to blend into the scenery, even though his every flinch and breath alters your life. So it goes with industry consolidation and concentration.

Sure, there's still the odd headline or study directed at industry consolidation (the number of players in a segment) and its stepbrother — concentration (how big the players are relative to the market and competition). More often than not, however, the focus is on the by-product of these realities, such as the move toward grids and formulas, the opportunity to brand beef in volume, or increased development of heat-and-eat beef products.

But, it's the gorilla that is doing the rearranging.

If you go by the most recent agricultural census, there were 796,436 U.S. beef operations in 2002. That's 11% fewer than the census before it (1997), 22% less than the one in 1974, and so on. That's attrition, but it's consolidation, too.

From 1997-2002, the number of operations with 100-199 beef cows increased 5%, those with 200-499 cows increased 8%, and 500- to 999-head operations increased 1%. Just as significant, considering that half the nation's cow herd exists in herds of 100 head or less, is that the number of herds with 1-9 head decreased 18%, those with 10-19 head decreased 14%, herds of 20-49 head fell 9% and herds with 50-99 head slipped 4%.

Fewer cows, more beef

Even with 20% fewer cows in 2003-2004 than in the peak inventory years of the early 1970s, the industry churned out record beef supplies — a testament to the efficiency of U.S. producers.

And, if it weren't for the Consumer Beef Demand Index increasing a heady 25% from 1998-2004, even fewer would be needed. If it weren't for the meager annual population growth in this country (assuming current demand), or the potential for increased beef demand globally — the U.N. Food and Agriculture Organization predicts a 22% increase in global beef production by 2015 — the nation's cow herd today would already likely be the largest producers would ever see in their lifetimes.

Bear in mind, too, that, between pressures on public lands ranchers and international beef export policies that could shrink packer presence in the Northwest and Northeast, regional consolidation of the national herd is expected to continue — more to the center of the nation. Cattle-Fax says that 50% of the nation's beef cows in 2004 were in the Central Plains and that number would expand; 25% were in the Southeast.

The customers to whom commercial producers sell are dwindling even faster. Already, the 25 largest cattle feeding firms account for 40% of cattle fed annually, Cattle-Fax says. And, the merger between ContiBeef, LLC and MF Cattle Feeding, Inc. (owned by Smithfield Farms) in January serves as a crystalline reminder of the speed and degree at which consolidation and concentration can occur in this sector.

ContiBeef was the second largest cattle feeder in the nation, while Smithfield, which wasn't even in cattle feeding until last fall, was the third largest. The new venture's combined one-time feeding capacity of 811,000 head clearly makes it the largest cattle feeding organization in the world — 62% larger than Cactus Feeders (500,000-head, one-time capacity), the longtime leader.

By 2006, the 25 largest yards are expected to account for 45-50%, Cattle-Fax says.

As consolidation and concentration increase in this sector, cattle feeders are selling to four packers that account for 84% of all U.S. fed beef. The four largest firms harvested 70.4% of all fed steers and heifers in 1989, according to the Grain Inspection, Packers and Stockyards Administration.

The border effect

In fact, ongoing trade disruptions caused by BSE already may have set the stage for accelerated packer consolidation and concentration. U.S. packers were already facing historically tight cattle numbers relative to demand before the Canadian border was closed to live cattle trade, snatching away the imports domestic packers relied on to operate at or near capacity. Now, expanding harvest capacity in Canada jeopardizes prospects of regaining this supply, meaning some U.S. packing capacity might be idled permanently.

Earlier this year, Randy Blach, Cattle-Fax executive vice president, estimated that Canada will have the packing capacity to harvest 90,000-95,000 head of cattle/week late this summer. They only need to be able to harvest 100,000 head/week to be self-sufficient.

So, consolidation and concentration become their own self-fulfilling prophecy.

Nowhere is that more visible than at retail, where the 10 largest retailers accounted for 55.1% of all 2004 U.S. food sales, Cattle-Fax says. The 20 largest accounted for 64.7%, up from 52% in 2002. Here again, consolidation and concentration are expected to continue.

Wal-Mart's the driver

That's not news. Nor is it news that much of the concentration has been driven by Wal-Mart Supercenters, now the largest food retailer in the U.S. and growing. The retail behemoth accounted for $103 billion in total grocery sales in 2003, out of total supermarket grocery sales of $432.8 billion, according to the Food Marketing Institute (FMI). Based on sales, Wal-Mart was 92% larger than Krogers, its closest competitor.

From a format standpoint, supercenters — defined by FMI as stores averaging more than 170,000 sq. ft. of space and devoting up to 40% of the space to grocery items — have led the charge.

What is an emerging story, however, is how the retailing industry is responding to Wal-Mart's procurement clout and ability to beat everyone else on price. Paradoxically, some retailers, especially those not playing the supercenter game, are fragmenting their beef offering to consumers in a kind of back-to-basics approach focused on quality and service. It seems to be working.

In March, FMI reported that, for the 2003-2004 fiscal year, smaller food retailers — those with less than $100 million in annual sales — posted the highest net profits (1.45%) and return on equity (20.38%) in six years.

“This is a tough, competitive market. Companies are squeezed by fierce competition and continued double-digit increases in the cost of health benefits, a major expense for an industry as labor intensive as ours,” explains Tim Hammonds, FMI president and CEO.

“Most encouraging, however, is many retailers are finding solutions,” Hammonds continues. “Supermarkets are continuing to find ways to operate more efficiently… The top performers are investing in technology, consumer service and new products that should sustain growth for years to come.”

More cattle needed?

In the meantime, Blach points out America's 0.75% annual population growth means that if current consumer beef demand is sustained — about 67 lbs./capita annually — U.S. producers will need to churn out another 3 billion lbs. of beef by 2015. Cowboy math says on a carcass basis of 800 lbs., that's equivalent to 3.75 million head.

Factor in a national average weaned calf crop/cow exposed of 80% or so, then consider the number of heifers that must be retained just to maintain the national factory's current size, and you're talking the need to increase the beef cow herd by 10%.

What's more, Blach underscores the value stronger beef demand has had to the industry. Since reversing the demand curve beginning in 1998, Blach says, “We've increased the wholesale value of beef more than 30%. That's equivalent to every man, woman and child in this country spending $70 more for beef annually.”

Is this newfound wealth the result of consolidation or concentration? No, but by the same token, most would be hard-pressed to argue that the industry's response to them hindered rather than helped it identify consumer concerns about beef, then improve the eating experience collectively and consistently.

Undoubtedly, folks will continue to debate the merits of consolidation and concentration as ardently in the next 20 years as in the past decade, or for that matter, since the early 1900s when five companies dominated the beef packing business. But thriving and surviving will continue to demand keeping an eye on these twin forces as much as the changes wrought by them.

Develop a portfolio on your cattle

In recent discussions with veterinarians and beef producers across the U.S., all agree it's a great time to be in the beef business. Despite the recent BSE case and a mostly closed export market, demand for beef is high and cattle prices are excellent.

So, is this a new era in beef production where we'll never see 500-lb. feeder steers trading for less than $80/cwt.? No one I talk with thinks this is the case. Maybe everyone remembers the wild predictions of corn “never going below $3/bu.” made back in 1996 when corn hit $5/bu. While everyone expects feeder calf prices to be excellent this fall, most see prices declining over the next five years.

Important herd tools

BEEF “Market Advisor” columnist, Harlan Hughes, advises readers to know their herd's unit cost of production (UCOP). This is a powerful tool if you're truly in the beef business.

Another important “must-have” is a portfolio on your cattle. Do you know the health status of your cattle once they leave your farm?

The fact is maybe your cattle are a source of angst for feedlot cowboys. Many studies show health has the highest correlation to profit in the feedlot. Healthy cattle grow and grade while sick cattle stall and become Standards.

What about growth rate and carcass quality; how do your cattle compare? Are your cattle the type that make a profit for the feeder and find tremendous acceptance with the consumer? Unfortunately, the answer of most producers to most or all of these questions is, “I don't know.”

While record-high prices over the past years have helped many operations pay off debt and add to family living, it's done nothing to build a portfolio on our cattle. It's hard to turn down a profit of $200/cow or more when selling calves at weaning, but now's the time to build this portfolio so when high calf prices retreat, your calves can command the price they deserve.

Building a portfolio

The easiest way to build a portfolio is to retain ownership of your calves through the feedlot phase. With today's calf prices at such high levels, however, retaining ownership on 100% of your calf crop — if you've never done it before — would be a huge risk. Cash flow would also be a huge concern if you normally sell calves before the end of the year.

But what about retaining ownership on a portion of your calves? If you have 200 cows and retain ownership on 20 head, that's only 10% of your calf crop. Many states have state-sponsored programs to make this a very easy option.

Our Indiana program has been a tremendous educational experience for participants. We now have herds that retain ownership of all their calves so they capture more of the value of their health and genetic programs. Other owners found they had health or genetic concerns that limited their profitability. Most found solutions to their weaknesses, and are now realizing more profit and selling a better product because they built a portfolio on their cattle.

Another option is to ask for health, growth and carcass data from your feedlot. This isn't a huge challenge if all your calves go to one lot, but that rarely happens. However, even the health, growth and carcass data on just a percentage of your cattle will help build your portfolio.

As the price of cattle decreases, the gap between high-dollar cattle (high health status, excellent growth, top quality carcass) and commodity cattle will widen. Now is the time to develop a portfolio on your cattle. If over the next 3-5 years you fail to build this portfolio, you will likely be selling commodity cattle for a much lower price than you deserve to receive.

W. Mark Hilton, DVM, is a clinical assistant professor of beef production medicine at Purdue University in West Lafayette, IN.