IN THIS ISSUE...

• Agritourism Part 1

• Alliance Survival

• Bulls in Transition

• World According To Hooter

• Just 5 Questions

• Land Rush

• TRAILS
• RIDING THE GAP

Over the next 10 years, the five largest U.S. beef packers will account for at least 90% of all fed steer and heifer slaughter.

Bill Helming, noted agribusiness consultant and economist made both of those predictions at the recent ID Info Expo hosted by the National Institute of Animal Agriculture. He was offering his perspective on beef industry evolution.

However, these same expectations go a long way in explaining why beef industry Alliances—vertical cooperation between industry segments—will likely increase during the same period of time.

Simple Idea—Hard Reality
The notion of alliances goes back at least three decades, but it wasn’t until the desperation wrought by perennial declines in consumer beef demand that the industry began employing them in earnest about a decade ago.

Though alliances also went hand-in-glove with the idea of branded beef programs, the basic and logical belief early on seemed to be if you could identify and aggregate more numbers of cattle that performed more similarly on the supper table, then they had more value to the consumer.
Managing more cattle capable of similar performance also yielded cattle feeding and harvesting efficiencies along the way. Furthermore, segments working more closely together should be able to make more by sharing the rewards made possible through the efficiencies spawned by such cooperation.

This idea was driven home by the industry’s first National Beef Quality Audit in 1991 which pointed out where the industry was losing the most money in terms of carcass attributes—marbling, bruising, injection site blemishes and the like. That first audit was quickly followed by the Strategic Alliances Field Study in 1993. This study pointed out what was possible when industry segments worked more closely together to reduce deficiencies and to increase attributes consumers were willing to pay more for.

“A more coordinated beef production system is in line with the National Cattlemen’s Association and its endorsement of a more Total Quality Management system suggested by the Strategic Alliances Field Study,” explained members of the Western Extension Marketing Committee in 1995. “This study centers on bringing various production segments together in a partnership so the reward for optimizing production is shared equally by all segments…studies show that non-conformance between segments hindered the beef industry from competing more effectively at the retail counter with pork and poultry.” The article, The Role of Cooperative Extension in the Changing Meat Industry appeared in the August Journal of Extension that year.

Growing Up to Grow Down
Subsequently, alliances began coming into their own. By 2001, the Alliance Yellow Pages published by BEEF Magazine included 36 different alliances with ties from production to harvest—typically from the feedlot forward.

Today, alliances are so ubiquitous—especially the value-based grids related to them—that they blend into the industry background to the point that they’re rarely regarded as a novelty if they’re regarded at all.

Ironically, that’s true despite the fact that alliances appear to be undergoing the same concentration and consolidation as the rest of the industry.

In BEEF Magazine’s 2007 Alliance Yellow Pages, 27 alliances were listed. Perhaps most telling, of the 15 alliances cited in the report in both 2000 and 2007, and reporting numbers for both years, 11 of them accounted for 63.7% of all cattle reported in 2000 (957,980 head). That same 11 accounted for 85.7% of the 1.8 million head reported this year.

Apparently, a handful began with a specific enough target and robust enough business model to sustain existence and growth, while others limited themselves or became limited by changes in the marketplace.

Arguably, few have come close to achieving the Alliance dream with mainstream volume. Simply put, that dream is a closed-loop system of vertical cooperation, by which product in the meat case is the result of inter-segment cooperation and common management goals, beginning with the genetics, ending with sale to the retailer or consumer, and then sharing added rewards between the cooperating segments.

U.S. Premium Beef (USPB) is one that has come as close as anyone. Last year they harvested 646,000 head of cattle through National Beef, which is owned by its members. These members—cow-calf producers and feedlots—shared in the rewards resulting in the sale of fed cattle and subsequent added value gained at wholesale. With its business model, USPB members own shares in the company and also earn dividends based on those shares.

Certified Angus Beef accounts for more numbers, but it isn’t an alliance, per se. Rather, it is the most successful branded beef program in history, which utilizes alliances to secure some of its supply.

As well, some alliance systems aimed at niche markets have not only succeeded, they’ve helped spur the growth of entire market categories such as natural beef.

Alliance Challenges Linger
For the successes, though, there will always be some basic challenges to the alliance concept in an industry as complex, independent, diverse and equity-intense as the cattle and beef industry.
For example, generating value-added rewards depends on having a consistent market—specifically or in terms of a market category—and consistently providing cattle that consistently comply with the specifications of that target.

Participating in alliances typically comes at a cost directly and or indirectly. That means potential participants have to see the opportunity to net more dollars in an alliance than marketing another way. There’s not much loyalty if someone else is paying a nickel more.

Moreover, since value-added cattle typically cost more, a premium is only possible if a relatively high percentage of the individual carcass—and the carcasses overall—can be used in the value-added market. Cattle that don’t comply with targets are costly in the open market, but their cost is magnified in value-added ones.

And that’s a short, over-simplified list.

Consequently, there have been some audacious attempts at creating dream alliance systems that have ended as spectacular flops.

Driving the Need Now
What may set the stage for accelerated use of alliances at this stage of industry evolution is that economics are driving closer alignment between industry segments differently than before.
For one thing, both the cattle feeding and packing industries have too much capacity for the cattle inventory today and the likely one in the future.

According to Helming, cattle feeding pen space has increased by at least 25% since 1990, while beef packing capacity has increased at least 20% during the same period.

Even back in 1995, those folks from the Western Extension Marketing Committee noted, “Increases in concentration for beef packing and feeding have caused more integration and coordination between these two market segments. As processors’ plants grow larger, more pressure is placed on packers to keep these plants near capacity to keep operating costs per head low. This has forced processors to search for methods to ensure future supplies of cattle to slaughter, especially during periods when cattle supplies are anticipated to be tight. These processors appear to be turning more to contracts and marketing agreements with feedlots resulting in more coordination than has existed in the past.”

Since then, continued consolidation and concentration among beef retailers has driven packers to offer more volume of the branded products these retailers are using to differentiate themselves. All of this while cattle numbers are declining.

At the same time, Helming pointed out there are fewer people willing to own feeder cattle than in the past, meaning cattle feeding organizations must own a higher percentage of the cattle themselves. So, both their equity requirement and financial risk have increased. Securing markets and market prices are a means of reducing both.

“Supply, pricing grids, value-added and branded beef agreements—partnerships—and vertical alliances will accelerate between relatively large cattle feeding and beef packing companies,” believes Helming.

So, where alliances first strove to survive, they may now become a lynchpin for the industry to do the same.

In other words, alliances will continue to offer producers added opportunities, but exploiting those opportunities or leaving them lie requires careful consideration.

Back in 1999, Don Schiefelbein, then executive director of the American Gelbvieh Association—now part of his family’s seedstock, commercial cattle and farming operation—advised, “If I’m a cow/calf producer, I’m making sure I’m doing everything right at home before I worry about alliances. Once I’m sure I have the right breed combinations that are doing what I need at home, then I evaluate the alliances and determine which one offers me the most value for the least risk.”

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