21 March 2007

6 minute read

North America

“I don’t mind paying a premium for good cattle.”

Art Wagner, of National Beef Packing Co. LLC, can say that because he knows the economics. “I make more money on the cattle that grade Choice and higher, than I do on Select, so I have no problem discounting those that are below par. I’d like every animal that walks through my doors to grade Choice or Prime,” says the procurement vice president. “Is that a reality? No, but the more we get, the more premiums we can pay out.”

Major beef packers across the United States say they’re most successful when cattle producers are successful.

“Everything is based on what we can sell our products for, to our customers and eventually the end consumer,” says Steve Van Lannen, Smithfield Beef Group general manager. “What they want, we have to produce. That’s why we give premiums for hitting the targets consumers want.” All packers have value-based grid systems with financial incentives for producing USDA Choice and higher.

“We like to buy what the consumer demands,” says Tyson’s head of procurement, John Gerber. “Typically it’s the highest quality cattle available each week. These would be cattle with a high percentages of Prime, CAB (Certified Angus Beef ®), and Choice, with minimal amounts of yield grade (YG) 4s and 5s and heavy carcasses.”

Even cattle sold on the cash market are evaluated for their ability to fit a premium program, Wagner says.

“If producers have those types of animals, we’re going to be more aggressive in trying to buy them,” he says, “whether it be through a formula, a better basis contract or higher cash bid.” Van Lannen says consistency is the first step, though.

“We try to find as many cattle as possible that fit a specific end-product model, and limit the outliers,” he says

“Producers need to know their data, both performance at the feedlot and genetics,” says Steve Williams, director of cattle procurement for Swift & Company. “We need a consistent product, so either into the feedlot or out, they need to sort cattle.”

In the packing plant, grids sort out the heavies, the lightweights and the poorly marbled. Cattle either earn premiums or take discounts accordingly.

“We recognize the only way we’ll have those kind of animals available is if we pass along some of those incremental revenues to producers,” says Cargill’s Ken Bull, vice president of cattle procurement.

However, producers will only get those rewards if their cattle fit the marketing channel. “If you have an animal that’s not adaptable to a certain grid, you’re not going to be successful in trying to alter that animal to get it there,” Bull says, describing a large, heavily muscled animal with little ability to marble. “Feeding it excessively long to get it into a premium program is not going to work. The premiums we’re able to pay, if that animal would somehow qualify, would not compensate for the lack of efficiency on the feeding side.

“You create an animal that’s a Select, YG 4. It’s missed every target,” he says. Wagner says making value-based marketing work starts with a realistic understanding of your cattle type and their potential on specific grids. “Then you can make whatever modifications in productio

n, management and genetics to reach those goals,” he says. “It’s something that, traditionally, a seller is not going to learn in one set of cattle.”

U.S. ranchers, feedlots and processors are all efficient, Bull says, but communication through the chain could boost that.

“We’re not good at passing the right signals back and forth,” he says. “The only way to do that is to have open-minded producers sit down and have conversations about how to work the supply chain to do what we all need: satisfy the consumer at a higher level.”

Providing consumers with more high-quality products will increase beef demand and, ultimately, industry-wide profitability.

“That’s the only way we can get revenue into the system that we can all share,” he says. It all goes back to the consumer’s desire to eat beef over alternate choices—a desire Gerber says could be negatively affected by the 30-year trend of increasing carcass weights.

“There are a lot of baby boomers out there who go into a restaurant and want a smaller cut of meat,” he says, noting an 8 oz. steak cannot be cooked to the right degree of doneness when its large surface area requires it to be cut too thin. “They have a bad dining experience and the next time they order fish.”Packers admit, bigger carcasses cause problems in their plants as well, especially when quality is lacking.

“High quality cattle are easier to market and are easier to handle also,” Gerber says. “Cattle that are too big, too fat or too old can slow us down, and efficiency is very important in the packing industry.”

Relatively high base prices per pound of beef and historically cheap corn in recent years produced an economy that seemed to favor quantity over quality. Packers say that might be changing. “The incentive is there in the form of premiums to produce cattle that grade Choice and higher,” Williams says. Last year’s Choice-Select spread stayed between $22 and $24 from May to July, he notes. “It was wider, longer than it normally is. Ten years ago the spread would be $3 or $4, but year after year, minus 2003, it’s consistently gotten wider.”

Regardless of what the packer wants, producers have to first make it work on their ranches and in their feedyards.

“The best thing we can do is communicate targets and predict what the values will be for those targets,” says Van Lannen. “Then a producer has to go back, put his pencil to it and figure out the production choices and decisions from there.”

Packers want their preferences to work for ranchers because, after all, individual producers are their key suppliers.

“We are in the business to process cattle, not feed them, so we rely on viable, healthy, progressive cattle feeders to supply our needs.”

Diversity in business philosophy is unavoidable, even healthy for an overall dynamic market. “We all work in competitive environments and, unfortunately, it looks like we are against each other,” Van Lannen says. “The bottom line is, we couldn’t live without the beef producer. We understand that they can’t live without making a profit. They’re in the business to make a profit and we certainly ask that they understand we are, too.”

The commonalities between all sectors of the industry reinforce the idea that everyone can work together to improve U.S. beef.

“The margins in the cattle industry are tough,” Bull says. “At times, in all of our segments, you stand back and wonder why we’re in it. It’s because we all love this industry so much that we want it to do better.”

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