The Next Step
Beef, Aug 1, 2001
Wes Ishmael

Just as some producers are growing more comfortable with the notion of coordinated production and marketing, that dynamic beast known as the alliance is changing its spots. And it is supposed to.

“The alliance should always have been viewed as a means to an end rather than the end in itself,” says Clem Ward, a professor and Extension economist at Oklahoma State University.

But, ever since alliances began peering over the industry horizon in earnest about six years ago, plenty of folks viewed them as the end, rather than one more stepping stone toward the consumer.

“Most all beef alliances started out trying to group numbers of similar cattle together, believing that had more value to the packer,” says Trent Loos of Loos Cattle Co., Norris, SD, a sixth-generation producer. “They all started with the packer as the market. But the ones that survive will be the ones focused on the end user as the market. Any alliance that isn't based solely on consumer desires is not an alliance.”

Loos speaks from his experience on the pork side. In 1993 he coordinated a cooperative of independent hog producers, including himself, that used similar genetics and management to churn out a consistent product. Collectively, they felt like the 200,000 hogs they could offer each year would serve up market leverage. Like virtually every other pork producer cooperative, it failed.

Loos explains the primary reason producer cooperatives, like theirs, lost the battle was the reluctance of the producers involved to sacrifice any control in making decisions. A single person at a vertically integrated behemoth like Tyson or Smithfield Farms could decide how a large population of hogs would be built and managed in order to satisfy specific consumer desires. But, Loos says, cooperative producers wanted to maintain complete control of their supply contribution.

Ironically, the fear of corporate entities telling producers what to raise and how is one reason Ward says beef producers are growing more comfortable with the concept of coordinated production and marketing.

“It seems to me there was a lot of fear that alliances would lead to vertical integration like in the poultry and pork industries. Now, people can see that isn't going happen,” he explains.

That's not saying producers are falling over each other in a race for alliances. There's a growing recognition, however, that the cost of amassing the land and cattle necessary to supply even a small branded beef system means that vertical coordination rather than owned integration will likely be the rule of thumb in the beef business.

However, as the alliance concept evolves in the cattle business, Loos explains volume and product consistency will continue to be the drivers.

“This is not a packer-driven situation, it's retail-driven,” says Loos. “There are 20 grocery store chains in this nation today that own 52 percent of the market share, and they have increased in size because it increases their purchasing ability.”

Retailers know that with size, they can demand products customized to their customer and offer them at prices competitive with generic commodity products. They're using size and brands to carve out more market share.

Consequently, Harlan Ritchie, a distinguished professor of animal science at Michigan State University, explains, “Even to serve a mid-sized retailer, you need a significant supply chain. You must have a packer participating in the production group and the retailer.”

Today, the beef industry is witnessing the birth of comprehensive gene-to-retail supply chain systems such as Future Beef Operations and Rancher's Renaissance. Rather than aggregate similar kinds of cattle and then market those cattle to a number of different brands, these systems are formally aligned with seedstock and commercial producers, stockers, feedlots, packers and retailers. They channel production and management toward specific consumers with specific brands.

Ritchie says the components in these emerging vertically coordinated systems are essentially the same as in traditional alliances.

“The fundamentals are the same — the common objectives, establishing information flow throughout the chain, putting incentives in place to encourage producer participation,” he explains. “But as we get into them, I don't think we realize how challenging they are, especially when you're dealing with a biological, perishable product like beef.”

That's an argument producers often cite in dismissing the idea that the beef industry — in which production occurs in diverse, uncontrolled environments — could ever mimic the pork and poultry industries where the production environment is manufactured to be the same, wherever it exists.

“Producers say that kind of system can never exist in the beef industry because you can't confine the animals. Well, you don't confine the animals, you confine the revenue supply,” says Loos.

More specifically, alone and in partnership, rather than confine animals, Loos says the pork and poultry industries figured out how to harness the capital beneath a single production and marketing umbrella. This allowed them to fuel growth whether the commodity market was up or down.

“I can remember going to pork producer meetings in 1988 and talking about how we had to band together or wind up like the poultry industry,” says Loos. “Today, I hear those same arguments from beef producers.”

For instance, Loos says pork producers wondered where all the true-blue stockmen would come from if the independents fell by the wayside. In reality, the pork industry has taken folks who didn't know a pig from a porcupine and trained them to be some of the top managers in the business.

“My challenge to the beef industry is to see all of this and to give up some of the decision making power they have so they can sustain themselves in the future,” says Loos. He believes that within five years the beef industry will see landowners and labor suppliers emerge as contract entities for folks providing the revenue.

Loos says that in five years there will be players, who the industry has not even heard of today, who will constitute a major force in the U.S. beef business. “These are not animal husbandry people. They will be money people,” Loos predicts.

Moreover, Loos believes sustaining a beef operation will revolve around fitting into a system based on profitability, period. “You have to look at it and decide what you can do that will guarantee a certain percentage of profit over a certain period of time,” says Loos.

Actually, that notion is what helped transform one small, independent pork producer into one of the largest in the nation.

“They focused on profits rather than premiums,” says Loos. “They didn't care whether they got paid $10/cwt. or $70/cwt. as long as they could be guaranteed a profit every year that they could take to the bank.”

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