The Cattle Business -- Beef Alliances

Livestock Update, June 1998

Bill McKinnon, Animal and Poultry Sciences, Virginia Tech

The buzzword in the beef industry these days is "alliance." If the term alliance is news to you, it is time to pull your head out of the sand. In the spring, 1998 issue of Beef magazine, a list of thirty-one various beef alliances was presented. There are several alliances that were not included in the list and new ones forming each month.

An alliance may be described as a marketing and/production agreement between two or more sectors of the beef industry. It is most often thought of as a form of vertical integration. An alliance might just be between two sectors of the industry. An agreement that stipulates that a seedstock bull producer will buy back his commercial bull customer's calves at an agreed upon price level is such an alliance. A more comprehensive alliance agreement might call for a feedlot operator to buy a commercial cow/calf operator's calves at a set price and provide him with feedlot and carcass performance data if the cow/calf operator uses a prescribed vaccination program and uses only bulls from designated breeders. The feedlot may then have an agreement with a packer to provide cattle of a targeted description, fed vitamin E to enhance shelf life which are sold on a grid formula. The packer might then agree to provide carcass data back to the feedlot, while selling the beef to a chain store under some brand name. The possible arrangements are nearly limitless.

There seem to be several factors nudging the industry toward alliances. The following is a partial list of some of those driving forces.

1. The creation of branded products will be an effort enhance customer loyalty and target advertising by providing beef products with established specifications. Joe Gordon, a meat consultant with Sparks Companies, estimates that roughly half of the beef sold in the year 2005 will be branded.

2. Closely related to the branded product issue is the attempt to improve the consistency of beef products at the retail level. The industry is keenly aware of the lost in market share as a result of beef's inconsistency.

3. The transfer of information up and down the production chain is improved when the industry segments are in business with each other. Types of information transfer might include genetic makeup, animal health history, feedlot performance, carcass data, shelf life, customer satisfaction surveys, etc.

4. Source verification of the beef product all the way back down the production chain is becoming increasing important to the retailer. For instance, if a restaurant beef product is identified as the source of a food borne illness, that retailer wants to be able to immediately identify the source of the problem.

5. The industry's frustration of selling finished cattle "on the average" and the desire on the part of producers of better cattle to market their cattle on a value-based system is also a factor. Some producers see alliances as a means of payment for superior cattle.

6. Alliances will also strive to do a better job of matching supply with demand. Matching product type and volume with shifts in seasonal product demand by consumers should improve the overall efficiency.

7. The alliance concept is also driven by seedstock producers who wish to establish long term demand for their breeding programs.

8. The whole beef industry chain, from consumer to seedstock breeder, would like to avoid extreme volatility in supplies and prices. Over time volatility in production and price levels should be leveled out through alliance formation.

Talk of the alliance concept sparks apprehension in many corners of our current beef industry. The beef industry has become accustomed to the adversarial relationship that exists between the different sectors of the production/marketing chain. It is human nature to be suspicious of change, especially when the long term implications are uncertain. The notion of giving up some independence as a producer is abhorrent to an industry of which independence has been part of the romance. The continued belief that a cow/calf producer in Texas or Missouri knows what a consumer in New York or Los Angeles wants has cost the beef industry market share to other protein alternatives.

The industry seems to be in the formative stages on many new alliances. Some alliance arrangements will survive and prosper for all parties involved. Many more alliances will fail from the lack of volume, the failure to provide the customer with value, the inequitable distribution of rewards to the various parties, the lack of a sound business plan or many other reasons. To ultimately successful, an alliance arrangement must transfer consumer dollars back to alliance partners based upon the relative value each segment added to the product.

Dr. Harlan Hughes of Michigan State and others have identified four product lines that seem to be able to match cattle type, production methods, and customer demand. The first and largest market would seem to be the chain store product that will provide the customer a blend of quality, cutability and tenderness at a median price level. Several alliances already target this market with calf-feds, producing beef grading middle Select to low Choice with above average cutability. This production route would seem to be able to utilize both the continental and British breeds of cattle blended to enhance productivity. The second largest market target will be the high quality market to serve the upscale grocery chain and the hotel and restaurant trade. This product will most likely be in the upper 2/3 of Choice or Prime with cutability and cost per pound being of secondary importance. The British breeds of cattle will provide the lion’s share of genetics to the quality market. A third and much smaller market will be the extremely lean product in which quality grade will be of minimal importance. This market would seem to favor the use of continental breeds marketed at young ages. The demand for a "natural" or "organic" product may enable producers to funnel their production towards this fourth market. The type of cattle would seem to be less important than the source of production inputs.

Whether a cow/calf producer considers participation in an alliance or not, some work and analysis on the home herd would seem justified. A producer might ask himself, "If I had to participate in an alliance tomorrow, which type would be best for me?" The vast majority of cow/calf operations receive no feedback on the feedlot and carcass performance of their cattle. Most producers would benefit from following up on the performance of their cattle with the operation that finishes the calves. Other producers may want to retain a portion of their calves through finishing. The resulting feedback could be used in doing a better job of marketing the operation's feeder cattle, making needed changes in the cow/calf operation, or deciding which alliance arrangement might offer some potential.

Another step the cow/calf producer can take which would reap benefits, no matter which marketing option is selected is to improve the uniformity of the cow herd. A cow herd with consistency in genetic background, frame size, muscling, etc. enhances the uniformity of the resulting calf crop which is almost always a marketing advantage. Having a cow herd that is a consistent British breed or cross or a British-continental cross enables the owner to directs production in a number of directions. If market conditions favor a high percentage British steer, the owner can simply use British bulls on the cow herd. On the contrary, continental bulls can be used if the market outlet favors faster growing cattle and chain store quality beef.

The "typical" Virginia producer with 29 cows may question how he can participate in cooperative marketing or alliance agreements. In Virginia, as in other areas of the country, horizontal alliances offer smaller producers the opportunity to reap the benefits available to marketing cattle in larger groups. Again, this may mean giving up some individual independence to participate in a larger marketing group. Many Virginia producers should be able to adjust to the concept of horizontal alliances easier than their neighbors. Our method of selling graded, commingled lots of feeder cattle has been a form of a horizontal alliance for the last sixty years.

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