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Living the Beef Production Chain PDF Print E-mail
Written by Steve Dittmer   
Monday, 05 May 2008
AFF Sentinel Vol.5#10

Changing and Adapting ... Instead of Fighting Change

A few years ago, a dairy producer's association official told a convention of mostly Colorado cattle feeders that his dairymen had gotten tired of tight margins and small returns from milking. They had invested some check off money farther up the production chain. Reasoning that margins were larger and the profit potential bigger closer to the consumer, they bought interests in cheese factories and ice cream manufacturers. They also learned about the dairy business beyond the milking parlor.

When cattlemen signed up -- with their own money -- for U.S. Premium Beef (USPB), they were looking to capitalize on producing high quality beef for premiums.

Then someone else's misfortune - Farmland's collapse -- gave them the opportunity to do something similar to those dairymen -- get in the packing business. They recognized it as a unique opportunity. Their confidence in their product and National Beef's ability to profitably market high quality, branded products not only paid off short term in significant premiums for cattle ($28/hd. recently). It will soon pay off long-term.

According to reports*, USPB members will receive $261 million in cash for their shares and $65 million in JBS stock. The 450 unit-holders will get $286 per share, for shares that cost $55 in 1997 - a 520 percent return.

USPB said 2,100 producers from 36 states have marketed cattle on USPB's grids. While radical activists like R-CALF and NFU just made noise, thousands of cattlemen marketed millions of cattle through USPB, collecting a total $120 million in cash grid premiums. How many R-CALF "reformers" do you suppose collected any of those premiums, since they oppose marketing agreements and branded or "natural" beef programs?

Some thoughts... It requires a substantial-sized plant for long-term financial stability, in a narrow margin business. National bought Brawley (cattlemen-owned) and built additional distribution centers in order to compete. Smithfield's CEO indicated their continued involvement in the beef packing business flatly hinged on buying Swift. When they couldn't -- and achieve economies of scale -- being in the beef slaughter business didn't make sense any more.

Contrary to what R-CALF, NFU and Congressional crusaders think, we're long past a mom & pop packing plant being a realistic preferred national model. Steve Koontz, a Colorado State ag economist who has extensively researched packing economics, charted the total slaughter and processing cost difference between the big plants and smaller plants at 15 percent. That's $20/head, which he notes, is one thing when it's $20 less profit but another when it's $20 all loss. Average cost is $140/hd. for the chart's small plants (3,000 hd./day) and $120/hd. for the large (6,000 hd/day) but he's seen smaller plants whose costs at times hit $250. That contributes to study** findings that larger plants tend to pay more for cattle.

Another thought. Everyone's feverishly calculating capacity. However, many plants are not running near capacity. Cattle supplies are lower than national packing capacity. Part of that is drought, part is the increasing productivity of the U.S. cowherd, producing record beef supplies from many fewer cows and fed carcasses. Packers, whose whole business model is on a per head basis, are nowhere near their best efficiency at today's levels.

As one cattle industry leader commented, while cattlemen are not jubilant at more packer concentration, they have to count it a plus that instead of losing another plant or packer, JBS has pumped capital into the industry and strengthened three important players. If National and Smithfield - which had worked hard at carving out niches, running efficiently and were still in business - had been making great profits and saw a really bright future for smaller big packers, they wouldn't have sold.

The irony is, in the face of National's successful value-based story, Congress is about to snuff it out. USPB's cattlemen, majority owners in National Beef, would be outlawed in the proposed Farm Bill. That had to be a consideration for USPB's cattlemen while weighing JBS Swift's offer. And anyone wishing to follow in their footsteps would be prohibited. JBS Swift has said National's branded products have a reputation, worldwide, founded in USPB's quality cattle. This is the success Congress wants to make sure is never repeated?

The legislation would forbid someone from owning both cattle and a packer with two plants. It is not clear how many shares of stock in a packer a cattleman can own before he becomes a packer and can no longer legally own cattle. When government begins to micromanage business, it gets ridiculous very quickly.

*Steve Kay, Cattle Buyer's Weekly, as quoted in Greeley Tribune, ("JBS-Swift Preps to Buy Nos. 4 and 5 in beef packing industry," 3/5/2008)

** "GIPSA Livestock and Meat Marketing Study," RTI International, GIPSA-USDA, Jan. 2007

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Last Updated ( Monday, 05 May 2008 )
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