Over the last three parts of this series, we've begun delving into the Organization for Competitive Markets (OCM), an agricultural "anti-trust organization."  These attorneys and activists hope to use anti-trust laws to break up the packers and retailers and eliminate contracting and alliances as tools for cattlemen.  By default, everyone would be forced back to auction markets as virtually the only available widespread market left for selling cattle.  Feedyards would only be allowed to sell to packers direct on a cash live basis.  No contracts or grids would be allowed.

Another area that OCM has targeted is agricultural producers' share of retail prices.

OCM notes that farmers' and ranchers' share of the final retail price has been shrinking, compared to ten years ago.  They fail to explain that, as an increasing proportion of beef goes into new higher priced convenience products or branded product lines to meet today's consumers demand, the value of the raw material as a percentage of the final retail price will naturally decrease.

For example, an iron ore producer may have the same costs to produce his ore, whether the ore goes into a $25 hammer or a $1,000 refrigerator.  But his percentage of the retail price is going to be much higher on the hammer than on the refrigerator.  Much more has been done to create the refrigerator?that is, more value has been added.  So the ore producer's percentage share of the final retail price will be much smaller on the refrigerator

But the key is that the final retail price is much higher and the ore producer's share of a much bigger pie, even at a lower percentage, will net him more dollars.  And if the manufacturer can sell more refrigerators than hammers because of the added value and cultural needs, the added volume helps the ore producer.  As the manufacturer gets more involved and has more capital invested in making refrigerators, via plants, marketing campaigns, commitments to dealers and attachment to cash flow from the business, he comes to value his supply of raw material more, giving the producer more leverage in pricing and terms.

So it is with beef.  Value-added products that are marinated, tenderized, pre-cooked and put in special packaging require more time and effort to produce and sell for a much higher price than fresh beef.  The producer of raw material, the producer of calves, necessarily has a smaller percentage of the final retail price.  But as demand for these new products picks up steam at the retail and foodservice level, that pressure to produce more works its way down through the processing and packing level to become stronger demand at the feeder and rancher levels.

Even fresh retail beef carries a load of labor, insurance, energy, pension, real estate and many other costs that have been increasing at a much higher rate than even a few years ago.  In fact, the overwhelming majority of all costs from the farm to the consumer is labor and that cost follows general business trends, not farm cost trends.  So the cattlemen's share of retail beef prices is going to trend down as a percentage of the total.  That doesn't mean his actual prices aren't increasing, as we've seen in recent years.  Widening spreads in such cases do not mean someone is "cheating."  It means the normal rules of economics are operating.  And competition enforces those rules.

Branded beef combines elements of both areas, justifying higher costs and a higher retail price by delivering added, consistent value.

In fact, although the percent of farm value of Choice beef, for example, increased to 48% in 2003, the actual farm return increased to a proportionately higher figure, $1.81/lb., following the increasing retail price (USDA figures).  From 1998, for example, the farm value has tracked the retail price most closely, with the farm value increasing over 38 percent, while the retail value increased 35 percent.  During the last few years, from 2001 to 2003, the catch up has been even better for cattlemen.  During that time, retail value went up 11 percent and the farm value went up 17 percent.

About half of the beef dollar is spent away from home, and the same principles apply in that case, only more so, because the cost of food is only a portion of the cost of the meal.  Prices for meals purchased from foodservice operators of any type have increased faster than the share left for raw material.

That is why beef alliances and branded beef programs make so much economic sense.  They give producers of raw material like cow-calf operators and cattle feeders the chance to participate and share in the profit opportunities from later sectors of the chain, where margins are wider and more predictable, where pricing power is stronger, like retailing and foodservice.  And the advantage for smaller, independent feeders is even more valuable because alliances give them the opportunity to participate without having to have large numbers themselves.

Next time: OCM Doesn't Want Cattlemen Diversifying

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