A Race To The Bottom -- by Lee Pitts
A publisher in a prominent western livestock newspaper suggests that we should not be celebrating R-CALF's victory to keep the Canadian border closed because of the damage it will do to packers. He says we're all in this together. In the same boat, so to speak. And when one end of the boat sinks the other will too. He says that the packers and large feeders have the same goals as ranchers, to which we say . . . horse pucky! Their goals could not be more opposite. The packers and their strategically aligned feeders want to buy your cattle as cheap as they can and you, no doubt, want to sell them as high as you can. Do those sound like common goals to you? No, this is a war and the packers were winning, cruising along in their armor plated battleships, while ranchers were paddling upstream against heavy winds in kayaks and canoes.
And then along came a mad cow and R-CALF.
The Packer's Plan
Corporations, by nature, tend to have lots of meetings. It's what they do best. And in those meetings they come up with five-,10- and 15-year plans and business models to find ways to reduce input costs, manage volatility, acquire greater control over the supply chain and to be more competitive than their competition. Years ago the business model in the beef business was that cow calf ranchers, stockers, feeders, packers and retailers operated independently of one another in a production system that, for the most part, produced consistent profits for the good operators. But such a system also presented problems for the packer and retailer. For one, because the parts were independent, with little communication between the segments, it also produced cattle that were not consistently good to eat. This coincided with a time in which public consumption of beef plummeted. Granted, there were other factors, significant ones like diet/health issues, but clearly ranchers were not producing a consistently good product. The beef packers looked around and saw an industry that was producing a consistent product and whose consumption was skyrocketing: the poultry industry. So, as businesses often do, they tried to incorporate the chicken model into the beef business through contract production.
Some ranchers signed on with packers in strategic alliances and most cattle publications and industry observers hailed these early ventures as the way of the future. The cattlemen's national organization, the NCA, was infiltrated by packers and their protégés in order to push such programs. Never once did these folks stop to consider all the power they'd be handing over to the packers if all ranchers became strategically aligned. Gradually the cattle business began to go down the same path as the chicken pluckers and as a result Bill Bullard of R-CALF says here's what happened:
According to USDA data, Bullard says the average return on investment among cow-calf producers in the U.S. was a negative $30.40 per bred cow per year for each year of the 1990s. "Your industry suffered staggering losses measured in the billions of dollars," says Bullard.
"We lost over 10 percent of the total number of beef cattle operators in the United States. We've lost over 108,000 producers since 1993," he said. As a result rural communities all across America have withered. The cow counties in Nebraska are among that state's poorest, for example.
While the ranchers were facing tough times the packer was enjoying heady days. "In 1998," says Bullard, "the average retail price of beef in the United States was $2.77. In 2002, when cattlemen were getting $10 cwt. less than they did a decade before, retail prices were $3.32 a pound. The retailer certainly benefited from these very favorable economic indicators and the packer did, too. In 1992, the average packer margin was $62 a head. By 2002, that more than doubled to $142 a head."
In 1994 Bullard says the rancher received the majority of the consumer's beef dollar: 56 cents for every buck the consumer spent on beef. But by 2000, the producer became the minority recipient. "Your share fell to 49 cents," Bullard said. "By 2002 it had fallen to 44 cents." But the packers got greedy and wanted even more so they had more meetings and decided to copy yet another business model.
A publisher in a prominent western livestock newspaper suggests that we should not be celebrating R-CALF's victory to keep the Canadian border closed because of the damage it will do to packers. He says we're all in this together. In the same boat, so to speak. And when one end of the boat sinks the other will too. He says that the packers and large feeders have the same goals as ranchers, to which we say . . . horse pucky! Their goals could not be more opposite. The packers and their strategically aligned feeders want to buy your cattle as cheap as they can and you, no doubt, want to sell them as high as you can. Do those sound like common goals to you? No, this is a war and the packers were winning, cruising along in their armor plated battleships, while ranchers were paddling upstream against heavy winds in kayaks and canoes.
And then along came a mad cow and R-CALF.
The Packer's Plan
Corporations, by nature, tend to have lots of meetings. It's what they do best. And in those meetings they come up with five-,10- and 15-year plans and business models to find ways to reduce input costs, manage volatility, acquire greater control over the supply chain and to be more competitive than their competition. Years ago the business model in the beef business was that cow calf ranchers, stockers, feeders, packers and retailers operated independently of one another in a production system that, for the most part, produced consistent profits for the good operators. But such a system also presented problems for the packer and retailer. For one, because the parts were independent, with little communication between the segments, it also produced cattle that were not consistently good to eat. This coincided with a time in which public consumption of beef plummeted. Granted, there were other factors, significant ones like diet/health issues, but clearly ranchers were not producing a consistently good product. The beef packers looked around and saw an industry that was producing a consistent product and whose consumption was skyrocketing: the poultry industry. So, as businesses often do, they tried to incorporate the chicken model into the beef business through contract production.
Some ranchers signed on with packers in strategic alliances and most cattle publications and industry observers hailed these early ventures as the way of the future. The cattlemen's national organization, the NCA, was infiltrated by packers and their protégés in order to push such programs. Never once did these folks stop to consider all the power they'd be handing over to the packers if all ranchers became strategically aligned. Gradually the cattle business began to go down the same path as the chicken pluckers and as a result Bill Bullard of R-CALF says here's what happened:
According to USDA data, Bullard says the average return on investment among cow-calf producers in the U.S. was a negative $30.40 per bred cow per year for each year of the 1990s. "Your industry suffered staggering losses measured in the billions of dollars," says Bullard.
"We lost over 10 percent of the total number of beef cattle operators in the United States. We've lost over 108,000 producers since 1993," he said. As a result rural communities all across America have withered. The cow counties in Nebraska are among that state's poorest, for example.
While the ranchers were facing tough times the packer was enjoying heady days. "In 1998," says Bullard, "the average retail price of beef in the United States was $2.77. In 2002, when cattlemen were getting $10 cwt. less than they did a decade before, retail prices were $3.32 a pound. The retailer certainly benefited from these very favorable economic indicators and the packer did, too. In 1992, the average packer margin was $62 a head. By 2002, that more than doubled to $142 a head."
In 1994 Bullard says the rancher received the majority of the consumer's beef dollar: 56 cents for every buck the consumer spent on beef. But by 2000, the producer became the minority recipient. "Your share fell to 49 cents," Bullard said. "By 2002 it had fallen to 44 cents." But the packers got greedy and wanted even more so they had more meetings and decided to copy yet another business model.
