Mike
Well-known member
ARE THE PACKERS TO BLAME?
The feedlot industry is just now coming out of one of the worst marketing periods in history. If fed cattle levels were to reach $.70, most cattlemen would feel things were good. The reality is that cattle sold for $.70 in 1972. To be comparable in terms of real dollars (adjusted for inflation), cattle would have to sell for well over a dollar. The fact is that since the 1970s, the consumption of beef has fallen by nearly 30%, and the price of beef in real dollars has declined 40%. Faced with that scenario, any other industry would be making massive changes, .... but not us.
Why? Because most of us believe we know what the problem is. If you ask virtually any feedlot operator, you will get one of two answers: 1. either packer concentration or; 2. captive supply.
The reality is that this belief is not the result of an analysis, but a gut reaction. It is long-standing animosity, not detailed research, that has brought producers to these conclusions. Every credible study or packer concentration has concluded this is not the problem.
The Real Problem
The fact is that while packers, through contract cattle, could conceivably affect price on a short-term basis, the problem is much greater than that. The problem is long-term. It is and has been long-term because supply is not the problem. That is, to really understand the situation, one must understand the basic principles of economics - supply and demand. The first principle of economics is that price is affected by supply. As supply goes up, price comes down. But long-term, beef supply has gone down, ... and so has price.
Price has gone down because demand has gone down. That is, there are two factors that control price: How much we produce is one factor, but how intently the public wants to buy is another. The reality is that the public does not want to buy our product to the same extent as before. And that is something the packer doesn't have control over. Or do they?
In the 21 years I have been serving this industry, I have been reading research pertaining to what constitutes meat quality. And what that research says is that our grading system doesn't get the job done. In fact, it works against us. One of my favorite quotations is from a Canadian meat scientist, Dr. S.D. Morgan Jones: "The idea that the grading system works is a charade that plays out on a daily basis." Scientists from our own USDA have said, "Based on available data, it appears that between 5 and 10% of the variation in tenderness can be accounted for by USDA marbling degree. Most importantly, none of the studies (on USDA marbling score) detected palatability differences, ... that could justify the price differentials (between Select and Choice grades)."
The bottom line is that our grading system assumes that marbling is essentially the only determinant of quality. The reality is that marbling is only one of several aspects affecting quality (more later).
Our grading system also assumes that the relationship with marbling is linear. The reality is that it is curvilinear. In other words, once you reach a certain point with respect to marbling, there is diminishing value to further increases.
The reality, is that once there is enough marbling to reach the Select grade, further increases are of marginal value. At that point muscle texture becomes much more important - yet our system does not even consider muscle texture.
The Crux of the Problem
Our grading system was designed in 1916 and has essentially remained unchanged since that time. It is a crude system, originally designed to differentiate corn-fed Midwest steers from grass-fed Texas Longhorns. It assumes (but does not measure) that muscle texture will be similar to British breeds. The problem is that dozens of new breeds have been introduced since the inception of the grading system that have vastly different muscle texture.
The net result is that when a consumer buys a "Choice" steak, he or she has no idea whether it will be tender or tough. That steak could be from a super-tender, calf-fed Holstein with more than 300 days on feed, to a tough-as-nails roping steer that never saw the inside of a feedlot ‘till he was two years old.
Why Demand is Down
There are two primary reasons demand is down. One is the health issue, which to a certain extent our trade associations have tried to deal with. Although not relevant to this discussion, it is important to realize there is a lot more to this issue than meets the eye. Within the scientific literature there is a great deal of information that for some reason public health agencies have chosen to ignore. This is a major problem and it may take more than we are currently doing to correct it.
What is germane to this discussion is the other reason demand is down - inconsistency. This is a problem we know we have and it is something over which we have control, and yet there is enormous inertia with respect to doing anything about it. Why?
Several reasons. To begin with, most of us eat our own beef. We don't walk into a supermarket and pay $5.99/lb. For a T-bone, when (as discussed) unpredictably the steak might be tough. Several years ago I wrote an article entitled "Curse of the Quality Grade," which pointed out that tenderness is the primary item consumers think of in terms of quality, yet our grading system does not address tenderness in any objective manner.
Since that time, we have made a token gesture in the form of the B-maturity issue, but it has had no consequential effect. To begin with, depending upon the cut, research has shown 15 to 40% of all supermarket beef does not meet minimum tenderness standards. Yet a USDA audit showed only about 1.5% of all carcasses graded B.
The reality is that B maturity was a token gesture, because no one wanted to get into the real issue ... which is breeds. The facts are that there is much more variation between breeds than between A and B-maturity. The problem is that some of the breed associations are highly political and vocal. There are breeds that benefit by having an ineffective grading system and will do virtually anything to prevent improvement.
A client who is on the NCBA Grading Task Force asked a major packer about grading their own meat. The reply was that if forced to do so, they would simply continue to use the old USDA system. Given the fact that even USDA's own scientists criticize the ability of the current system to identify quality, why don't the packers want to change?
The reason is that the entire marketing system would change. As it is today, packers have evolved competing on procurement and packaging. Put them on a value-based system, and their world would be turned upside-down. Instead of selling #2 beef or #3 beef, they would have to genuinely identify quality. Most unnerving, they would essentially have to guarantee that quality to the customer.
How Much Would This Cost?
Nothing. As it is today, we assume that Choice is superior to Select and spend $20-$50 in extra feed to try to make every animal grade Choice. The reality, however, is that for any given animal, that extra feed does little more than generate excess fat that costs extra labor to trim off. For any given steer, the carcass with 100-120 days on feed will eat just as good as the same carcass with 130-150 days. Under a value-based system, cattle would be killed when they reach physiological maturity - in other words, with fewer days on feed. That saves money, ... all the way from the feedlot to the butcher. (Less money for unnecessary feed and less labor to trim off excess fat).
An Enormous Risk/Benefit
I recently was visiting with a couple of clients who thoroughly understand value-based marketing. Richard and Ron Heleniak own a highly successful regional packing facility and feed a large percentage of their own cattle. Ron said something that is totally obvious, but most of us probably haven't thought about it: "The big packers are not going to want to become involved in branded products due to the damage a recall could do. Conversely, this would be to the advantage of the industry as a whole. In other words, in case of an E. coli 0157:H7 recall, the public doesn't get turned-off on beef in general. If the packer's name appears on the package, they discriminate against that brand, ... not the product." Such would also be the case with quality. If a housewife gets a tough steak, she doesn't quit buying beef, ... she just switches to another brand.
The Future
If we want to change things for the better, we have to face reality. To reiterate, the reality is that our current grading system does not measure tenderness in any objective manner. As a result, it guarantees inconsistency, while causing us to feed excessively. Most important, it ignores the genetic diversity in cattle and keeps us locked into a commodity-based pricing system.
Every one of our competitors has gone to a value-based system. Ham, bacon, broilers, turkey, catfish, cheese and dairy products all have the quality guaranteed by the processor. This not only creates consistency, but also leads to innovation.
Every marketing study has indicated that the consumer is becoming less and less traditional. Vital to the future will be products that can be prepared quickly or are otherwise "user-friendly." Our competitor's products are available in a myriad of precooked, packaged and/or microwavable forms. Uncooked, they often come with instructions, breaded, basted or in their own cooking utensil. Turkeys even come with internal thermometers.
The packer achieves success not for accurately predicting quality or providing convenience. Rather, the packer is rewarded only through buying, processing and shipping at a lower cost.
Can We Blame The Packer?
No. As long as we continue to put blind faith in a system that ignores muscle texture and says marbling is the only indicator of quality, ... the packer has no choice. As long as we adhere to a system that says a crossbred Brahman with 150 days of feed is the same as an Angus with 100 days; is the same as a calf-fed Simmmental with 200 days, the packer has no choice. He has to buy them as cheap as he can, put them all in the same box, and worry not what the consumer thinks.
Bottom Line
The packer is not the cause of our problems, but he is the key to our future. By himself, however, he is not going to take us there. Left alone, he will continue to take us down the same road we are on. Declining real prices and market share.
Dr. David Porter Price,
"American Beef Cattleman"
The feedlot industry is just now coming out of one of the worst marketing periods in history. If fed cattle levels were to reach $.70, most cattlemen would feel things were good. The reality is that cattle sold for $.70 in 1972. To be comparable in terms of real dollars (adjusted for inflation), cattle would have to sell for well over a dollar. The fact is that since the 1970s, the consumption of beef has fallen by nearly 30%, and the price of beef in real dollars has declined 40%. Faced with that scenario, any other industry would be making massive changes, .... but not us.
Why? Because most of us believe we know what the problem is. If you ask virtually any feedlot operator, you will get one of two answers: 1. either packer concentration or; 2. captive supply.
The reality is that this belief is not the result of an analysis, but a gut reaction. It is long-standing animosity, not detailed research, that has brought producers to these conclusions. Every credible study or packer concentration has concluded this is not the problem.
The Real Problem
The fact is that while packers, through contract cattle, could conceivably affect price on a short-term basis, the problem is much greater than that. The problem is long-term. It is and has been long-term because supply is not the problem. That is, to really understand the situation, one must understand the basic principles of economics - supply and demand. The first principle of economics is that price is affected by supply. As supply goes up, price comes down. But long-term, beef supply has gone down, ... and so has price.
Price has gone down because demand has gone down. That is, there are two factors that control price: How much we produce is one factor, but how intently the public wants to buy is another. The reality is that the public does not want to buy our product to the same extent as before. And that is something the packer doesn't have control over. Or do they?
In the 21 years I have been serving this industry, I have been reading research pertaining to what constitutes meat quality. And what that research says is that our grading system doesn't get the job done. In fact, it works against us. One of my favorite quotations is from a Canadian meat scientist, Dr. S.D. Morgan Jones: "The idea that the grading system works is a charade that plays out on a daily basis." Scientists from our own USDA have said, "Based on available data, it appears that between 5 and 10% of the variation in tenderness can be accounted for by USDA marbling degree. Most importantly, none of the studies (on USDA marbling score) detected palatability differences, ... that could justify the price differentials (between Select and Choice grades)."
The bottom line is that our grading system assumes that marbling is essentially the only determinant of quality. The reality is that marbling is only one of several aspects affecting quality (more later).
Our grading system also assumes that the relationship with marbling is linear. The reality is that it is curvilinear. In other words, once you reach a certain point with respect to marbling, there is diminishing value to further increases.
The reality, is that once there is enough marbling to reach the Select grade, further increases are of marginal value. At that point muscle texture becomes much more important - yet our system does not even consider muscle texture.
The Crux of the Problem
Our grading system was designed in 1916 and has essentially remained unchanged since that time. It is a crude system, originally designed to differentiate corn-fed Midwest steers from grass-fed Texas Longhorns. It assumes (but does not measure) that muscle texture will be similar to British breeds. The problem is that dozens of new breeds have been introduced since the inception of the grading system that have vastly different muscle texture.
The net result is that when a consumer buys a "Choice" steak, he or she has no idea whether it will be tender or tough. That steak could be from a super-tender, calf-fed Holstein with more than 300 days on feed, to a tough-as-nails roping steer that never saw the inside of a feedlot ‘till he was two years old.
Why Demand is Down
There are two primary reasons demand is down. One is the health issue, which to a certain extent our trade associations have tried to deal with. Although not relevant to this discussion, it is important to realize there is a lot more to this issue than meets the eye. Within the scientific literature there is a great deal of information that for some reason public health agencies have chosen to ignore. This is a major problem and it may take more than we are currently doing to correct it.
What is germane to this discussion is the other reason demand is down - inconsistency. This is a problem we know we have and it is something over which we have control, and yet there is enormous inertia with respect to doing anything about it. Why?
Several reasons. To begin with, most of us eat our own beef. We don't walk into a supermarket and pay $5.99/lb. For a T-bone, when (as discussed) unpredictably the steak might be tough. Several years ago I wrote an article entitled "Curse of the Quality Grade," which pointed out that tenderness is the primary item consumers think of in terms of quality, yet our grading system does not address tenderness in any objective manner.
Since that time, we have made a token gesture in the form of the B-maturity issue, but it has had no consequential effect. To begin with, depending upon the cut, research has shown 15 to 40% of all supermarket beef does not meet minimum tenderness standards. Yet a USDA audit showed only about 1.5% of all carcasses graded B.
The reality is that B maturity was a token gesture, because no one wanted to get into the real issue ... which is breeds. The facts are that there is much more variation between breeds than between A and B-maturity. The problem is that some of the breed associations are highly political and vocal. There are breeds that benefit by having an ineffective grading system and will do virtually anything to prevent improvement.
A client who is on the NCBA Grading Task Force asked a major packer about grading their own meat. The reply was that if forced to do so, they would simply continue to use the old USDA system. Given the fact that even USDA's own scientists criticize the ability of the current system to identify quality, why don't the packers want to change?
The reason is that the entire marketing system would change. As it is today, packers have evolved competing on procurement and packaging. Put them on a value-based system, and their world would be turned upside-down. Instead of selling #2 beef or #3 beef, they would have to genuinely identify quality. Most unnerving, they would essentially have to guarantee that quality to the customer.
How Much Would This Cost?
Nothing. As it is today, we assume that Choice is superior to Select and spend $20-$50 in extra feed to try to make every animal grade Choice. The reality, however, is that for any given animal, that extra feed does little more than generate excess fat that costs extra labor to trim off. For any given steer, the carcass with 100-120 days on feed will eat just as good as the same carcass with 130-150 days. Under a value-based system, cattle would be killed when they reach physiological maturity - in other words, with fewer days on feed. That saves money, ... all the way from the feedlot to the butcher. (Less money for unnecessary feed and less labor to trim off excess fat).
An Enormous Risk/Benefit
I recently was visiting with a couple of clients who thoroughly understand value-based marketing. Richard and Ron Heleniak own a highly successful regional packing facility and feed a large percentage of their own cattle. Ron said something that is totally obvious, but most of us probably haven't thought about it: "The big packers are not going to want to become involved in branded products due to the damage a recall could do. Conversely, this would be to the advantage of the industry as a whole. In other words, in case of an E. coli 0157:H7 recall, the public doesn't get turned-off on beef in general. If the packer's name appears on the package, they discriminate against that brand, ... not the product." Such would also be the case with quality. If a housewife gets a tough steak, she doesn't quit buying beef, ... she just switches to another brand.
The Future
If we want to change things for the better, we have to face reality. To reiterate, the reality is that our current grading system does not measure tenderness in any objective manner. As a result, it guarantees inconsistency, while causing us to feed excessively. Most important, it ignores the genetic diversity in cattle and keeps us locked into a commodity-based pricing system.
Every one of our competitors has gone to a value-based system. Ham, bacon, broilers, turkey, catfish, cheese and dairy products all have the quality guaranteed by the processor. This not only creates consistency, but also leads to innovation.
Every marketing study has indicated that the consumer is becoming less and less traditional. Vital to the future will be products that can be prepared quickly or are otherwise "user-friendly." Our competitor's products are available in a myriad of precooked, packaged and/or microwavable forms. Uncooked, they often come with instructions, breaded, basted or in their own cooking utensil. Turkeys even come with internal thermometers.
The packer achieves success not for accurately predicting quality or providing convenience. Rather, the packer is rewarded only through buying, processing and shipping at a lower cost.
Can We Blame The Packer?
No. As long as we continue to put blind faith in a system that ignores muscle texture and says marbling is the only indicator of quality, ... the packer has no choice. As long as we adhere to a system that says a crossbred Brahman with 150 days of feed is the same as an Angus with 100 days; is the same as a calf-fed Simmmental with 200 days, the packer has no choice. He has to buy them as cheap as he can, put them all in the same box, and worry not what the consumer thinks.
Bottom Line
The packer is not the cause of our problems, but he is the key to our future. By himself, however, he is not going to take us there. Left alone, he will continue to take us down the same road we are on. Declining real prices and market share.
Dr. David Porter Price,
"American Beef Cattleman"
