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http://www.admani.com/alliancebeef/TechnicalEdge/Surviving%20the%20beef%20industry%20change.htm
Surviving the Beef Industry Change
Nichols Farms: A Success Story
by J. David Nichols Managing Partner Nichols Farms
My dad was a “reputation” cattle feeder. He fed 200-250 steers annually from 1940-65. He bought his steer (mostly Herefords) calves at the Omaha Stockyards from “reputation” Nebraska Sandhill ranchers. His “reputation” served him well, as his cattle sold at/or near the top of the terminal markets. I became a cattle feeder as a 9-year-old and have fed cattle ever since. At that time, Swift, Armour, Wilson, and Cudahy slaughtered about 70% of the fat cattle (and they were fat). These big four packers sold individual hanging beef carcasses to buyers, which included bargain hunters, chain restaurants, and purveyors to white table cloth restaurants. Packer concentration has not been a “change,” though the packers are different ones.
Packing Industry Change
Then a major “change” occurred! The packing industry led by Iowa Beef Processors (IBP) moved to the country where the cattle were fed, escaped costly union labor contracts, mechanized processing, and introduced boxed beef. The introduction of boxed beef improved efficiency and lowered the cost to the consumer. But alas, it turned beef into a classic example of a price based commodity. The least cost producers were usually large feedyards and packers whose huge volumes enable them to produce beef at lower cost per head. The pricing system sent clear economic signals to feeders to buy and feed cattle that barely met minimum quality standards. The small, mostly mid-western cattle feeders who failed to “recognize and accept change” simply quit feeding cattle. My dad changed! He started buying, feeding, and selling cheap-colored-native calves from southern Iowa and Missouri auction barns. Commercial feedyards fed mostly long-tailed yearlings (Okies), which had naturally acquired high levels of immunity due to their age and exposure to a myriad of respiratory diseases. Thus, death loss and sickness was manageable. And, finished cattle all sold at basically the same price.
Breeding Industry Response
During this period (1970-95) the seedstock industry responded by selecting for frame size with little or no selection for meat quality (marbling) and imported about 20 “exotic” dual-purpose breeds, from Europe. Soon, much of US calf crop resembled #2 Okies at least in color and confirmation. Consumer beef demand decreased dramatically in spite of the nation’s cow herd numbers declining nearly every year. In public beef producer meetings, the most optimistic economists referred to the beef industry as “mature” In fact, it was in a deadly downward economic death spiral.
Branded Beef Enters the Market
Almost in desperation, the American Angus Association introduced Certified Angus Beef (CAB), as they were losing registrations, members, and income at an alarming rate. CAB was not an instant success, but grew dramatically in the early 1990s and reached critical mass in food service, exports, and retail markets. Its grown to be the largest US beef brand. The success of CAB inspired others to introduce their own branded beef. It is estimated over one-half of the beef sold today is branded or sourced. Many cow/calf producers were bewildered or angered as they saw black hided calves sell higher than their own similar quality colored ones. Many recognized the “change”— grudgingly accepted it and turned out black Angus bulls.
Producer Exodus
In the mid 1990s, as a large seedstock breeder and small cattle feeder, I watched my neighbors, who were independent swine producers, “exit the business” only to be replaced by vertically integrated swine/food companies. Exiting the business, is the same vernacular as, “I was down-sized out of my job;” instead of, “I got fired, because I wasn’t contributing ideas or $$$ to the company’s bottom line.”
Nichols Beef Business Changes
In 1995, we “recognized” and accepted the fundamental “change” in the beef business and sensed the exploding consumer demand for high-quality branded beef. We hired Ross Havens away from an integrated swine company to ram rod Nichols’ value-added programs. Ross and I plunged ahead with a plan and had our first Nichols Genetic Source Feeder Calf Auction in 1996. Our plans were subject to change, as there were no blueprints for our costly and risky undertaking. There weren’t any guidelines for such a feeder calf sale, but as a buyer of feeder cattle, I made the Nichols rules (no exceptions allowed):
Calves must sired by Nichols Bulls. (Since 1961, Nichols Farms has progeny tested herd sires for carcass merit.)
Calves must be weaned 45 days prior to the sale, vaccinated pre-weaning, given modified-live booster shots post-weaning, and veterinary certified.
Calves are individually weighed, frame scored, muscle scored, body condition scored, and sorted for sex and color. Based on this data, a computer program is used to group calves into 50,000 lb load lots with a maximum weight spread of no more than 75 lb in each lot.
Each calf possesses a unique ear tag, and buyers receive the consignor’s name, address, and phone number and vice versa. Calves are sold with prepaid individual carcass data collection services.
Nichols’ Success
Our 1996 sale was a resounding success in spite of low feeder prices and a host of nay-sayers. The calves sold for $78 a head more than if they had been sold as “commodity” calves at the same auction barn that same week! Though my hat size increased two sizes after this first sale, we invited the buyers of the calves to participate in a focus group after their Nichols’ calves had been fed, sold, and harvested. To our surprise, every one of them recommended using only one company’s vaccine and a standardized regime. So, we partnered up with the good people at Merial Corporation, and the Merial SUREHEALTH program was born, tested, tweaked, and then offered to the entire beef industry. It has become the gold standard for the feedlot industry. Predictably, several pharmaceutical companies are trying to emulate it now, with “me too” programs.
Expansion
Since our first Nichols Genetic Source Feeder Sale in Iowa in 1996, we’ve added feeder sales in Tennessee, North Carolina, and Indiana, with more on the way. We’ve sold about 25,000 head of Nichols Farms’ source-verified calves, each with a traceable EID ear tag. All sales have put “real folding money” in the pockets of cow/calf producers and, just as important, put black ink on the close-out sheets of the cattle feeders who plunked down their hard earned cash to buy them.
Future
To paraphrase Satchel Paige, the great baseball pitcher in the Negro Baseball League, “Never look back, they may be gaining on you.” Looking forward, it was apparent to me, that more than superior beef genetics and a certified health program were needed to keep our customers in business. Plus, I detest survival mentality and want and expect our customers to prosper. Any company’s success or failure depends largely on their customers’ profits and his/her quality of life.
Teamwork
Nearly everyone realizes that sound nutritional inputs and professional designed rations are critical to profitability in any food animal. But, none of these are worth much if there isn’t a viable value-based market available when finished cattle are ready to sell. ADM Alliance Nutrition and Nichols Farms teamed up two years ago to add not only sound nutritional programs and services, but to add USPB and IQB packing house shares/slots to our customers in “the system.” In addition, eMerge came on board to provide comprehensive animal tracking solutions, which will not only meet National Mandatory ID and COOL requirements, but provide individual animal tracking of health, performance, costs, marketing, and profit. When you count all the apples in the barrel, this truly unique combination of innovative companies and people has no equal in providing all the tools for all the customers our individual companies share.
A Piece of the Pie
Is the beef industry returning to my dad’s era of “reputation” cattle? Yes! Will it be the same? No! In dad’s day, it was a “good old boy” network of cow/calf producers, cattle feeders, and packers based on their own personal experiences and individual personalities. The premiums or discounts were negotiated face to face, mostly on their instincts if “the cattle worked.”
This time, all the entities “from farm to fork” will have hard data in their hands, which will determine the $$ value of cattle and/or beef. Business relationships will be formed and many will evolve into personal friendships.
Those who won’t accept “change” will level charges of “corporate concentration” to anyone who will listen, including the media and politicians. During the last 30 years, the beef industry has been cutting the dwindling “beef pie” into fewer and bigger pieces at every level, including retail outlets. Nichols Farms and their partners are working together to make the “beef pie” bigger. And, we are offering a slice of it to anyone, large or small, who wants to sit down and enjoy it— together.
The Next Step
Cattle producers need to gather production information and decide which business alliances will be of value to them in furthering their growth and prosperity. Without a doubt, in the future some cattle producers will be involved in successful business relationships while other will be watching from the sidelines. Producers should be prepared to ask questions, learn from other livestock industries, and make decisions that deliver a “piece of the pie.”
Click on chart for enlargement