The terms value-added, vertical coordination, and new generation cooperatives have become the latest “buzz” words in agriculture. Why? Producers everywhere are looking for a way to increase the value of the products they produce and capture more of the consumer’s dollar. How do we do that in a commodity-based business like the cattle industry? In NCBA’s Sept-Oct 2002 Issues Update publication, it reports that the producer’s share of beef retail value in August tied a record low of 41.6%. In comparison, packers received 10.5%, while retailers captured a record 48.6% of beef’s retail value. What are packers and retailers doing to earn 59.1% of the consumer’s dollar? They are adding value! Packers and retailers are adding value through closer trimming, offering consumers more boneless cuts and branded products, improved packaging, and ultimately going to branded, case-ready products. As value is added due to further processing and packaging, the packer and retailer share of the total retail value of beef will continue to increase on a percentage basis. This does not necessarily mean, however, that the “amount of dollars” that producers receive will decrease. In fact, producer receipts could very likely increase because the value-added end-product will be worth more total dollars. Meeting consumer demand for convenience, safety, potion control, etc. is a key piece of this equation.

There are only so many dollars of value per animal. Yes, it is true that some animals are worth more than others, and that all of the value will be either captured or discounted as we move from one segment to the next through the production and marketing chain. Who will receive discounts depends on how they are positioned in the marketplace. If a person raises commodity beef, why should they expect anything other than commodity price (commodity price is defined here as lowest average price). If the consumer thinks it is a commodity product, then it is a commodity product, and they will not pay a premium?

Assume for a moment that you are a feedlot operator, that wants to buy approximately 200 steers calves weighing 500 lb (2-50,000 lb pot loads) through an order buyer to fill a pen. How would you spec your order for calves? Would you likely tell the order buyer to buy calves that he knows nothing about? Would you ask the order buyer to buy all colors of bawling calves in small groups through 2-3 auction markets over a 4-5 day period to get the 200 you need? Would you ask for a 350 lb weight spread between heaviest and lightest? Would you ask for a few bulls thrown in for good measure? Would you ask for bawling calves that have not been vaccinated, have a high probability of not eating or drinking after arrival, and are good candidates to get sick in the several weeks following arrival? Is this the way to stack the deck in your favor? Unfortunately, that’s what many cow-calf operations individually, and collectively offer to buyers every day through local weekly auctions. If you were the feedlot in this scenario, would you likely authorize your order buyer to pay less, equal to, or more than commodity beef prices for these calves? No matter how we cut it, this is commodity beef that will receive commodity beef prices. One can legitimately ask this question, “So what - you topped the local weekly market the day you sold your calves, but you left $3-10/cwt still sitting on the table?”

As individual cow-calf producers we have several opportunities to control our fate. One important fact before going on, however, is that we must learn how to manage discounts before we can expect to receive premiums. The following is a discussion of the five major selling options available to cow-calf producers.

1) Sell small numbers of calves directly off the cow at weaning. The 1997 Census of Agriculture indicates that over 90% of the cow herd operations in the U.S. have less than 100 cows and they represent 49.5% of the total U.S. cow population. What does this mean? It means that there are very few cow-calf operations, especially in the Eastern Cornbelt, that have the opportunity to put together a pot-load of uniform calves. If we evaluate the market place, where are the premiums (or lack of discounts)? Is it in selling small lots of calves at the local weekly auction? If one studies markets, they tell us time and time again that larger groups of uniform calves sell for more dollars than the same type calves sold as small groups. Order buyers are paying commodity prices for calves sold in groups that weigh less than ~50,000 lb load lots. We are not managing discounts if we choose to ignore this market signal.

2) Sell small numbers of preconditioned calves 30+ days following weaning. Preconditioned calves should be worth more to backgrounders and feedlots because the deck is stacked in favor of the calves not getting sick. If they do get sick, data clearly shows that they respond more quickly to treatment and require less antibiotics. Additionally, preconditioned calves are only worth more if the entire group arrives preconditioned. If preconditioned and non-preconditioned calves are commingled on the same load, the entire load will be processed upon arrival in the feedlot to the lowest common denominator. In other words, if I don’t know anything about some of the calves, the whole load gets the full receiving combination of vaccinations, etc. In this case, why would a backgrounder or feedlot authorize an order buyer to pay any premium for “some” preconditioned calves?

3) Sell uniform pot-loads of calves (~50,000 lb) directly off the cow at weaning. There is some premium, some say the most significant part of the premium, comes from selling uniform pot-load groups of calves. Every time order buyers buy a set of cattle, they are thinking about filling a pot. This includes buying at the local weekly auction. Eventually the purchased cattle have to be shipped somewhere to a backgrounder or feedlot. The most cost effective and efficient way to do that is shipping a 50,000 lb pot-load group. On the purchase side, lower transportation cost is worth something. If the calves are uniform on the load, and sorting upon arrival is not needed, the calves are worth more to the buyer because of reduced; labor, stress on the animal, shrink, and sickness.

4) Sell pot-loads of uniform preconditioned calves 30+ days following weaning. These calves have added value to a buyer. Why? Transportation cost is minimized, calves are uniform and do not need to be re-sorted, receiving vaccinations are minimized, there are no bulls or pregnant heifers to contend with, cattle know how to eat out of a bunk and drink out of a tank/waterer, and receiving labor is minimized. Bottom line is that a properly vaccinated and immunized calf that experiences minimal time from sale to delivery, undergoes minimal stress and begins eating when placed into a pen. This translates directly into a much higher probability of staying healthy and hanging a more desirable carcass on the rail when harvested. There are several major alliance programs, with a large number of bigger feedlots in this country, that do not bid, do not buy, and are not in the market at any price unless calves are preconditioned – period.

5) Retain ownership of calves through the feedlot. The data says that it is more profitable to retain ownership of calves through the feedlot 11 out of 13 years. Not all of us want to feed out our calves, nor do most of us have a trusting relationship with a custom cattle feeder. For those that do not/cannot feed out their calves at home, there are programs such as IBEEF, the Quality Beef Project, and Five State Beef Initiative that already exist to help cow-calf producers find custom feedlots, as well as get carcass data back on their calves.

In Indiana, most of us do not have cow herds that are large enough to sell pot load lots of uniform calves by ourselves. As cow-calf producers, the majority of us have only one option, and that is to cooperate with other producers to generate large groups of uniform, value-added calves. To do that, we have to focus on genetics, management and marketing. Special sales that attract 1000-1500 calves have been, and continue to be, successful in nearby states because they add value to the consignors’ calves. These sales are most successful when they require producers to be BQA certified and that calves be preconditioned using a common protocol. When the calves arrive, they are sorted into large groups by breed/color, weight and gender. These sales have routinely documented $4-10/cwt premiums for these preconditioned calves sold in pot load lots. A recent summary of 28,000 CPH preconditioned steers and heifers that were sold trough special sales averaged almost $10/cwt more than the weekly average.

The question we need to ask ourselves is, “How can we, as cow-calf producers, add value to the animals we produce and capture more of the retail beef dollar?” I propose the following 10 step process for consideration.

Step 1. Be willing to change how you think and do business. Another way of looking at this is, “If I always do, what I have always done, then I will always get, what I have always gotten”. In today’s marketplace, can we expect to realize more value for doing what we have always done? If the answer to this question is no, then something different needs to be done to correct it.

Step 2. Understand what the customer, or consumer, want from the beef products we produce. The ultimate consumer wants food safety, wholesomeness, convenience, taste, tenderness and assurance of animal well-being and environmental stewardship. Consumer demand for beef products is important to every producer, regardless of size. One bad animal does have an impact. Edward P. Grace III states that one bad eating experience results in the affected person telling 12 people who then tell 8 people each who then tell 5 people each who then tell 2 people each. This results in 960 people hearing of the problem. Harris and Savell (1993) in a review of the impact of carcass maturity on eating quality, stated that steaks and roasts from a single tough carcass could influence an estimated 542 consumers based on the number of steaks and roasts generated from a carcass and the number of servings that could be derived from them. Ground beef and trim are not affected by toughness, but they would be impacted by such things as antibiotic residues, microbial contamination, etc. Since hamburger and trim are mixed together from many animals, how many consumers would be affected by just one “bad” animal. Think about this - every time we stick a needle in a calf, or an animal gets sick, it affects how that animal will perform for the end-user. Needle tracks in the wrong place can cause injection site blemishes and a reduction in tenderness for four (4) inches surrounding that blemish. What we do on the farm will, and does, impact how our products perform throughout the production chain and all the way to the consumer of our beef products. Five State Beef Initiative producers receive training and certification in areas that impact all of these consumer issues. Closer to the farm gate, however, is another consumer (customer) of our beef products. For example, if you are a cow-calf producer, the backgrounder or cattle feeder could be your customer. Here is what they want. 1) Access to large groups of uniform calves that are castrated, dehorned, vaccinated, weaned 30+ days, broke to a feedbunk and waterer, and managed under beef quality assurance guidelines. 2) All calves to be shipped in pot load lots in the shortest possible time to minimize transportation cost, as well as reduce stress and shrink. 3) Calves that require a minimum of receiving procedures and sorting upon arrival. 4) Calves that start eating and drinking the first day they are placed into the pen. If a calf is eating and drinking, the probability of that calf getting sick is minimized. Every time a calf gets sick in the feedlot, over $60/head is lost in extra labor and medication, as well as reduced gain, feed efficiency and carcass grade.

Step 3. Evaluate the operation, where it is, and what its priorities are going to be in the future. Why are you in the business? Some will answer they are a seedstock producer, others will say they are raising club calves, still others may say they need a few cows just to utilize some rough ground. One producer said the only reason they had cows was because Mom loved to go out and work with the calves. She had Alzheimer’s disease and she remembered that she had to take her medication before going out to do calf chores every morning and night. There are a variety of answers to this first question, and that is ok. Second question; are you in the cattle business or the beef (food) business? Regardless of the size of your operation, and the perception you have about the importance of your beef production practices to the industry, remember that every animal you sell will be consumed by someone, sometime, somewhere in the world. We are all food producers and we have not only the right to produce beef, but also the obligation to do it right.

Step 4. Understand the costs, hidden costs, and return on investment of doing, and not doing, certain management practices. Most of us view improved genetics and management as a cost, but we often forget about calculating the return on that investment and managing risk. There is no question that buying a better bull, castrating and dehorning, implanting steers, preconditioning calves, renovating pastures, etc. increases the cost of production. But, what are the hidden costs of buying a cheap bull, selling horned bull calves right off the cow at weaning, having low pasture/forage quality and quantity, etc.? In most businesses - it takes money to make money, and the beef business is no different. We must continually evaluate the costs of implementing, as well as the hidden costs of not implementing, sound management practices into our operations. Where are the discounts and where are the premiums in the market place, both now and into the future? Many of us can remember when black hided calves received a premium in the marketplace and many of the breeds turned their hide color black as a result. Are “black hided” cattle still receiving premiums, or have they become the norm with the off-colored cattle receiving a discount? It may not be right, but in many markets the off-colored cattle receive discounts. Yesterday’s premium often becomes today’s average, and perhaps tomorrow’s discount. I predict that black hided calves that are not preconditioned will receive discounts in the not too distant future. We already know several major alliances in this country that will not place a bid on calves unless they are BQA certified and preconditioned.

Step 5. Develop farm/ranch goals that includes production of products that are worth more to the end-user. Each one of us need to establish goals for our operation after going through Steps 1 through 4. Ideally these goals should be written down and used frequently by the operation to stay focused when making both financial and management decisions. The goals should include identifying the target market that best fits the resources available to the beef operation. If an operation cannot sell multiple pot loads of calves by itself, the target market needs to be narrowly defined to focus on one type of product, and one market. This allows the operation to combine forces with other producers doing the same thing to move pot load lots of uniform cattle through the system. It also allows smaller operations the opportunity to capitalize on the economies of scale enjoyed by the bigger operations. By working together, many smaller operations have the opportunity to take advantage of; selling a reputation product directly to backgrounders or feedlots, selling through special sales where there are large numbers of like-kind calves, or retaining ownership and filling pens in custom feedlots. The negotiating power that comes with large groups is completely different than any one of us can accomplish by ourselves. Knowing what the market wants, and what it is willing to pay for, is important to establishing the farm/ranch goals.

Step 6. Develop specific strategies that will accomplish our defined goals. These strategies need to include; genetic make-up and management adjustments needed to reach a target market, pasture/forage quality and utilization needed to support the targeted level of productivity, timing of the breeding season to be used, as well as information and records needed to help make financial decisions and management adjustments to better reach the established goals.

Step 7. Implement strategies in a logical and timely manner. Make changes that are likely to have the largest financial impact first. Some changes will be simple and cheap to implement, while others will be more costly and complex. Prioritize how available dollars are spent and keep moving the plan forward.

Step 8. Monitor progress toward the established goals. This is where records (performance and financial) play a significant role. Collection of data is the first step, but that data has to ultimately be turned into information and then into knowledge. Performance and financial data input forms have been created by the Five State Beef Initiative for producers, with producer input. They were designed to give producers important information that can be turned into knowledge. The extension network across the state and Brian Shuter are here to assist with this process. The data can be summarized into meaningful reports that will allow producers to benchmark not only there operation from year to year, but also against other producers collecting similar information. This knowledge has real value to each operation. Areas that limit profit are identified and strategies can be developed to make improvements. For example, producers in Illinois and Iowa that kept financial records in the SPA program for five years cut annual cow by over $175. We can talk all day long about a $5-10/cwt premium on feeder calves, but that translates to an increase income per cow of $25-50. Which would you rather have – a reduction in cost of $175, or a premium of $25? Obviously we would like to have both. It has been said that you cannot change what you do not measure.

Step 9. Re-evaluate strategies to make sure progress is being made in the desired direction. Use records and reports to document where you are and where you are headed. Ask for help. Again, the extension network across the state and Brian Shuter are here to assist with this process.

Step 10. Have the constitution to keep what is right, and be flexible enough to adjust those things that need to be changed. Most of us try to make decisions based on the best information available. As time moves forward, we should acquire newer and more relevant information. This new information needs to be included into our decisions. At times, we will need to develop new strategies and adjust the old ones. Does this mean we abandon the goals and strategies we created in Steps 4-5 above – no. It does mean, however, that the farm/ranch plan is a living, evolving document and it needs to be updated every 3-5 years.

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