It Begins And Ends With You
— by Lee Pitts
The on-again, off-again marriage of IBP and Tyson turned into a shotgun wedding. When a Delaware judge ruled that Tyson Foods improperly backed out of its deal to buy IBP and must either complete the deal to buy IBP for nearly $5 billion or pay a lump sum settlement to walk away, Tyson figured as long as they have to cough up the cash they might as well consummate the marriage and get something in return. Even though the bride looks a lot less attractive now than when the two started their mating dance.
“The most important reason that Tyson slowed down the merger process was it was having buyer´s regret,” said the judge. It seems once Tyson got a chance to look under the veil at the bride-to-be and the chicken plucker didn´t like what it saw. Welcome to the club Mr. Tyson. We could have told you that.
Business Marriages End In Divorce Too
Make no mistake, the shotgun wedding of Tyson and IBP to create the world´s largest meat provider will have significant impact on the way the beef industry goes about its business. To see the future all we have to do is look at the past. Tyson became the leading poultry producer by forcing contract production down the gullets of chicken ranchers. IBP has attempted to achieve the same results with a different tactic: captive supply. Both methods were, and are, being used to lock up supply at cheap prices without buying the farm, both in a figurative and very real sense. A marriage of Tyson and IBP is apt to produce a hybrid offspring that goes by the name of “Strategic Alliance.”
If you´ve read any business books or magazines lately you know that strategic alliances are hot. Along with the words “paradigm” and “thinking out of the box,” they are the new buzzwords in business. According to a Forbes special issue, strategic alliances “may be the most powerful trend that has swept American business in a century.” According to Accenture, in 1996 there were 5,200 strategic alliances formed and last year 10,000 business allied themselves.
Not wanting to be left behind, the beef industry has jumped on the bandwagon and there are now dozens of alliances you as a cow-calf producer can join to market your cattle. “Hey look at us, we´re trendy too.”
Although they are called “strategic alliances” in the beef business, they are far from a marriage of equals. While K-Mart may have the muscle to team up with Coca Cola in an alliance, how are you as an individual cattle producer going to be on equal footing by “partnering” with giants like the IBP/Tyson combo?
For the sake of argument, let´s assume these contractual arrangements truly are strategic alliances in a collaborative sense. Before you sign up you may want to consider the reality behind the buzz. According to Forbes, strategic alliances have about the same rate of failure as modern marriages. “More than half of all alliances fail to meet partner´s expectations. Thirty percent of alliances are abject failures, while another 17% have some success but eventually wind down as priorities and people change,” says Forbes. “The bad news is that most companies in the U.S. aren´t very good at alliances.”
When strategic alliances fail Forbes recommends a simple remedy: “If the deal doesn´t work . . . dissolve it.” That´s easier said than done and if you don´t think so just ask Ford and Firestone what happened when the wheels fell off their little alliance.
One Man´s Story
For our own case study on strategic alliances we don´t have to depend on Fortune 500 companies. Instead, consider the experience of Elroy Heim, former manager of Callicrate Feedyards in St. Francis, Kansas. Although his comments were made awhile back they have more meaning now after the IBP/Tyson coupling. “Approximately six years ago,” recalls Heim, “I decided to actively investigate a better, more efficient way of feeding cattle to an optimal endpoint; that point in the feeding process that maximizes feeding performance and carcass quality. In response to industry demands for improved consistency, quality, and trace-back ability, I have devoted the last six years to developing an individual animal tracking system. I decided to scan and sort the cattle we were feeding for the Certified Hereford Beef Program. Applying a four-way sort to each pen of cattle, who were able to achieve 97 percent certification compared to 85% program-wide. By eliminating the out-of-spec cattle, the heavy and lightweights, yield grade fours, standards, etc., we received approximately $30 a head above the base price.”
“Subsequently,” says Heim, “CHB reduced the grid premiums and additionally required our yard to feed MoorMan´s mineral to continue our participation in the CHB program. Abruptly, they changed the rules on me.”
“Feeling taken advantage of, I started marketing cattle on Monfort Beef Alliance Grid. Within the first six months we were receiving $35 a head premiums only to have Monfort, just as CHB before them, change the rules and reduce the grid, eliminating the premiums.”
“Then along came U.S. Premium Beef (USPB), the “producer owned” program that was going to pay the producer for what he delivered; significant premiums for high-quality, consistent product. We convinced our customers (at Callicrate Feedyard) to join us in making the significant investment in USPB stock, electronic tags, ultra-sounding and sorting, for the promise of a better way of marketing high-quality consistent cattle. Once again we delivered as requested receiving as much as $50 a head premiums.”
“But, you guessed it, USPB changed the rules on us again! Discounts for out of spec heavy and light weight carcasses were reduced; the very discounts my system profited from the elimination of.”
Often, these days, when a producer joins an alliance the excuse is given that the rancher just wanted to get carcass data back on his calves. Listen to what Heim had to say about that. “In August of 1998 the oversold USPB program didn´t fail to overcharge or disappoint when one of our producers scheduled eight head involved in a herd improvement sire evaluation study. It was very important to timely process the cattle with less than three-tenths back fat. The cattle were previously ultra-sounded three times during their feeding period to insure we were able to achieve the goals of the producer. USPB informed us they had decided not to accept groups of cattle of less than 40 head. When I explained the importance of the sire evaluation, and that the producer was willing to pay an extra $30 a head if necessary, USPB still refused to work with us.
“After delivering approximately 5,000 head of better than 80% choice and less than 1 percent out of spec cattle, and averaging $18 a head above the base price, we decided we had to quit USPB.”
You might be wondering, why would they quit after receiving an $18 per head premium? Because the cost of joining USPB was $55 per head stock purchase and a $12 per head retainer fee along with the obligation to deliver the cattle. Summing up his experience Heim said, “We felt deceived after investing much needed and precious working capital in this oversold “farmer owned” cooperative.”
We All Lose
Whether or not you sign up to become someone´s captive supply is your own business. But that does not mean your decision won´t affect all other beef producers. It´s a proven fact that as captive supplies go up, prices of live cattle go down. The reverse is also true, as captive supplies go down, live cattle prices go up. Elroy Heim found what many others will no doubt discover the hard way: Many of these so called strategic alliances are just schemes to lock up captive supply for the packer. “In addition to the disappointing returns,” says Heim, “we realized that National Beef, our “partner” and one of the last cash trading packers had attained massive numbers of price depressing captive supplies. The USPB cattle were being used by National Beef to reduce their participation in the cash market, essentially lowering the price for all cattle producers, including those of us who invested in USPB stock.”
“After investing six years and enormous capital in developing a state-of-the-art individual cattle management system utilizing ultrasound, sorting and grid marketing I have come to realize that I have done nothing more than supply a very high quality product at a very deeply discounted price,” says Heim. “The talk of improving our beef product is only talk. Packers do not want value-based marketing; they only want price depressing captive supplies. The packer has no intention of paying a premium. The packer will continue to change the deal as producer´s beef production programs constantly change with useless and futile efforts to focus on the moving target.
“Trust me, the practical evidence shows there is not one honest value-based market in the beef industry; they are all discount and captive supply driven,” concludes the former manager of Callicrate Feedyard in St. Francis, Kansas. We say “former” because Heim was so disappointed by the whole process that he left his position. Says his former employer, Mike Callicrate: “Elroy Heim fought courageously for the best interests of his customers and a healthy independent cattle industry. After the many years of Elroy´s dedication beyond his duty, his constant innovations and contributions to the cattle business, he left this industry that seems to be bent on enslavement of its independent family farm, ranch, and cattle feeding participants. The cattle industry is a big loser with the loss of people like Elroy Heim.”
It´s not like we haven´t been warned. The poultry industry has gotten so concentrated through vertical integration that discontented poultry producers have no other companies to turn to if they are dropped by a packer. A survey of broiler growers reveals that most are making less money than they expected under their contract and can do nothing about it. They have no control over feed efficiency and growth because feed and vets are provided by the processors.
In the last five years the hog market has gone from 70% cash market hogs to less than 30%. Yet the cash market hogs set the price for all contract hogs. By staying off the market with captive supplies the packers can send prices for cash hogs down, and because cash hogs tend to be of lesser quality than contract hogs, captive producers receive a formula price that is based on inferior pigs.
If you want to see what happens when one packer totally dominates an industry look at the sheep business. During the recent debacle now known as mandatory price reporting, featuring the 3/60 rule written into the law by the USDA at the urging of the meat packers, the sheep industry has been crippled beyond repair. According to 3/60, when one packer in an area controls 60% of the kill, prices DO NOT have to be reported. In the sheep industry one packer controls 65% of the kill in most every region of the country. Whereas we used to get prices from the USDA on 52 categories of lamb cuts, Tom McDonnell of the American Sheep Industry Council says now we´re lucky if we get four. “No one is pricing lambs,” says McDonnell. “Prices don´t get reported and lamb prices drop drastically.”
These should be good times for the lamb producer. Domestic production is down 12% and during the May 23 through June 12 period, the first weeks of mandatory price reporting, imports were down 42%. But without price discovery three and a half weeks of kill backed up and lamb prices dropped precipitously. We think lambs are currently trading around 50 cents, but who knows? “There is nothing else to attribute the price drop to,” says Tom McDonnell. “It´s bankrupting our industry.”
Just Say “No”
If you want further proof of the damage caused by captive supply, contract production and strategic alliances consider this simple fact: as captive supplies increased there has been a direct correlation between higher retail beef prices and a lower share of the consumer´s meat dollar for ranchers. In fact, it´s at an all time low.
It doesn´t have to be this way. You may feel helpless but if our industry goes the way of the others it will be because ranchers, one at a time, chose to make it so. To prevent concentration from happening ranchers must maintain their independence, not sacrifice it. Pat Goggins, the president of the Livestock Marketing Association said at their annual meeting this summer, “We know the only way you´re going to get a strong price, a consistent price, is through competitive bidding. America´s livestock markets are the last hope for price discovery and profit for cow-calf operators. We discover and create prices and we are a thorn in the side of the pricing system.”
Says Goggins, “The cattle industry is in the center of the bullseye and packers are working very hard at eliminating price discovery in cattle. If the marketing sector lets this happen, we will surely lose our industry as we know it.”
Want to avoid becoming a chicken farmer in cowboy boots? Then don´t hand over your cattle to a packer in some kind of captive supply arrangement, even if they do call it “a strategic alliance.” You´ll be aligned all right: Directly in the packer´s sights.