KAY'S korner

Nov 6, 2009
KAY’S korner


USPB remains remarkable model

US Premium Beef (USPB) remains a remarkable model of how beef producers can work with, not against, packers and put more money in their pockets.

USPB began operations in 1997 with a minority ownership in then Farmland National Beef and has gone from strength to strength.

The producers who initially paid $55 per head to buy into the integrated concept have been well and rightly rewarded for taking what at the time was a huge risk. USPB in the past 11 years has paid a total of $136 million in premiums (over cash market prices for live cattle), an average of $20 per head. It has paid another $120 million in total patronage and cash distributions. All the while, USPB has increased its ownership interest in National Beef. Producers continue to be rewarded for producing cattle the market wants. Apart from its premiums for quality and yield grade, and for cattle that qualify for National’s branded beef programs, US- PB unit-holders get $35 per head for age-verified cattle.

As for that $55 investment, these units (as they are called) at their peak traded at $165-170. A few last traded a year ago at $120. Just recently, USPB increased its majority owner ship of National Beef to 69.35 percent from a previous 54.8 percent. Minority owner NB- PCo Holdings LLC increased its ownership to 24.7 percent from 19.6 percent. These two owners acquired the ownership interests of National CEO John Miller and general counsel Scott Smith, who remain in these posts at National. Affiliates of National President Tim Klein hold the remaining 5.93 percent of National. USPB in 2003 joined with Roth and management to acquire Farmland Industries’ remaining ownership share of National—that’s when US- PB became National’s majority owner. At that time, the owners established a time frame by which certain minority owners would exit, says USPB CEO Steve Hunt. That has now occurred. National Beef’s business continues to do well, which is a tribute to its owners, suppliers and managers, he says. USPB’s success provides several pointers for aspiring producer-packer alliances.

First, a group must have a clear vision of its intention. USPB realized it must focus on producing the highest quality cattle possible. That was not a concept easily put into practice when USPB began to be formed. Many producers didn’t even know which cattle they sold produced the best carcasses.

USPB began to educate and guide its members by pro viding carcass data. That data is an essential tool for genetic selection, herd management, and feeding practices.

Second, ownership of an existing packer was critical for USPB’s survival and ultimate success. It wasn’t deflected into trying to raise tens of millions of dollars to build a new plant. More important, ownership gave producers an opportunity to be rewarded for the value that packers capture in their plants. I’m told there were times that USPB could have failed, in part by losing its grid pricing premiums, had it not had ownership in National.

Third, who leads a new company can make the difference between success and failure. USPB’s founders were fortunate in attracting Kansas producer and banker Steve Hunt to lead USPB from its inception. He has proven to be one of the industry’s true visionaries. He not only had a clear idea of US- PB’s vision, one of his greatest achievements has been to hold that vision, execute it, and not allow USPB’s focus to deviate from it. Hunt is almost unique in the way he straddles the production and processing sectors of the U.S. beef industry. If only it had more like him. National Beef’s financial performance over the past few years speaks volumes about its ownership by US-

PB, the quality of National’s management, and their combined focus on producing high quality beef. National, in its past six fiscal years, had a combined net income of $338 million, averaging just over $56 million annually, with no loss years. It made $125 million in fiscal 2008. It is on target toward having another strong year. It reported net income for the 26 weeks ended Feb. 28 of $27 million, versus a net loss of $34.6 million in the year earlier period.

National’s performance is in part because of USPB’s ownership. USPB unit-holders in fiscal 2008 provided National with 19.1 percent of the 3.8 million cattle it processed. The vast majority of these were high quality cattle. USPB cattle averaged more than 70 percent Choice and Prime in 25 of the first 30 weeks of fiscal 2009. They set a new weekly record of 77.92 percent the week ended March 2. Such grading enables National to sell beef at a sizeable premium to the spot market. That enables it to outperform other beef packers and put even more money into the pockets of a pioneering group of producers. — Steve Kay

(Steve Kay is Editor/Publisher of Cattle Buyers Weekly, an industry newsletter published at P.O. Box 2533, Petaluma, CA, 94953; 707/765-1725. Kay’s Korner appears exclusively in WLJ.)