KAY'S korner

Nov 6, 2009


Breed brands sell beef

Go into any supermarket and you’ll find that most poultry items are branded with a company name. These include Tyson, Perdue and Pilgrim’s, which is soon to be majority-owned by JBS. Branded beef is much harder to find. There are niche brands such as Harris, Maverick, Laura’s Lean and Coleman. But the majority of retail beef is either sold generically or with a house brand developed by the grocery chain that’s selling it.

This makes all the more remarkable the success of the Certified Angus Beef (CAB) brand begun in 1978 by the American Angus Association. Not only has CAB set new sales records each of the past three years, it has significantly raised the value of Angus genetics over the past 30 years and put more money into producers’ pockets. Angus cattle sell at a premium to other breeds, and CAB sells at a premium to other beef of comparable quality. A recent study says CAB beef from 2005 to 2008 inclusive brought in $367 million more at the wholesale level than it would have if sold as USDA Choice.

CAB has thrived even though it has spawned a slew of copycat programs using the name “Angus.” All appear to be successful because consumers associate the name with quality. Mc- Donald’s rolled out its Angus burger nationally in July.

Despite selling at $3.99, sales have exceeded the chain’s expectations and helped it report higher than expected earnings in its latest quarter. Its Angus burger sales are even booming in places like Australia.

CAB in its latest year sold a record 663 million pounds, a 24 million pound increase over 2008. In addition, it maintained a premium over Choice beef and demand held up better for CAB than for Choice. That’s remarkable given the recession has forced many Americans to trade down in their beef purchases. But analysts say that’s precisely what one would hope to see in an established premium brand.

The CAB program identified about 14.1 million cattle and certified as CAB nearly 2.87 million head, an 8 percent increase over the previous year. Acceptance rates climbed to 19.8 percent.

The Hereford breed also has a brand program, Certified Hereford Beef (CHB).

While tiny compared to CAB, it also experienced market growth during fiscal 2009. Its two packing partners harvested 379,300 CHB-eligible cattle and certified 250,250 carcasses during 2009. CHB marketed 36.8 million pounds of beef in total, up about 2.5 percent compared to 2008.

Own part of a packer

Meanwhile, producers have a unique opportunity to own part of two of the industry’s four largest packers.

Both JBS USA and National Beef Packing are planning public stock offerings. JBS’s offering, which might occur early next year, aims to raise up to $2 billion. JBS USA wants to move to distributing its beef, pork and lamb products direct to retail and food service customers and produce more consumerready products. It also revealed its commitment to its U.S. and Australian operations by saying it will spend $500 million of the money on capital expenditures.

JBS USA has dramatically improved the former Swift & Company’s beef business since parent JBS SA acquired it in July 2007. It has already invested heavily in its plants, created its own trucking fleet, and upgraded its Five Rivers feedlots. It has returned Swift Beef to profitability and strengthened it with the acquisition a year ago of the Smithfield Beef Group. One can only imagine what JBS will do in the next two years with even more money to invest.

National is going to the market primarily to give its producer owners a cash payout. A new entity, National Beef, Inc., plans to sell up to $300 million of stock through an initial public offering (IPO). It will use $230 million of this to acquire units of National Beef Packing Co LLC. (NBP). The vast majority of this will go to members of U.S. Premium Beef LLC (USPB), which owns 69.4 percent of NBP. The IPO is a way to reward US-

PB members for their investment in NBP, which began with a minority ownership in 1997. It is recompense for USPB members missing out on a payout after the Justice Department in October last year blocked JBS SA’s proposed acquisition of NBP. USPB members had been poised to get $261 million in cash, another $50 million in patronage payments, and $65 million in JBS stock. The other $70 million of the $300 million that National hopes to raise will go to pay down debt.

National seems a potentially attractive investment because of its efficient operations, its level of valueadded products, its strong export position, and its excellent earnings record. For its size (it has a 14 percent share of steer and heifer slaughter), it has been consistently the most profitable beef processing company in the U.S. It had combined net income of $338 million from 2003 to 2008 inclusive. It had record profits of $124.5 million in fiscal 2008 and will likely report another record year in 2009. The IPO is expected to take place in December. Using it and JBS’s IPO, producers who want to understand more about the packing sector will have a unique chance to invest in it. — 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.)