Symposium focuses on the economics of meeting quality beef demand

Aug 20, 2010
by WLJ

The economic evidence says there’s profit to be made for cattlemen who understand what consumers want. A symposium at the recent Agriculture and Applied Economics Association meeting in Denver, CO, examined trends that document a desire for high-quality beef.

Kansas State University (KSU) livestock marketing economist Ted Schroeder served as moderator for the event, “Vertical Coordination in the Evolving High Quality Beef Market,” which he indicated is no niche.

“This is a market segment with true momentum behind it,” Schroeder said. “If the consumer is being responsive to this highquality product—and we’ve good evidence that is the case—then we have to start addressing issues with respect to targeting and coordinating the entire beef chain toward producing for that market.”

Panelists presented the proof that a sharper focus on beef quality can lead to growth and profit. Mark McCully, Certified Angus Beef LLC (CAB) assistant vice president for supply development, mapped out the demand for high-quality product as a growing segment.

Consumers want their beef branded—that shows in the 112 percent increase in the number of USDAcertified branded programs since 2001, McCully said. More than 55 percent of that increase was in brands that target premium Choice and Prime, like the CAB brand.

Those are the types of programs that find success in the midst of a recession. CAB product sales will increase by more than 100 million pounds in 2010, Mc- Cully pointed out. As of May 2010, the brand’s retail and grocery partners had increased sales by 23 percent over fiscal year 2009, while foodservice and international sales had each increased by 10 percent.

That demand translates to dollar signs for high-quality cattle prices, but the Choice/Select spread has become a less robust indicator. After all the premium brand boxes are filled, what’s left in today’s Choice box is less worthy of a much higher price than Select, McCully explained.

Despite erratic Choice/ Select spreads over the past eight years that averaged $7.97 per cwt. since 2002, the market spread between CAB and Choice has maintained more stability at $7.05/cwt. The Prime/Choice spread has averaged $23.48 over those years, and the Prime grid premium averaged $13.81/cwt. over the past three years (see graph).

“In today’s marketplace, the Choice box is so diluted that premium Choice and Prime will have to become the new benchmarks for ‘high quality,’ ” McCully said.

But does that profitability show through in the feeding sector? Iowa State University (ISU) economist John Lawrence says yes. He presented research findings from his team’s recent white paper, “Assessing the cost of beef quality: revisited.” Even with higher corn and cattle prices, marbling is still the most important performance and carcass trait affecting feedlot profitability, the ISU team concluded.

“Indeed, his work shows there is a strong profit opportunity there for targeting marbling. That focus on quality is still a significant and important driver. So the consumer is calling for it, and the feedlot has the opportunity to target that as a profit opportunity,” Schroeder said.

How can cattlemen profitably provide those highperformance animals to the feedlot? KSU agricultural economics graduate student and former CAB marketing specialist Lance Zimmerman is looking for answers.

He is researching factors that influence the price of value-added calves in Superior Livestock Auctions.

Schroeder, who works with Zimmerman on the project, listed some positive factors: “Animals that come into the feedlot in better condition, are better preconditioned, have better vaccination programs, have better genetics and an ASV [age and source verification] program. All of these also increase the probability that cattle are going to produce a higher quality carcass,” he said.

The dollars are in the details when cattlemen want to capture the most premiums in the sale ring, Zimmerman showed. In a comparison of two 125-head lots of 550-pound (lb.) Kansas heifers, the Superior data showed a large value difference between seemingly similar animals. The difference? Lot No. 2 was never implanted, had a complete vaccination program, was weaned and described as black and black-white face. In comparison, lot No. 1 was noted as “natural-eligible,” followed “VAC-45” protocol and showed “predominantly Angus” genetics.

Those slight differences were enough to create an $8 variance in per-head value, accumulating to $1,003.75 difference between the two lots.

“Lance’s work shows that there are certain management practices and factors that producers can do to better manage cattle to give them a higher probability of attaining top price in those high-quality markets,” Schroeder said.

University of Missouri economist Joe Parcell continued the discussion by indicating those management decisions must start with genetics that have the ability to perform. Ongoing Missouri research indicated fairly rapid genetic progress can be made by utilizing fixed-time artificial insemination and high-accuracy sires.

“Even using commercial cow/calf operations in their studies, the Missouri work shows that you can very quickly improve the accuracy of hitting a quality target—first by making the proper AI selections on bulls, then by maintaining the higher quality heifers in those programs,” Schroeder said.

“There are some very interesting linkages between all these presentations that demonstrate nobody is in this business independently,” he noted. “It really takes an effort from each segment to participate in a highquality market. It just takes a little bit more careful management and a little more careful targeting.” — WLJ