Commercial Agriculture Program

The Missouri Beef Audit:

Chapter 3: Systems, Strategies, and Economic Opportunities for Missouri

As Missouri's beef industry continues to evolve, it will likely remain a predominately cow-calf state with a stable to growing stocker/backgrounding segment. Larger profit-motivated operations and smaller operations with a desire to compete will find opportunities to cut costs, increase margins, and capture value with innovations in production and marketing. Service providers willing to package and market their services to the large number of beef operations too busy to keep up with the pace of innovation will find margins to be captured by providing these services.

Based on this audit, which highlights the comparative economic advantages, disadvantages, value drivers, opportunities, and challenges for the Missouri beef industry, authors have identified production systems that have the greatest opportunity for success in Missouri. Future Missouri beef production systems are likely to be described, wholly or in part, by one of four basic models.

System # 1: Heritage and Lifestyle Motivated Beef Producer
System # 2: Enhanced-Profit-Motivated, Individualist
System # 3: Enhanced-Profit-Motivated, Group Oriented
System # 4: Seedstock Producer

Each model has different labor, management, land, and capital requirements. Moreover, each has different strengths, weaknesses, opportunities, and threats. A description of each of these four basic production systems follows.

3.1 System # 1: Heritage and Lifestyle Motivated Beef Producers

Description
Heritage and Lifestyle Motivated Beef Producers currently operate a large percentage of Missouri's beef enterprises. This type of producer typically depends upon non-cattle sources of income for the majority of his or her family livelihood. While this type of producer may be deeply committed to his or her farm and to the cattle business, they typically adopt a low input management style. The primary operational motivation on this type of farm may be to simplify the production system so that it does not consume more time than is absolutely necessary. This type of producer may also be extremely cost conscious in purchasing inputs, in an effort to avoid having to subsidize their farming operation.

Strengths

Financially and geographically stable.
Low capital input.
Cattle operation enhances wealth due to land appreciation and enforced savings.
Cattle provide liquid family asset in times of need.

Weaknesses

Low profitability - low operating returns on family capital and labor.
Access to borrowed capital depends upon personal finances and credit worthiness rather than profitability of the beef operation, which limits growth potential.

Opportunities

Where suppliers or vendors can package simple production enhancements, these producers can adopt practices to enhance profitability.
Long-term land appreciation may justify the investment in a beef operation even with meager operating profits.
These operations provide liquidity to cattle markets by producing large numbers of calves in small batches.
The large number of these types of producers provides profit potential for supply and marketing companies with targeted service programs.

Threats

Scarcity of time and capital may hinder the ability of producers to evolve and adapt to changing industry conditions.
Scarcity of time and capital may hinder the ability of producers to improve quality, thus degrading the reputation of other Missouri cattle.
Increasing speed of innovation threatens producers who lag behind.
Maintaining access to markets as consolidation continues and supply chains tighten.
Emerging demand for source verification will usher in changes in price and marketing for undifferentiated cattle.

3.2 System # 2: Enhanced-Profit-Motivated, Individualist

Description
The Enhanced-Profit-Motivated Individualist is a cattle producer who has the time and motivation to pursue new marketing and production innovations if they make money and if they can be accomplished as an individual rather than having to cooperate with others. They are among the most progressive of cattle producers. They are keenly interested in the industry and usually depend upon it for a large portion of their income. One of the prime reasons they are involved in the cattle industry is that it offers the opportunity to operate a business as an individual; managing and marketing their products without interference from or cooperation with government or other segments of the industry.

Strengths

Willing to manage for more profit.
Willing to adapt, learn, and seek new information and models of operation.
Willing to seek and pay for value-adding services.
Characterized by a positive outlook on the industry and its future.
A single person making decisions allows the opportunity to adapt to emerging innovations in production and marketing.

Weaknesses

Least stable type of operation because success depends upon one individual.
Solitary operations may lack the scale necessary to take advantage of some innovations.
Lack of capability to delegate authority creates an impediment to timely adoption of innovations and prevents full attention to a changing business environment.

Opportunities

Independent focus permits concentration of efforts on cost reduction, revenue generation, and marketing strategy.
Streamlined decision-making permits rapid response to changing market conditions.
Implementation of production and marketing innovations is limited only by the operators risk profile.

Threats

The ability to keep up with all significant changes in the industry may be a challenge.
Lack of scale may close some opportunities for marketing and for production innovation.
It may be difficult to properly evaluate opportunities with just one person's viewpoint.

3.3 System # 3: Enhanced-Profit-Motivated, Group Oriented

Description
The Enhanced-Profit-Motivated, Group Oriented cattle producer is one who has the time and motivation to pursue new marketing and production innovations if they make him or her money. These producers are willing and able to work with other like-minded business people, if necessary, to take advantage of emerging marketing opportunities and production innovations.

Strengths

Willing to manage for more profit.
Willing to adapt, learn, and seek new information.
Willing to seek and pay for value-adding services.
Characterized by a positive and progressive outlook on the industry and its future.
Positioned to benefit from the collective wisdom of business partners.

Weaknesses

It can be difficult to find like-minded cattlemen with which to partner.
Mutually dependent upon other group members and the operator is exposed to risk resulting from poor group decisions.
Group-based decisions may occur too slowly to take advantage of emerging market conditions and production techniques.

Opportunities

Opportunity to implement production changes prescribed by partners.
Operators have access to evolving marketing partnerships because of their business framework.
Operators have the potential to take ownership and profit all the way from the germplasm stage to the retail stage of production.

Threats

There is a risk of choosing partners who are unable or unwilling to change as necessary.
It is difficult to evaluate the risks and profit potential associated with joining an alliance, particularly at the inception of such an organization.
Operator's products may not match those of the alliance.
Branded beef programs carry both positive and negative price risk.
Anonymity is no longer a possibility, which presents some risks of liability.

3.4 System # 4: Seedstock Producer

Description
The Seedstock Producer is focused on producing bulls, heifers, semen, and ova that meet the needs of every segment of the beef industry, including operations that want to maximize pre-weaning traits, post-weaning terminal traits, and maternal traits. They are often passionately attached to a specific breed and even bloodlines within breeds. Profit is not the only motivator and may not even be the biggest motivator for these producers. Recognition and respect from peers and customers are also highly coveted in this industry segment. Marketing skill is among the hallmarks of successful seedstock producers.

Strengths

Passionately committed to the operation.
Business responds positively to aggressive marketing.
Strongly in tune with the science of genetic improvement.
A great deal of beef industry research and resources are presently focused on seedstock production.
Accurate and detailed record keeping is highly valued.

Weaknesses

Success depends upon marketing skill.
Passion for the operation may produce lack of objectivity about the business.
Difficulty in producing genetic resources of value to all industry segments.
Small-scale seedstock production is much more capital intensive and only marginally more profitable than small-scale commercial production.
Because of greater gross returns, there is a tendency among seedstock producers to ignore least-cost production methods in preference for higher priced inputs. This is particularly true with regard to nutrition.

Opportunities

Seedstock enterprises are among the first in the beef industry to benefit from new technologies in animal breeding, genetics, and reproduction.
Emerging technologies, which are more likely to be used by seedstock producers, provide ample opportunity to differentiate and market a superior genetic product.
Seedstock enterprises are positioned to lead the industry into coordinated food production systems by providing germplasm and by providing source verification information.

Threats

Breed associations may lead in a direction other than one focused on system profits.
Seedstock producers may choose or persist with breeds that lose market share.
New technology may alienate export markets.
New technology may fail to make a return on investment.

The competitive position of Missouri's beef industry can be described by segmenting it into production and marketing sectors. A list of each sector's strengths and weaknesses is presented; moreover, opportunities and threats facing each sector are identified and discussed.

3.5 Production Strategies for Missouri's Future Beef Industry

Exhibit 3.5-1 Missouri's Current Beef Industry - Production Sector

Strengths	Weaknesses
Large acreage of productive pasture.	Lack of adoption of defined breeding seasons.
Cow-calf enterprise is well suited to part-time farmers and retirees.	Lack of commitment to select sires of economically superior merit; failure to take advantage of hybrid vigor.
Close proximity to decision makers in the seedstock industry.	Enterprises may be too small to motivate producers to implement the level of management needed to create value.
Proven forage management opportunities are available to lower costs of production.	Lack of adoption of forage management techniques that lower costs and reduce endophyte toxicity.
Established successful replacement heifer source in the Show-Me-Select Program.	Historically high costs or low productivity.
Established feed and by-product infrastructure that permits a wide array of feeding options.	Continued selection for both terminal and maternal traits within the same small herd slows genetic progress.
Opportunities	Threats
Increase carrying capacity via intensive rotational grazing and/or use of by-product feedstuffs.	The industry is small-scale and fractured. It may not be able to discover value or react quickly enough to take advantage of value drivers.
Increase backgrounding and on-farm finishing; market farm-raised grain through cattle weight gains.	Small enterprises may not adopt production innovations.
Increase adoption of information technology to improve value capture.	Compliance with environmental regulations may be a barrier to creation or expansion of backgrounding / finishing operations.
Commercial producers who specialize in maternal or terminal trait selection and who adopt synchronized breeding with artificial insemination can make rapid genetic progress.	Failure to take advantage of hybrid vigor drastically reduces production potential and hinders the competitive position of the state.

Missouri has large numbers of small farms. Consolidation in production agriculture has compelled many farmers to grow larger and become more specialized to remain competitive. Conversely, it has also compelled many Missouri farms to become part-time operations. The gross income on most Missouri farms has become too small to generate family living expenses. However, beef operations lend themselves to part-time farming as a way to generate supplemental income from land devoted to forage.

While the number of farms in Missouri continues to drop every decade, farm numbers are increasing in retirement areas and around large cities. Buyers of pastureland are often motivated as much by the appreciation potential of the land as they are by its productive capacity. Long-term compound appreciation rates on Missouri farmland approach 6% per year, effectively doubling land value every 12 years.

Cow-calf production is typically a capital-intensive, low-margin business. Moreover, it is a tradition-bound business in which habit and experience, and not necessarily least-cost, determine management practice. Regardless of production system type, the management issues discussed below are those identified in three separate audits (USDA-APHIS ¹ , Iowa State University ², and Texas A&M University ³) as being most critical to the financial success of beef cattle enterprises.

Develop business sense - Producers must commit themselves to making their operations financially successful. They must measure and monitor progress toward financial and production goals. Their production and marketing strategies must not remain static but must continually evolve with the marketplace.
Monitor and control feed costs - Feed costs explain over 50% of the variation in herd-to-herd profits. High-cost, low-return feeding management options at the cow-calf level include unnecessary grain processing, creep feeding, self feeding, and long-term harvested forage feeding (especially homegrown forages). Consider balancing these management options with individual profit objectives or replacing them with higher-returning alternatives: feed whole grains to beef cows - do not roll or grind; stockpile cool-season perennial forages for winter grazing; graze dormant winter pasture and supplement with concentrates; offer supplements on an alternate-day basis; hand-feed rather than self-feed supplements; purchase rather than make harvested forages; and make use of Missouri's extensive by-product feed availability.
Minimize machinery investment - Minimize investment in high-cost assets that tend to depreciate rapidly. Consider leasing needed equipment (e.g., tractors) or hiring machine work done on a custom basis (e.g., haying, silage making, earth work, etc.).
Specialize production - Most beef herds in Missouri (> 90%) are composed of fewer than 100 cows. Managers of small beef herds typically find it challenging to raise both quality replacement heifers and quality terminal-type feeder cattle. The reason for this challenge is that herd improvement comes very slowly when selecting for both maternal and terminal characteristics within the same small herd. Managers of large beef herds (> 400 cows) minimize this problem by dividing their herds into maternal and terminal breeding programs. Managers of small beef herds can take a similar tack by specializing in either terminal- or maternal-type calf production. In the former case, replacement heifers are purchased and the majority of revenue is generated through the sale of calves that excel in terminal traits like growth and carcass merit. In the latter case, the majority of revenue comes from the sale of replacement heifers. This approach is sensible because in most years the break-even price of purchasing an average quality replacement heifer is only $50 to $100 more than the actual cash costs (excluding the value of labor and management) of raising one.⁴ Furthermore, accessing or selling replacement heifers in Missouri is a simple task. The University of Missouri's Show-Me-Select Replacement Heifer Program is one of the premier replacement heifer sources in the nation.
Avoid small-scale seedstock production - Seedstock production is even more capital intensive than commercial cattle production. As such, it is typically very difficult to cash flow small seedstock operations. Operators of small herds should consider concentrating on commercial cattle production.
Consider alternative income streams - Even well managed cow-calf herds offer only modest returns on investment. Cow-calf operators should consider dual-purpose land management as a means to generate additional revenue. Enterprises such as fee hunting and timber production are two possible income streams that can complement a cow-calf operation. Imagination and entrepreneurial spirit are the only factors limiting other possibilities.
Control the breeding season - Confining the breeding season to 60 to 80 days greatly improves calf crop uniformity and marketing opportunities.
Avoid industry fads - There is seldom a shortage of novel nutritional supplements, management techniques, or animal health products on the market. Invest only in those that have been scientifically evaluated and found to have a reasonable likelihood of enhancing profitability.
Avoid tax shelter investments - All investments should be made with the expectation of an increase in after-tax equity.
Be willing to accept additional risk - It is relatively easy to add value to beef calves through health programs, improved genetics, and special nutrition. Unfortunately, adding value is not synonymous with value capture. Most of the value added by the cow-calf producer through management and breeding is harvested after weaning. It is nearly impossible to significantly improve value capture without retaining ownership for some length of time past weaning. Backgrounding, retaining ownership through finishing, and marketing alliance membership offer means to improve value capture. However, all come with increased investment risk.

Stocker / Backgrounding production
Missouri ranks third in number of feeder cattle produced in the U.S. Many of these calves are exported to other states for growing or finishing, however, some are retained past weaning by Missouri farmers and ranchers to utilize the state's vast forage resources as well as the abundant availability of by-product feeds.

Some cow-calf producers may be interested in retaining their own calves past weaning rather than purchasing weaned calves. Retained ownership through a stocker production phase provides cow owners the opportunity to capture the benefit of superior genetics, nutritional practices, health programs, and overall management systems. It is also an opportunity for adding value to or marketing other resources such as labor, facilities, feedstuffs, management skills, and capital.

Stocker operations with or without a cow/calf enterprise are designed to capture the growth potential of young cattle, as well as to harvest available forage in a manner that optimizes beef production. The knowledge required for nutritional supplementation of forage, maintenance of health, and marketing is different in stocker enterprises compared to cow/calf enterprises. Cow/calf producers who wish to add a stocker cattle enterprise must expand their cattle production and marketing knowledge base. Current stocker operators will increase in efficiency by adopting production and marketing technologies that offer the greatest profit potential. Genetics, health, and nutrition all greatly impact the production efficiency of young beef cattle grown with a grass-based diet. Marketing arrangements for both purchasing and selling greatly impact the financial efficiency of stocker operations.

3.6 Marketing Strategies for Missouri's Future Beef Industry

Exhibit 3.6-1 Missouri's Current Beef Industry - Marketing Sector

Strengths	Weaknesses
Established network of local and regional livestock markets.	Lack of maintaining information relationships with supply chain after weaning impedes value discovery, value capture, and information transmission.
Established set of beef cattle production and marketing alliances with widespread knowledge of their availability.	Entrenched production systems and cultural independence causes Missouri cattlemen to perceive marketing changes as threats and not opportunities.
Easy access to the Midwest corn belt and the Great Plains cattle feeding belt.	There are few market outlets for finished cattle remaining within Missouri's borders.
Opportunities	Threats
For producers willing to horizontally or vertically coordinate their production and marketing, size and scale are less of a challenge to capturing value than is often perceived.	Increasing migration of cattle to regional livestock markets may decrease viability of local auction markets and local market opportunities in cattle they market.
Alternative beef marketing structures have matured; most complications and problems have been identified and corrected.	Increasing migration of high-quality cattle to alternative marketing venues may decrease viability of regional auction markets without programmatic links to these venues.
Emerging electronic identification systems will enable identity preservation opportunities that will aid in value capture.	Cattle sold without source- or process-verification could be discounted to unprofitable levels.
Feeders and packers view Missouri cattle favorably and are willing to align with individuals and groups who can deliver cattle in volume.	Market prices for live cattle may become less meaningful as more cattle are traded via merit-based transactions. Characteristic-based pricing will move down through the value chain to the cow-calf producer, reducing the price for cattle without required specifications.
Continued strong interest in value-added grain processing in Missouri will provide investment opportunities that complement beef cattle production.	Lack of price-risk management experience may expose new backgrounders and feeders to market losses.

Marketing in the beef industry is in the midst of a major structural and philosophical change. Prior to 1995, the vast majority of fed cattle were traded in a price-coordinated commodity marketplace where prices were based on the average retail value of all product produced. Cattlefax recently reported that a majority of fed cattle are now traded via some type of negotiated, non-price disclosed, value-based pricing agreement. Under value-based marketing systems, sellers are rewarded or penalized based upon individual animal quality.

Under the price-coordinated commodity beef system, fed cattle prices nationwide deviate by only a few dollars per head in spite of the fact that $500 differences in carcass value per head are common. Negotiated coordination, rather than price coordination, is the distinguishing feature of the value-based marketplace. It attempts to capture value based on the merit of individual carcass quality. Cattle sold into value-based processing systems may be committed for sale weeks or months in advance of their harvest date, under precisely negotiated terms, rather than on a spot-cash basis. In spite of the fact that many of these transactions occur at the behest of producers or producer-controlled alliances, they may fall under the definition of captive supply and potentially contribute to the price discovery controversy.

In some cases, the use of value-based pricing is available without the accompanying preharvest commitment for sale. This system sends price signals regarding individual cattle back to producers with which they can make appropriate production decisions to respond to the market signal. In addition, information on genetics, health, and management that follow cattle through the production chain provides upstream value chain participants with the opportunity to learn which producers and production systems best fit their desired target market. This is an advantage for cattle that excel in certain physical traits and a disadvantage for those that are below average. Over time, as more animals are marketed through source- or process-verified systems, the demand for commodity cattle will diminish. Reduction in price will follow.

Predictability in terms of both growth and carcass merit is the distinguishing characteristic of cattle that are developed for value-based markets. Within groups of cattle developed for specific target markets, volume and uniformity have also come to play crucial roles in obtaining market rewards. The volume, uniformity, and predictability that are essential for success in a value-based marketplace can only be developed when the seedstock, cow-calf, and finishing sectors are full partners in the supply chain. These partners are necessary not only to meet supply requirements for a specific type of carcass but also to carry out suitable source- and process-verification procedures (e.g., health protocols and animal well-being practices) demanded by consumers.

Beef Alliances
Beef alliances use contracts and incentives to link stages of production and to create a marketing organization.⁵ They are a form of vertical coordination aimed at helping groups of producers capture some of the marketing margin, processing margin, and carcass value of the animal. Successful alliances operate in Missouri today such as the MFA Health Track Alliance, the Missouri Premier Beef Marketing Program, U.S. Premium Beef, and many others.

Alliances are formed between groups of individuals that possess similar production goals or values that may include an emphasis on carcass quality, genetics, animal health, or geographic identity. They allow cow-calf and stocker producers an opportunity to increase their profitability through retained ownership and afford them the ability to market a larger group of cattle of consistent size, genetics, health, and finish. Currently, there are two distinct types of alliances. Alliances can be formed horizontally (among producers within the same segment of the marketing chain) or vertically (among producers and other market participants from several levels of the marketing chain).

Most alliances have rules that must be followed and documented in order to become a member. Normally, producers must pass an inspection, which is conducted by a member of the alliance or an outside party hired by the alliance. The most common requests are vaccination, weaning, castration, and dehorning records. Most alliances will ask producers to meet some basic management requirements, such as minimum genetic standards, on-farm weaning for 14 days or more, and on-farm adaptation to concentrate-based diets. These examples are basic in nature. Some alliances may require more in depth practices. All of these rules are set in an effort to create uniformity among the cattle in terms of appearance and performance.

Alliances offer several advantages to producer members, which include reduced transportation costs, improved market power, streamlined sales, and improved down-stream information on their cattle. A successful alliance must operate as a single entity with common goals and values.

Beef production and marketing alliances have brought about fundamental changes in cattle marketing:

Strategic business alliances in the beef industry have enabled the communication up and down the supply chain that is necessary to coordinate production from the level of cow-calf production to the packer. Soon this communication and coordination may extend from the level of germplasm to the retail meat case.
Alliances have enabled collective bargaining for beef producers and the creation of target markets for beef products.
Larger marketing entities and less market chaos have resulted, in part, from alliance formation (fewer than 2,100 feedlots now market 85% of fed cattle).
Alliances may be formal or informal and coordinated vertically (PM Beef) or horizontally (Missouri Verified Beef).

Success of strategic alliances has been fostered by:

Greatly improved predictability of growth performance and carcass merit.
Fewer beef breeds in functional use.
Increased interest in post-weaning data collection.

The organizing principle of most alliances is to establish brand-recognition or to supply product for an established brand name or brandable product. The following factors contribute to the success of alliances:

To enhance or add value, some type of product differentiation (i.e., a brand) must be established.
Prior to the economic collapse of 2009, beef demand was rising since 1998, partly a result of new branded beef products being brought to the marketplace.
Retailer and consumer demand centers first on food safety; branded beef products are positioned to supply the industry with the source- and process-verification needed to assure food safety.
The ultimate iteration of branded beef is the case-ready product:

Case-ready products place high emphasis on red meat yield. It is impossible to market waste fat in transparent cases, therefore, both the retailer and the consumer benefit.
Case-ready products offer the highest degree of control of food safety in the marketplace.

Retailer and consumer demand also centers on convenience and consistency; case-ready beef products meet these criteria. It takes highly organized and reliable supply chains to bring a branded, case-ready product to market. Alliances are an unavoidable part of the process because no single business entity can own outright all of the resources necessary to bring a brand-name product to market on a global scale.

Adding Value to Missouri's Beef
Under the present production and marketing structure, the large majority of the retail value of beef is added after the cattle leave their farm of origin. There are, however, several ways cow-calf producers can capture value prior to marketing cattle to the next step in the market chain.

The term value-added is used to describe improvements made to a raw product before it is taken to the next stage of production. Discussions centered on value-added beef often focus on improvements or enhancement to the meat product. However, beef enhancement can also begin at the cow-calf level. Once a producer understands what is valuable to his or her customers, and then improvements to the product can be made that will benefit both. It is critical to understand that the concept of adding value is in fact the customers' perception of value and not the producers' perception. Therefore, communication between the producer and the customer is an important key to developing a profitable value-added beef program.

Adding Value through Information
One aspect of adding value is providing information to buyers about calves prior to the sale. Providing potential buyers with information on animal health practices, genetics, feedlot performance, and carcass performance reduces their investment risk. As a result, they may be willing to pay more for calves, thereby increasing a cow-calf producer's profitability.

Value is an economic term. The value of a commodity refers to how much that product, as an input, will benefit the next owner. The marketplace, however, does not automatically allow a producer to capture the value that his or her product provides. Indeed, a purely competitive market place would add price to a product based on the number and strength of competitive bidders for that product more than the characteristics therein. Adding value to beef can create an additional demand for that product if several rules are met.

The product and its characteristics are differentiable.
The buyer can identify the producer and the characteristics of the product sold
The buyer understands the extra value that is added to the system (i.e. he/she knows how much he/she could pay for the characteristics of the product).
The buyer has a way to communicate with the producer which characteristics of the product were most valuable, thus allowing the producer to repeat the same process or make changes to add even more value to the product.
The seller (producer) can re-establish contact with the end user of the product for negotiations in the next market cycle and has an alternative selling method available with minimal loss in profits.

Retained Ownership
One of the most common methods of adding value to cattle is through retained ownership. Retaining ownership though post-weaning production stages can decrease losses from shrinkage and sickness, eliminate middleman fees, and improve the return relative to production costs. The major disadvantage is the delay in cash flow and the market risk of feeding cattle.

¹USDA, APHIS. 1996. Management practices associated with profitable cow-calf herds. http://www.aphis.usda.gov/vs/ceah/cnahs/nahms/beefcowcalf/beef_cow_calf.htm
²Iowa State University Extension. 2001. Iowa beef cow business record: 2000 summary. http://www.iowabeefcenter.org/Publications/spa00.pdf
³McGrann, J. 2002. Standardized performance analysis for southwest herds - 1991-2002. Texas Agricultural Experiment Station. http://agecoext.tamu.edu/spa/papers/spaforsouthwestherds.PDF
⁴Feuz, D. M. 2002. The costs of raising replacement heifers and the value of purchased versus raised replacement. In: Managing for Today's Cattle Market and Beyond, Western Extension Marketing Committee. http://agecon.uwyo.edu/Marketing/mngtcmkt/RplcHeifr.pdf
⁵Anton, Tom. Beef Alliances: A Basic Economic Overview

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