Beef's Future Is Expert Panel
Focus At Recent NCBA Meeting

DENVER — An industry panel of experts shared their thoughts on positioning the beef industry for the future at the Cattlemen's College during the National Cattlemen's Beef Association summer meeting last month.

Ranchers Renaissance is a customer-focused, vertically integrated beef production system with profits derived from increased efficiency and consistent, high-quality finished products.

"Ranchers Renaissance is about value chain alignment," John Butler, Rancher's Renaissance CEO, told listeners.

Seedstock and cow-calf members are responsible for producing genetics that will assist in consistently hitting specifications. Stocker operator partners are responsible for assisting in inventory management by purchasing sourced cattle, Butler said, while their packer/processor partner, Excel Corp., provides expertise in marketing and gives them access to end users.

The final link in this vertically coordinated system is the retailer or end-user, and Butler said the alliance is in "11th hour" negotiations with a large retailer who will ultimately market the alliance's branded product. They hope to roll out their branded product before the end of this year.

Ranchers Renaissance members are located all over the country, from Texas to California, from the High Plains to Canada and across the ocean to Hawaii.

"We’re looking for the right kind of people – people who will embrace our vision statement, people who are willing to change if necessary."

Butler shifted gears then and talked briefly about some of the things he sees on the horizon for the beef industry.

Vertical coordination, Butler predicted, will continue to grow within the beef industry with the drivers of that coordination being branded products, enhanced risk management and transfer of information.

Arrangements will be developed with every segment of the production chain, including the packer and retailer, and these relationships will be for the long haul and not a short-term commitment.

"If you are not part of an alliance, I think you need to think seriously about becoming a member," he told listeners.

That said, he admitted that more alliances will fail than will succeed.

"I’m here to tell you this kind of a project is not easy. It takes huge commitment and that commitment is tested daily."

Butler predicted that change in the industry will be driven by private industry. Industry associations, like NCBA, will play a role in information sharing.

"When the rubber meets the road, however, it will be up to the individuals to make the difference and make the changes."

Processors will focus on acquiring a consistent supply of products, he predicted, and in time, that guaranteed consistency will become more important than price.

New product development, he opined, will continue to drive demand issues in the beef industry.

In terms of data collection, Butler said there must be and will be an improvement in learning how to manage and interpret the information gradually becoming available throughout the production chain.

"It’s become easy to collect data; it’s very difficult to manage that data, to know what it's saying to make changes accordingly.

"I like to say we're traveling down the road at a rapid pace. We're lost, but we're making damn good time."

U.S. Premium Beef's story is not a new one, but it was just a few years ago that they, too, were tackling some of the same issues now facing Ranchers Renaissance. The newness of USPB's story, however, is in its now proven success. The company's CEO, Steve Hunt, was on hand to describe to listeners how they've achieved some of that success.

Their story begins with the foresight to change.

"Those of us who organized USPB quickly came to the realization that it was either time to change or get out of the beef industry."

From that realization came the company's mission statement — to profitably sell meat and meals instead of cattle. Early on, USPB organizers agreed that the three keys to a successful beef industry were value-based pricing, carcass data back to the producers, and ownership in the system beyond the production level.

USPB bought a company called National Beef, which today is owned in partnership by Farmland Industries and USPB. USPB's contribution is a designed supply of cattle while Farmland gives USPB exclusive access to the Farmland label. The company is governed by a board of directors, one director from each of the two companies. Hunt serves as USPB's director. The directors' main responsibility is to hire management to run the company.

Today USPB owns 29 percent of Farmland National Beef. They have 1346 members in 28 states, 353 stockholders in 20 states and 711 feedyards in 14 states. They have had 1.4 million cattle go through their system, and from those cattle the company has paid out to their members $18.8 million in grid premiums and $28 million in earnings on $1.5 billion in total sales.

Today, deliveries on an annual basis amount to 650,000 head. Premiums currently are averaging $15 per head but there are members every week, Hunt said, who realize more than $100 per head in premiums.

"We have cattle that do that consistently week after week and we are working to identify them," he told the group.

Total earnings for USPB alone for fiscal year 2000 are expected to be roughly $15 million. Patronage dollars per head in 1999 averaged $18 per head. This year they expect it to be more than $22 per head. Shares are trading around $87.50.

"We have a pretty liquid market," Hunt told listeners. "We're trading shares every week."

The CEO agreed with Butler's assessment of the painstaking process involved in establishing a viable alliance.

"This is not an easy process," Hunt said. "The first six months of this operation was one of the worst six months of my life. The calls started early in the morning and ended late at night. Our producers were not happy. 'Those can’t be my cattle; I know my cattle are better than that; I know there must be a $200 bill under the table that you’re keeping.' Folks, I’m here to tell you, it is not there.

"Who has it? The poultry people, but we're moving rapidly to achieve more of that dollar."

Despite the rough start, what the company has done since that time far exceeds their expectations, Hunt said.

"In 1999 alone our members realized about an 80 percent return on investment, and those whose cattle fell in the top 25 percent realized about a 118 percent return. We're projecting that the average producer will realize 100 percent return on investment this year. And those who deliver the better upper end cattle will likely realize 150 percent return on investment."

Elements of a good deal, Hunt said, include the right people, governance, economics as a driver, a foundation in profitable operations, focus, expertise, due diligence and structure.

"What have we learned?" he concluded. "That there are extreme value differences in similar cattle; grade is determined by genetics and production management; that processing earnings are misunderstood; that processing earnings are seasonal; that low cattle prices don’t result in higher processor earnings; that prices are predominantly driven by supply and demand and that business parallels between segments."

As is often the case, the question about their grid and its basis was posed to Hunt.

"That’s probably the most common question we get," Hunt admitted, "and probably the toughest pill for us to swallow." He was referring to the fact that their grid uses the cash market as the basis, something to which organizers were strongly opposed. But as it turned out, organizers found that there wasn't a better alternative. They looked at retail indexing, boxed indexing, futures indexing, etc.

"The bottom line, we discovered, is that an index is an index is an index," he told listeners. "And the industry still considers cash an index. Quite frankly, it doesn’t matter to us today because we sell products. That’s one of the reasons we decided to own the processing company, because now the cattle price becomes a transfer price to us. What we’re most concerned about is what does the meat sell for," he explained.

That said, Hunt admitted that using cash as a basis for these "value"-based grids is a problem, particularly as the number of cattle sold on the live market dwindles and the number on formulas or grids increases. He said his company is ready and prepared to change tomorrow, but added that the industry must make the change together.

George A. Hormel established Hormel Foods in 1891 in Austin, Minnesota. He bought an abandoned creamery and started out processing mainly dried sausage. Today the company is experiencing record sales topping $3.3 billion. Reported earnings in 1999 were $2.22 per share, an increase of 37 cents over the previous year, and it's the 33rd consecutive year the company’s annual dividend rate on the corporation's common stock was raised.

Joe Swedberg, vice president of marketing, told listeners that the company's success is mainly attributable to the marketing behind their brands and a diversified portfolio.

In the meat division, Hormel is the number one seller of pepperoni. Fifty percent of the pepperoni sold in the U.S. is Hormel's pepperoni. Their grocery product division markets products like Hormel’s chili, Dinty Moore, Spam, Chi-Chi’s, etc. They are also the country’s largest turkey processor under the Jennie-O Foods brand. Their newest brand in the grocery line is Carapelli olive oil.

"It's very important as branded marketers to be able to control brands," Swedberg told listeners. "Wayne Gretzsky likes to say, 'I always skate to where the puck is going to be, not where it is.' This is something that we, as marketers, need to follow."

In answering the question of where he expects the beef industry to be in five to 10 years, Swedberg shared some marketing research his company recently completed.

Key demographics and consumer value trends will create a more positive environment for "new" types of cooking, snacking and in-home meals, he told the group. Consumers are looking for "simpler, fresher and more mature foods — interesting tastes, balanced health choices and convenience products" but taste is still the most important factor.

Protein continues to be an important part of the meal. Side dishes have gone down in importance over the years, but snacking, Swedberg noted, is huge.

Another important aspect revealed in Hormel’s recent consumer survey is that people are bored with what they’re having for lunch. That in itself, he insisted, is opportunity.

Demographics are important in terms of ethnicity and what he termed "rural rebounding."

Swedberg predicted that in five to 10 years 50 percent of the meat case will be in value-added products. He touched on the research done on their pork products that led the company to develop their "Always Tender" brand. Research done on pork products in general, Swedberg said, showed that 26 percent of people are not very satisfied or not satisfied at all, 51 percent are somewhat satisfied, and 23 percent are very satisfied. Furthermore, 91 percent of consumers cook pork "medium-well" or well done.

Consumers gave "commodity" fresh pork products a "three" rating on a scale of one to five and Hormel’s own "Always Tender" Fresh Pork a "five" on the same scale.

"Some said it was the best pork they’ve ever eaten," Swedberg said.

Some of the one-liners used in their ad campaigns are "fork-tender" pork; "forkchop," a pork chop so tender and juicy you can cut it with a fork.

The "Always Tender" pork line is injected with a solution to aid in tenderness, but he said few respondents questioned the fact that the product was injected.

"Of those who noticed the solution statement, they said it was a non-issue once they tasted the product. All they really cared about was the eating quality of the product," Swedberg said.

About a year ago Hormel Foods teamed up with Flint Hills Foods out of Alma, Kansas. They were looking for a fully cooked line of beef products, and Flint Hills Foods made a nice fit.

"Flint Hills Foods' challenge was that they had the manufacturing and product know-how, but they didn’t have the marketing distribution arm, nor did they have the brand behind them," Swedberg explained. "We saw it as an opportunity."

Today the product is in 50 percent of U.S. supermarkets and the company hopes it will be in 75 to 80 percent by October.

"Repeat purchases are absolutely critical," he told listeners. "Thus, a new product absolutely has to taste good first or you won’t get those repeat purchases."

NCBA came to Hormel with some insights and suggestions, and from there evolved another new line in which they took the Always Tender Flavored Pork concept to deliver a tender, consistent, flavorful pork every time, to develop an Always Tender Flavored Beef line. Today the line includes peppercorn beef and teriyaki beef.

Swedberg concluded with this statement: "The future is always here before we are ready to give up the past."