Packers Field Feedlot Industry
Questions During TCFA Session

AMARILLO — Representatives of the "Big Four" beef packers participated in a question-and-answer panel during last week’s annual Texas Cattle Feeders Association meeting here. The following are feeder questions and packer responses:

"We do own a feedlot in Texas which is designed to be profitable as a profit and loss center on its own," Swift & Co.’s John Simons told listeners. "That feedlot capacity is not used to raise or lower prices," he insisted. "I believe all important processors control marketing dates on some cattle in Texas."

We are told that cattle feeders and packers need to work together. How can that be done when packers have all the leverage?

"We’re out there trying to do the same thing you’re doing every day. We’re trying to make as much money as we can," Farmland National Beef’s Tim Klein said. "How do we do that? We do that by buying the cattle as cheap as we can and selling them for as much as we can.

"We don’t think we have any leverage over you," he continued. "Look at who we’re selling to. Look at the concentration in the retail sector. They have a hell of a lot more leverage."

Do forward contracting, alliances and other marketing agreements improve the ability of small feedyards to compete with larger feedyards?

"I sure think they have the potential to help with that," said Excel’s Bill Rupp. "If he understands the end product that the consumer desires and he’s raising cattle that will fit that end product and he has an arrangement with the packer where he has the ability to recognize that value, then I believe, yes, he will make more money."

"I think if an independent cattle feeder aligns with a packer to produce the type of product that a packer can pay a premium for, then they can survive," said Farmland National Beef’s Tim Klein .

"USPB members are not big cattle feeders and they are getting around $20 a head premiums every year because they are producing a product that we want and we can create value from that product in the marketplace."

Why do you reduce kills when you’re making money and there’s still large numbers of cattle available?

"The truth is, if we’re making money, we don’t reduce kills," IBP’s Gene Leman told feeders. "We watch each other across the fence, but the truth is, we’re trying to make some margin so that we have the opportunity to add value and continue to produce a better product."

Bill Rupp added, "Demand is key to that. We can have large supplies of cattle, but if it’s at a time where the retailer just isn’t going to absorb beef into the marketplace, we fill up that pipeline, and once it’s full hours get cut. We end up with this big slingshot effect where one week we’re killing a lot and the next we’re not doing anything, and that’s rough for all of us to try and plan our businesses."

How would you measure the success of eliminating captive supplies?

"The ultimate measure is how well captive supply has helped increase demand," John Simons said. "I think if we were to go without captive supplies for one year or five years, it would show that we don’t do as well garnering a fair share of the consumer’s protein dollar."

"We prefer to call it ‘coordinated supply,’" Tim Klein said. "If you eliminated captive supply, there would be two or three times more cattle to market on a weekly basis on the cash market. I think it would create a lot more volatility in the marketplace."

Leman added, "I’m not sure that captive supplies are really that detrimental to cattle prices on a spot or an average market basis.

"I think that captive supplies certainly have a place

in the market for those interested in getting a premium for the quality that they bring to the marketplace."

Would eliminating captive supplies put us at a disadvantage to pork and poultry?

"If we can’t pay premiums for the raw materials that hit the target and discount those that don’t, then we’re at a severe disadvantage with respect to other proteins," Simons said.

If captive supplies are not eliminated, why shouldn’t they at least be regulated?

"I could ask how many of you who right now are on some kind of formula or marketing arrangement want to back away from those agreements," Leman said. "Do you want to back away, or do you want your neighbor to back away? I think there is a whole host of issues here that we need to think about. It may be rewarding to some and detrimental to others, so I would say that there are two sides to the story. If we eliminated captive supply, I don’t think that the real price paid today would change a great deal."

"By eliminating coordinated supply we would eliminate our ability to grow our branded programs," Rupp insisted.

"Taking a quote from Chandler Keys — it’s easy to get government into our business, but once you get them in, you’ll never get them out."

"I think technology is the biggest key as to why that trade happens the way it does," Rupp told cattle feeders.

How do processors perceive consolidation of the retail market?

"As I pointed out in my discussion, the top five retailers really have gained a lot of strength," Leman said. "You’re also seeing other groups like wholesale distributors join together. So we’re going to continue to see pressure from retailers to do more of what they want.

"Much of the product today is sold at what the trade calls ceiling prices," he noted. "If the beef price goes down, the retailer gets that price, but if it goes up then the retailer only has to pay the ceiling price."
"Because of the growing demand for closer trimmed products and different packaging and so forth, we’ve added about $35 a head to the cost of killing and breaking a carcass," Klein told listeners. "That’s a lot of money."

"We all want to differentiate our product," Simons noted. "Some do it through branding. It takes about $15 to $30 million a year to support a branding program, so the stakes are getting higher and higher."

"I don’t know the method," Simons told listeners, "but I do think that if we walk the talk — you and I — there will have to be a system of serious premiums and serious discounts for raw materials that make it easier to create a consumer product that is relevant. And if it’s not that way, then our only choice is to use processor product technology so that no matter what the producer gives us we can overcome any problems with the raw product."

"We will have to recognize the value that an animal brings to the marketplace, and that has to be done through value-based procurement," Rupp commented. "There are pockets of that occurring today, and as that continues to grow I think you’ll see retailers try to differentiate their product offering to the consumer even more.

"Clearly, demographics need to have a play in what is offered in a store."

"I think it’s going to force more alliances," Klein told the group. "I think alliances between producers and packers are the future of our industry."

"We’re going to have to find a way to get some kind of base price in the marketplace," Leman said, "whether that’s going to come off a product or some other type of instrument that we develop together. I don’t really know that answer, but there are going to be significant premiums that give producers direction.

"Alliances will be another strong program," he continued. "I think that there are thought processes being developed on how we might work together. Maybe there’s risk sharing at some point. Maybe there’s a whole host of new ideas, but there will have to be more cooperation.

"The chicken guys worry about some of the things that you worry about, like feed costs, but they don’t worry about the interface between that chicken price and that plant. That’s a big difference in how they run that business compared to how we do it. I’m not advocating that, but I’m just saying that we have to get to that virtual integration or we really are going to be in trouble competing with the other side of my new company."

"Tremendously," Leman said. "Four years ago we started producing product for them. Two of my competitors also produce for them. We’re seeing a tremendous change. The product is now trimmed in an online operation which is bringing about efficiencies and consistency, and it’s being packaged in high-oxygen trays.

"I think we’ll see more retailers move this direction because of Wal-Mart."

Does Swift intend to rebuild their Kansas plant?

"Undetermined," Simons said. "For those who have followed the recent acquisition, we’ve had lots and lots of diligence from a variety of stakeholders, banks, bond holders, etc. and the finish line was getting this deal complete. The giant decision to rebuild capacity was not considered during that diligence period."

"We cooperated with a variety of government entities including the CDC in both Atlanta and Athens, and shared customer lists with state health departments," Simons said. "We shared isolates from May 31, but we did not share other isolates because we thought it would create a whole host of false positives."

Why is irradiation not the silver bullet for E. coli?

"We started producing irradiated product in the last six months," Leman said. "It really is going very well, and I think in a few years there will be more irradiated product.

"The problem is even though the pathogens have been removed through radiation, if there is any cross-contamination at home, there could still be a problem. That’s why it’s not a silver bullet," Leman said.

"Consumers then might say that irradiation isn’t any good when the truth is that the irradiation did its part; it was the consumer who caused the problem."

"Irradiation is a function of demand," Rupp added. "The consumer has to want it to happen. I think the best thing that could happen is for USDA to mandate irradiation for the school lunch program. I think it would go a long way toward convincing the consumer that this product is very safe to eat, safe enough to feed to our children."

"The only real silver bullet that we have today is the consumer cooking the product to 155 to 160 degrees, period," Simons reminded the crowd. "There was disproportionately less said this summer after the recall about the need for consumers to simply cook a hamburger till the juices are clear. We hope that the media and other organizations choose to highlight that in the future."

"E. coli could happen to any one of us," Leman commented. "It is an industry problem, not a one-company issue."

"The meat supply today is safer than it’s ever been, but because of the testing and increased scrutiny being placed on our industry, we’re feeling the brunt of this financially," Klein remarked. "When we have a presumptive positive, whether it is a combo or trim or load of ground beef, that entire product is destroyed. You’re talking about a significant hit."

Will any of the extra inputs that the cattle feeder does to address E. coli be reimbursed in the cattle price paid, or is it just another cost we have to absorb? What are these extra inputs worth to a packer, and will they pay a premium?

"We have been trying to make sure that our product is the safest possible, but I believe that because we aren’t guaranteeing the product is free of pathogens, all of us are taking a hit in the marketplace," Leman told listeners.

"So if you can guarantee it, I would say there would be a premium. If you cannot, I would say we will continue to fight the battle together."

"We started what we call a test and hold program in Texas," Rupp told listeners. "We lot all of our ground beef and test it for E. coli. We worked on a protocol with the government where if we found a positive we would throw away the lot that was positive, the lot before it and the lot after it. That program has probably cost us about two percent of our ground beef production," Rupp said. "So there is great cost being paid by the industry to make a safe product.

"I don’t think it’s a function of who’s going to pay to make a safe product," he continued, "but more of a function of if the product doesn’t get safer, will we have anything to sell in the long run?"

"I’m not sure that the demand will diminish so much as it has been held back by food safety concerns," Simons offered.

"If we start using such things as lactoferrin, which does take the safety all the way to the consumer’s home, will the consumer then get sloppier in the way they handle the product? If that occurs it could create an even bigger problem," Klein pointed out.

Emcee Paul Engler added his own thoughts on the issue.

"So many of us, including myself, believe that if we do something at preharvest level to increase the value of our product, then we should be paid for it. I think we all have an obligation to improve our product, which hopefully will improve demand. We shouldn’t necessarily expect payback," Engler said.

"It was a big disappointment to me when Vitamin E came out and it showed that it could really increase the value of our product. We got hung up trying to figure out who was going to pay for it. So now there is very limited use of a tool that we know would improve the value of the beef product."

"We’re here today," Rupp offered. "We came down around Christmas last year and spoke with TCFA. It’s something that we need to do more of," he admitted. "If there is an opportunity to get us involved to help us understand each other’s business, don’t hesitate to ask. We welcome those opportunities."

"We feel the same way," Leman said. "We really need to keep the communication lines open.

"Since your annual meeting is going to be here again next year, I want to extend an open invitation to all of you to tour our plant here."

Competitor Excel’s Bill Rupp jumped on that one, asking, "Does that include us?"