Big Four Packer Reps Discuss
Issues Before Cattle Feeders

AMARILLO — In a show of solidarity, top executives of the four major packers were on the same stage — and pretty much the same page — here last week. They were on hand for a discussion with cattle feeders attending the annual convention of the Texas Cattle Feeders Association.

It isn’t the first time the four have sat down with TCFA. They had a similar meeting last December, and it was that meeting that sparked TCFA’s leadership to ask the packers to participate in an open forum at their annual meeting.

Association chairman Paul Engler termed it a truly historic moment. For more than two hours a packed room of cattle feeders listened attentively to the four packers share their thoughts on the industry and their businesses in particular. After each provided a brief overview, feeders were given an opportunity to ask questions.

The discussion covered everything from marketing agreements to country of origin labeling and mandatory price reporting. The one commonality among all four packers was the challenge of food safety. It was brought up time and time again.

Engler emceed the panel discussion.

"One of the things that has bothered me ever since I’ve been in the cattle business," Engler told listeners, "is the adversarial relationship that has always existed between feeders and packers. We won’t really get where we want to go until that adversarial relationship is broken down," he opined.

"I think we made history today, because for the first time we got four of the major packers together on one forum. It’s undoubtedly driven antitrust lawyers bonkers, because each of them, with the exception of Tim Klein, have been named in a lawsuit started by producers, and I’m sure that every one of them had a very good reason — prompted by their attorney — for not coming down here, but they’re here.

"I think we’ve made a tremendous step in starting to break down that adversarial relationship."

John Simons, president and chief executive officer for Swift & Company, led off the discussion.

"Doing the right thing means that right now we come together as an industry, and it’s in that spirit that I accepted the invitation to be here," Simons told listeners.

Swift & Company, he said, produces just shy of $8.5 billion in sales. They process seven million head of cattle and 11 million hogs. They have six U.S. processing plants, and their four plants in Australia make them the largest processor in that country. They have operations in seven countries, including Asia, and they employ 21,000 people between North America and Australia.

Swift & Co. also has six U.S. feeding operations that feed about 900,000 cattle. They have feeding operations in Australia as well.

On September 19, ConAgra finalized the transaction which gave majority ownership of the company to Texas investment firm Hicks, Muse, Tate & Furst, and other investors, including Booth Creek Management Corp., controlled by George Gillett Jr., a longtime meat industry investor who lives in Vail, Colorado.

The new owners, Simons said, bring with them a very conservative capital structure and balance sheet along with an understanding of the food industry, particularly in the grocery sector and food service.

Swift & Co.’s vision, Simons said, is to be the best red meat company in the industry, but to get there, the company must do some simple things well.

"We have to produce the safest, most wholesome products. We have to keep workers safe. We have to be able to retain and attract the best workforce, maintain the highest standards of quality and consistency, and we have to be able to work with you the producer partners to increase our share of the protein market.

"We have to produce safe meat," he continued. "We have to work through this country of origin labeling issue. We have to continue to focus on new product development. These are true opportunities that we as an industry have to get right if we are going to have any chance at all to expand the pie and increase demand."

Simons talked at length about food safety. Food safety has been on the front burner more than usual for this company the last three to four months because of possible E. coli contamination which resulted in the first of several large recalls beginning July 19.

He told listeners that there is incredible pressure from non-governmental organizations — consumer activist groups — to show zero tolerance.

"Quite frankly, it’s our view that there is no such thing as zero tolerance."

He said educating the media is one important step in putting the food safety issue in its proper perspective.

"Our industry is in fact turning over every stone to try to find an answer to E. coli 0157:H7. We have carcass sprays and dips, ultra high pressure sterilization, irradiation that we are testing, etc. We’re trying probiotics in some of our Colorado feedyards. We’ve been testing vaccines, cleaning and sanitizing yards, and still I know of no silver bullet."

On the country of origin labeling issue, Simons told listeners that he finds the rules confusing and cumbersome, and according to the Food Marketing Institute, there is little incentive for grocers to put a voluntary program in place.

"What we are certain of is that there will be added costs. One trade magazine estimated such a program would cost $1.5 billion to $2 billion per year, and the real question is whether or not the consumer is willing to pay more for that product because he thinks something is better."

Labels, Simons insisted, would be even more intimidating to the consumer. The worse case, he said, will be on ground beef.

However, Simons said, one way or another, source verification ultimately will be required. It’s already occurring in Japan and Australia.

"More than 10 percent of our product goes to international markets," he reminded, "and if we’re unable to meet international guidelines we will lose a significant slice of the value of our drop credit."

"I don’t want to bear all of the cost, I don’t think you want to, and the retailers don’t, so the ultimate question, then, is whether or not the consumer is willing to value that differentiated label product by nation enough to pay significant sums for it. I don’t think so."

New product development, Simons told listeners, is vital if the industry is going to grow demand for the pie.

"If we are committed to functioning as a demand-based industry, we must focus our efforts on achieving new products with new packaging to drive our share of the protein pie."

The development of new products, he said, takes about 12 months from concept to start-up, and only two of every 100 products actually succeed. Stocking costs and the cost of the raw product make the development of new beef products more expensive.

"Ten years ago Monfort was a commodity processor," he continued. "Our products were largely differentiated based on price. These last few years we have been dismantling a lot of profit and loss centers, creating a team culture, and doing what I refer to as blocking and tackling to focus on specific channels."

Bill Rupp, executive vice president of Excel Corp., told listeners that the real problem in the beef industry isn’t packer ownership. It isn’t concentration, and it’s not trade flaws. It’s the fact that costs exceed demand.

"We’re trying to increase demand through branding, marketing, food safety and exports, Rupp said, "but we need to be coordinated with live production to be successful in providing consumer-focused solutions."

Excel is working to improve demand by offering more and more branded products, more specifically branded products that deliver on the promise of consistency and tenderness, he said. Some of Excel’s brands include national brands like Certified Angus Beef and Hormel Always Tender. They also have specific brands for specific customers like Cattlemen’s Collection, which was developed for the Kroger Corporation, and Harris Teeter’s Ranch, produced for Harris Teeter. These two brands, Rupp said, have made an aggressive commitment to move away from commodity beef.

To deliver branded solutions, vertical alignment with producers is critical, the speaker reiterated.

"We have to be focused on the consumer. We also need a pricing mechanism that rewards producers for creating value but also assures retailers that we can commit to a steady supply of beef for branded programs."

A steady supply is particularly critical, because more than 50 percent of the beef sold today is sold on feature, he told listeners.

"We’ve learned a lot since we started supplying a full counter replacement branded beef program," Rupp said, "but one of the biggest things we’ve learned is how much supply is necessary to cover demand for branded beef sold on feature."

He talked briefly about their marketing efforts and what it takes to roll out a branded beef program. Over the last decade, the company’s marketing expenditures have gone from half a million dollars to well over $15 million, which averages about $2.50 a head. Excel’s "demand team" — their sales and marketing team — has grown by 75 percent in the last five years.

Food safety, Rupp noted, requires commitment from everyone in the food chain, including the consumer. Consumers don’t always handle the product properly, and many don’t cook ground beef to the proper endpoint, he explained, and that mishandling can lead to illness.

Significant capital has been invested by the processors to ensure a safe beef product, but like Simons, Rupp reminded listeners that there is no silver bullet.

"We strongly believe that the answer to E. coli is a coordinated industry approach."

Rupp also focused on the importance of the export market in terms of demand.

"We have to a presence overseas, and we must establish relationships. In 1982 we opened our first office in Japan. We now spend about $2.5 million a year just to maintain two offices in Japan."

The big population gains, Rupp said, are going to come in Asia, and rising populations along with improved standards of living will lead to increased consumption of animal protein.

Referring to country of origin labeling, the speaker said the industry needs to be careful not to shoot itself in the foot by coming up with "solutions" that will not solve the problem.

"Country of origin labeling will add significantly more cost to the beef industry, and it will do nothing to improve demand. It will greatly compound the problem we face as an industry trying to compete with the other proteins."

Rupp also told listeners that they fully expect another push for a ban on packer ownership.

"Just as with COOL, this is a solution that does not address the problem. A ban would eliminate marketing alternatives for producers and relegate all producers to being basic commodity suppliers. What if these marketing alternatives were the vehicles to actually improve demand?"

He pointed to studies which he said show no evidence linking captive supplies to lower prices. These various analyses, Rupp insisted, clearly show that prices are still being determined by good old supply and demand.

Proponents of limiting packer ownership of livestock point to the current cash market as the best option for producers, but Excel contends this logic is severely flawed because the cash market is based on averages and does not drive the kind of production practices that will ultimately grow beef demand and producer profitability.

(Proponents of packer ownership limits counter that what actually ails the cash market today and reduces it to averages is the very captive supplies they wish to restrict. Not too many years ago, packers paid different prices for different grades of cattle, they point out, and the only thing that has really changed is that they no longer have to do so because they control enough supply to offer a take-it-or-leave-it ultimatum rather than a bid. The captive versus cash market has become a matter of the tail wagging the dog, they insist, and their goal is to dock that tail. — Ed.)

Tim Klein is the president and chief operating officer for Farmland National Beef. He started his remarks by telling feeders that he empathizes with the losses they are experiencing.

"We’re a little unique in that we are producer-owned, and one of our owners, Farmland Industries, is struggling through Chapter 11 as we speak. The other owner, U.S. Premium Beef, is made up of producers just like you, and we know what the equity loss that is being experienced in your sector means to all of us."

Farmland National Beef has annual sales of $3.2 billion. The fourth largest packer-processor represents about 10 percent of the market.

The company was formed in 1992-93 with acquisition of the High Plains dressed beef plant in Dodge City and a year later with the acquisition of the National Beef plant in Liberal, Kansas. At that time the combined slaughter of the two facilities, Klein said, was 1.5 million head of cattle a year. Today Farmland National Beef is killing more than three million head a year.

Over the last eight years, the company has spent more than $200 million on their two plants to bring them up to standards so they could compete with other plants in the industry.

Farmland National also operates a portion-controlled facility. Kansas City Steak Co. markets products through catalog on the QVC cable television channel and they also do a fairly significant food service business, Klein said.

Their most recent venture is their two case-ready beef plants, one in Georgia and the other in Pennsylvania. Last year they invested more than half their profits back into their case-ready operations.

"We’re doing everything we can to be out front, to add value and increase revenue. We don’t know how quickly case-ready is going to embrace the market, but we want to be part of it."

Alliances, Klein said, are important to their company.

"Because of the alliance we have with our producer owners, we have been able to put together a designed supply system that feeds our value-added markets. We can go to our producer owners and tell them this is what we want and this is what we’ll pay for."

Klein said the company gives back to the producer 80 percent of the increased value received in the marketplace. That payment comes in the form of a grid premium.

Like previous speakers, Klein identified food safety as one of the most important issues facing the beef industry today. Farmland National Beef, too, is doing everything they can to find ways to produce the safest product, he insisted. They’ve introduced a new concept they call "Biologic." It breaks their slaughtering facilities down into different zones. Each zone has its own safety criteria, its own measurement systems, and Klein said it results in a cleaner plant.

They are also testing the use of activated lactoferrin, but here again, like their competitors, they have not found a silver bullet. He said that if the industry can find a way to "brand" food safety it will definitely command a premium in the marketplace.

Farmland National Beef, Klein said, is often asked how they’ve managed to be so successful in a relatively short time. He said it’s all about focusing on the key drivers to profitability.

"We have to strive to be the low-cost producer. We have to develop alliances and partnerships with both our suppliers and our customers," Klein said. "We have to identify and develop value-added products. Most of all, we have to have clarity of vision so that everyone on our team knows where we’re headed and how we’re going to get there.

"We need to ask ourselves how we as an industry stack up," he continued. "Do we know what the drivers to profitability are? Are we working on them together? I don’t think so. Are we the low-cost producer? We’re sure not that. Beef is, however, the protein of choice. The consumer will pay a significant premium for beef over any other protein.

"I challenge us as an industry to work together. It’s not about whether the packer has captive supplies or he’s doing this or that," he continued. "At the end of the day we’re going to make $20 to $25 a head; that’s it.

"We open our books to USPB members. They now realize how hard it is to make a profit in the packing business.

"The opportunity for us as an industry," he concluded, "is to break down the barriers and the distrust, so that we can all work to increase demand and take costs out of the system and make this work for everyone."

Gene Leman, senior group vice president for IBP, echoed much of what his competitors said.

"While we’re in different parts of this meat industry, we certainly are all still in the same business," Leman told cattle feeders. "We really need to find ways to cooperate and work together."

Gone are the days of the commodity mentality, Leman said.

"It’s no longer about producing a commodity and selling it at the best price. Rather, it’s about producing a product that the consumer wants. It’s all about value."
Tyson Foods and IBP joined forces about a year ago, making them the largest producer of chicken, beef and pork products.

"It is a big job putting two companies like this together," Leman admitted. "We think we have been able to create something greater out of the total than the sum of two parts.

"Tyson has already helped us with new product development and marketing. We had one or two people working in new product development. Tyson has about 120. You’re going to see a lot of new products come to the marketplace this next year."

Tyson processes more than 10 million head of cattle annually at 12 different locations from the Midwest to the Texas Panhandle and Canada. They have 25,000 "team members." In 2001, Tyson’s beef group did $10 billion in sales in the beef group. Leman said they expect the same for this year.

Every facet of the beef industry, he noted, is experiencing some degree of consolidation, some more than others. Today the top five U.S. supermarkets, he pointed out, account for 50 percent of the retail marketplace.

"Some believe by 2005 that could be 60 percent, and with companies like Wal-Mart, I believe those figures," Leman said.

One of the biggest changes coming to the beef industry in recent years is case-ready production. IBP has been in the case-ready business now for about four years. Their biggest customer is Wal-Mart. Today the company produces 100 case-ready beef items and 40 pork items.

Last year they produced 225 million pounds of case-ready product. This year, Leman said, they expect to roll out 450 million pounds. Their facility at Council Bluffs, Iowa is producing 2.5 to three million pounds of case-ready muscle meats, while their biggest case-ready facility, located in a suburb of Nashville, is putting out six to seven million pounds of muscle meat and about 1.5 to two million pounds of ground beef.

IBP started branding their case-ready product with the Thomas E. Wilson brand, but that brand and all their others are being transitioned over to the Tyson brand.

The speaker shared his thoughts on marketing agreements and packer ownership. He first reminded cattle feeders that all marketing agreements they currently have with feeders were initiated by the feeder, not IBP.

That said, Leman insisted the arrangements have benefited both parties. As for packer ownership, the speaker said his company has no interest in becoming a large livestock feeder or producer of livestock.

"The truth is, eliminating packer ownership would hurt us less than my three competitors up here because we really do not feed livestock," Leman claimed. "We’re still against it, and that’s because it would be a bad law. It would mean more regulation, and we don’t like someone telling us how to run our business."

His comments on mandatory price reporting and country of origin labeling were along the same lines.

"This mandatory price reporting law has greatly confused a lot of people who it was intended to help. It was primarily written by lawmakers who were bent on doing something they thought would help the livestock industry and maybe hurt the packer," Leman commented. "If it would have been developed by people in this room and those of us up here in a cooperative spirit, I believe we would have a lot better information, more timely information, and a lot less confusion."

Like his competitors, Leman contended that COOL will add a great deal of cost to everyone.

"The real truth is that there isn’t any real justification for country of origin. It really is a protectionist issue, and I really think we ought to think about the consequences before we move forward," he concluded.

(Editor’s note: So the packers are all of one accord on the ownership/captive supply issue, a revelation that will surprise no one. Their strongest argument outside the self-serving category appears to be that it would somehow frustrate their efforts to develop new products and to otherwise give the consumer what he or she wants. Let’s see if we have this straight ... The consumer desires a particular type of beef and makes this desire known by willingly paying more for that product. The retailer takes note and passes the message on to the packer by paying more for particular types of cuts and carcasses. In the unsophisticated old world most of us grew up in, the packer would — and did — relay the message to cattle producers by paying more for cattle that produce desirable carcasses and less for those that don’t. But now we’re told that for some obscure reason country folk are too simple-minded to fathom, that time-tested method of communication no longer works in the brave new world of the "beef" industry. Sunspots, perhaps. Now, it seems, producers can be induced to provide the "right" kind of cattle only by shepherding them into complex arrangements in which they turn all their decision-making and bargaining rights over to other people who understand their business far better than they do. Everyone else in the chain still gets the message the old-fashioned way and understands it just fine, but the smart boys insist the cowman has to be led around by a nose ring. Furthermore, that restrictive construct is now defined as "supply and demand" and "free enterprise." Wonder if the term "oxymoron" still means what it used to? We’re pretty sure the "moron" part does, and that we’d be one if we swallowed this argument without the aid of a thumb-sized chunk of salt.)