Engler Says Grades Must Stay,
Group Marketing Wave of Future

ABILENE, Texas — Proposals to eliminate the federal beef grading system must be headed off, insists Cactus Feeders CEO Paul Engler.

Speaking at the recent Texas and Southwestern Cattle Raisers Association board of directors meeting here, Engler defended the grading program and also touted "group marketing alliances" as the wave of the future.

The cattle business, Engler said, can be categorized as a boom and bust industry in which there seem to be more busts than booms. It’s also characterized as a way of life rather than as a sophisticated business where great wealth can be accumulated.

Quoting his late father, Engler said, "If you are in the cattle business, whether you leave an estate or not is totally dependent upon the phase of the cattle cycle that you die in."

Engler opined that the two factors which have had the greatest impact on cattle feeding are that industry’s shift from the Cornbelt to the West and South, and the advent of cattle futures.

Generally speaking, he explained, the transition from the Cornbelt feeder era to large cattle feeding operations in the Southern Plains has been positive for the beef industry. Engler said the move allowed production efficiencies in the feeding, packing and processing industries that have helped in production cost battles with pork and poultry sectors.

He had a different opinion, however, about the impact of cattle futures trading.

"Personally, I am on the side that maintains that cattle futures have been destructive to our wellbeing, costing the producing and feeding sectors untold billions of dollars," Engler told listeners. "I can’t prove that statement. However, I had the privilege of being in the cattle feeding business before futures, and I can truly say it was a much better business when it was operated strictly on supply and demand without the extraneous influence of cattle futures."

Economists, Engler told the crowd, predict that steer prices might be back up to 80 cents by the year 2002. In the short term, using Nebraska steer price averages, economists predict that the average will drop from $63.82 this year to $62.18 and then climb and reach the $80.76 mark by 2002.

Based on Oklahoma City data, feeder prices for 1997 are expected to average $62.30 and then rise along with fed cattle prices to a projected high of $96.60.

The outlook for the cow-calf sector, Engler said, is not as promising.

Engler identified eight "pressure points" affecting the cattle market today. They include excessive supplies, loss of demand, product quality, food safety, excessive production costs, packer concentration, captive supplies, and private property rights.

Supplies will remain excessive in the near term, Engler predicted, but he said he hopes the export market will be strong enough to utilize the excess.

"I really believe we’ve saturated the American people with meat proteins, and any expansion that can be reasonably expected has to come from exports," he explained. "The question is, then, if the markets are there are we really good enough to capture them? Our track record is not too bad, but we are going to have to get better."

According to the Beef Quality Audit, the most important reason foreign countries like to purchase U.S. beef is because they can get individual cuts in large quantities.

Poultry and pork can do better on production efficiencies, Engler conceded, but he reminded listeners that they only have price and leanness to sell, while beef has palatability.

"For goodness sakes, when we start getting kicked around by poultry people, we need to remember that."

In determining quality, tenderness is the number one criteria for beef consumers, and tenderness, Engler admitted, is one area where the struggle continues.

He said the industry must rapidly develop an instrument grading system for tenderness that can be incorporated into the federal grading program.

The Canadians are close to implementing an instrument grading system, Engler said, but their system still lacks the ability to determine tenderness.

He suggested that the private sector help with this problem by establishing an incentive program with a $5-10 million prize along with the licensing rights. The goal, he said, should be an instrument that determines the degree of tenderness and is also compatible with the packing house environment.

"I cannot think of any better use of our checkoff funds," Engler insisted.

The biggest room for improvement and where most headway can be made in terms of tenderness, Engler believes, is in the packing industry.

Stress, aging, length of storage, and electrical stimulation all have a big impact on tenderness, he noted. In the early 1980s, Texas A&M University proved that high voltage stimulation could actually improve tenderness by at least 30 percent. Yet, today only two packers are implementing that technique, Engler told listeners.

"Economics have to come into the game. The packing industry today is a commodity business. Packers have extremely good margins, so there isn’t the incentive for them to change anything. The thing that will really turn it over is branded product," Engler said.

"If the packers put their name on a product, they’re darn sure going to want to make sure it’s tender. Then, proven techniques like electrical stimulation will be used."

Fielding a question from the crowd, Engler told producers that he was "tremendously disturbed" by proposals to eliminate the federal grading system.

"It’s absolutely ridiculous, and could even be catastrophic if that happened. I think every effort should be made to dead-end that kind of talk," he said. "It would be one of the worst things that could happen to us in terms of exports. U.S. Choice is the gold standard in the export market.

"There’s nothing the Australians or the Canadians would prefer more than for us to do away with the grading system," Engler stressed. "Irrespective of what you think about the grading system, it still is a standard, and it’s a standard that programs like Certified Angus Beef key off of.

"We tend not to explore the eventuality of what’s going to happen if we did do away with it," Engler continued. "If we turned it over to the packers ... that’s never-never land."

He cited impending changes in the grading standards in regard to "B" maturity cattle as an example of producers "fooling around with something they don’t know anything about.

"NCA investigated the grading system several years ago and they didn’t really come up with anything, so we tried to put a band-aid on the present system by recommending ‘B’ maturity cattle automatically be put in the standard grade," Engler said.

He told listeners that at Cactus Feeders alone, about 4.3 percent, or well over a million head of cattle fall into the "B" maturity category.

Today the discount for standard grade is $22 cwt., or $165 per carcass.

"Based on an annual slaughter of 28.4 million head, times a discount of $165 per head, that comes to a total of over $155 million or a charge of $5.46 per head that it will cost the industry," Engler said. "The sad part is that not all of these cattle are tough."

Engler predicted little change in packer concentration in the future. In fact, he predicted that concentration might even lessen.

"When the pendulum swings too far, the free enterprise open competitive system causes it to go the other direction. That, and historically high packer profit margins and government investigations and the lawsuits, all these things have a dampening affect on further expansion and concentration," Engler told the crowd. "At the same time, those same things offer an incentive for new entries into the business. We’re already seeing some proposals out on the street along this line."

Engler predicted the industry will see the growth of at least two new marketing avenues. The first, which he believes has the most potential, is group marketing in which feeders bind together in a legal entity such as a marketing co-op to sell their cattle on a negotiated carcass merit basis.

"Combine numbers could give feeders and producers more marketing strength and leverage to counteract the buying strength of packer concentration," he explained. "Packers have become very powerful. I don’t think they’re doing anything illegal, but they are powerful, and I’ve always said you fight power with power."

Another method which Engler believes has some potential is marketing through strategic alliances. Those alliances, he noted, can take several forms — producers grouping together or feeders forming alliances with packers to further integrate their operation from a custom arrangement to one where they share the profits or losses in the packing house.

Northern Plains Premium Beef is one such cooperative which plans to build a meat packing and processing plant somewhere in the Upper Midwest in 1998 or early 1999. So far, more than 3200 ranchers from seven states and two Canadian provinces have pledged about 431,000 cattle to the cooperative. North Dakota has drawn the largest interest. Other states involved are Nebraska, Iowa, South Dakota, Minnesota, Montana and Wyoming. The Canadian provinces are Saskatchewan and Manitoba.

U.S. Premium Beef is another alliance being initiated by producers in the Midwest.

Captive supplies and formula pricing arrangements, Engler noted, are receiving considerable attention, and "probably rightly so."

Cactus Feeders is in its ninth year of selling cattle to packers on a carcass merit basis. Under this arrangement, fed cattle are marketed weekly on a formula based on the packer’s dead cost of animals which they purchase on a live basis.

"When we established this relationship, I told IBP that the arrangement was strictly transitory in nature," Engler remarked, "because if it was good for us, it would be good for other people, and as more and more people got on the bandwagon it would be less valuable to us."

Irrespective of the criticism that has been directed towards the formula arrangements, Cactus and its customers have benefited, Engler said.

"The biggest benefit is being able to market our cattle on a carcass merit basis instead of a live average system, which is prison, in my opinion. That system has imprisoned our industry for many years. We have a computer database that gives not only feedlot performance but also carcass performance in terms of yield, quality, cutability, dark cutters, you name it. It’s helped us in our cattle purchasing programs and I truly believe that we and our customers have profited by being in the forefront of the value-based marketing system."

Despite that, Engler repeated a comment he’s made several times in recent months: "Formula pricing systems as we now know them are in the ditch. I would predict that changes in the present arrangement will be forced in the next few years."

Any value-based system, he added, must be done on a negotiated basis. "We’re a long ways from it, but the present formula will not get it done."

Engler said he does not know what the magic number is in terms of cattle sold on a negotiated daily basis.

"I don’t know what it is, but I strongly suspect if we’re not there, we’re pretty close to it."

Engler closed by citing an African tale and encouraging producers to take control of their own destiny.

"Each morning a gazelle wakes up knowing that he must run faster than the fastest lion, or he will be killed and eaten that day. And every morning a lion wakes up knowing he must outrun the slowest gazelle, or he’s going to starve to death.

"It doesn’t matter if you’re a lion or a gazelle," Engler said. "When the sun comes up, you better be running."