Paul Hitch Shares Personal
Outlook On Industry’s Woes

By Colleen Schreiber

GUYMON, Okla. — Paul Hitch has been the chairman of the National Cattlemen’s Beef Association Live Cattle Marketing Committee for the past three years. He describes the three years as interesting but frustrating at times, given the fact that the cattle market has been in the tank during his entire reign.

"The only thing that we cattlemen seem to agree on is that right now we hate the price of cattle," Hitch says. "No matter what discussion you take up, no matter what problem or complaint in the beef industry, the discussion starts with lousy prices. We all agree on that, but we can’t agree on how to fix it."

As has been the case for the last several years, the hot topics in the latest committee meetings have centered around such things as captive supplies, futures contracts and value-based marketing. At the most recent NCBA summer meeting, a large majority of the discussion focused on mandatory price reporting and labeling of imported red meat products.

A faction of cattle producers, primarily those in the Northwest, are convinced that mandatory price reporting and labeling of imported products will fix the problem, or at least help solve it. Hitch isn’t so sure. He’s firmer in his opinion about mandatory price reporting, however, than he is on the labeling issue.

"Frankly, I think mandatory price reporting would be a mess," Hitch says. "How do you enforce it, for one thing? There would have to be a penalty for failing to obey the law and we would have to have some kind of monitoring system, etc."

He made note of a philosophy that the National Cattlemen’s Beef Association has today and has had in the past. That is, they’ve never been a proponent of big government.

"The only governmental thing that I can remember any of our cattle associations ever pushing for was an import restriction back during Nixon’s term. So, not wanting mandatory pricing is consistent with the political philosophy of the organization over the past 80 years," he insists.

The labeling issue, he says, is being pushed hard by the Northwestern states as well, primarily because they’re closest to the Canadian border and feeling the brunt of that situation.

"Every day they watch the Canadian trucks loaded with fat cattle roll across the border. They’re killed in the U.S. plant and they roll out of the kill plant reading USDA Choice. They contend that it’s false labeling. The consumer thinks it’s a domestic product, born, bred and raised in the USA. They believe labeling imported product, as such, will make consumers loyal to the U.S. label.

"What concerns me is that there will be an increased expense in selling the product," Hitch counters. "It will be an increased expense to the packer and to the retailer, and they’re going to get that money back from somewhere.

"In the end, I cannot construct a scheme where labeling itself increases the value of the product. I think they’re well-intentioned. They really want to solve the problem, but the real problem is that we don’t have people buying our products," he stresses.

He attributes the lack of demand in part to the fact that the beef industry is slow in developing new products. And that, he attributes in part to the segmentation of the industry.

"In simplified terms we have the rancher, feeder, packer and retailer. These are the basic segments, and each is definitely divided. None of these segments has been able to, or are willing to, spend money to develop new products. The packer has never considered himself responsible for developing new products, and the retailer says, ‘we don’t develop new products, we sell them.’"

That philosophy, Hitch contends, might slowly be changing, however.

"The Big Four have managed to grow even though people are eating less beef. They’ve done it by either buying up or driving out of business the smaller packers. I believe, however, that they’ve about come to the end of that road," Hitch says.

"Politically, it’s going to be really difficult for them to continue to grow by getting more market share, particularly IBP. Thus packers may finally realize that further growth is going to have to come from adding value to the product.

"I’m guardedly optimistic that value-added products are going to grow, but it will take some time before these kinds of products account for any real tonnage."

The middle meats continue to do well, but the chucks and the round are what’s dragging on the market, he points out.

"You can make a good meal out of a chuck, but you have to be able to cook," Hitch says. "That’s why places like the Outback don’t have pot roast, for instance, on their menu. Their grill is divided into basic cooking units: rare, medium, medium well and well done. Any monkey with a stopwatch can cook a steak for a prescribed number of minutes, turn it and cook it for more prescribed time.

"People with stopwatches and spatulas are cheap. A good cook is expensive, and chains like the Outback aren’t as enthusiastic about making a good meal out of a chuck, because they have to have someone who really knows how to cook," Hitch contends. "Perhaps if someone developed a precooked pot roast for the restaurant trade, then maybe they might add it to their menu."

In terms of the current marketing situation, Hitch says the industry is gradually digging itself out. Unlike a few months back, when some cattle had too many days on them, feeders are trying to stay more current. That does little, however, to solve the excessive supplies of red meat currently on the market.

"Cattle were heavy when they were placed," Hitch explains. "They gained well and they’re heavy going out. Tonnage on the market is astounding."

Pork supplies, in particular, he notes, are adding to the tonnage, and it’s been rumored that pork producers have plans to add an additional 20 percent in production over the next three years.

"When I read about the increases planned for pork production, I’ve got to wonder if we’ve lost our collective minds."

Hitch uses "we" because Hitch enterprises is now one of those large hog producers.

Will the industry ever move totally away from the cash market?

"Do I even want to?" Hitch asks. "I love the cash market, but I don’t love the way it works today. There’s no differentiation in the value of the cattle, and that’s not right."

How did the industry get to that point? The genesis of it, he says, was when packers started buying and selling for one market.

"We used to price cattle differently. At one time cattle might be priced with three or four dollar spreads. Packers also were differentiated. For instance, Swift loved lightweight cattle that hadn’t been fed quite long enough to grade Choice. Excel was a plain cattle buyer."

When society became homogenized, so to speak, the packers became homogenized as well. They no longer bought a specific type of carcass for a specific market.

The other key to the change, Hitch says, is simply more and better communications.

"In the early days, feeders didn’t talk to each other much," Hitch says. "Every feedlot basically negotiated separately and in isolation. The feeders eventually realized that they were at a disadvantage because the packers had buyers at all the feedlots every week, so they knew what was going on in every yard, but the feeders didn’t necessarily know what was going on with their neighbor feeder, much less others in the state."

Out of the desire to have more information, Cattle-Fax and TCFA’s price and sales reporting service were born. Feedlots voluntarily agreed to report their sales to a common point for dissemination to all the other feedlots.

"Now we know very quickly what the market is," Hitch says. "If a packer pays more than the average for fat cattle, everyone knows it, and before the buyer gets to the next feedyard the manager adjusts his asking price to the higher newly established price.

"To counter that, packers who previously might be buying cattle from, say, $57 to $61 with an average price of $59, now just pay average price for all the cattle."

The feeding sector, Hitch says, is just as guilty as the packers because they’re willing to sell everything on the average, and once the selling starts it’s not long before the flood gates are opened wide.

"It doesn’t appear that the cash market will allow the better quality cattle to receive what they’re worth anymore. At one time it did, and it still does to some extent if you talk about feedlot performance. Some people will still pay more for feeders if they think they’re going to gain more on feed. You’ll see some differential on those cattle, but it’s only the differential on feedlot performance, not the differential for quality."

Hitch, like so many in the industry, believes the only way to get paid for quality is to move to a value-based marketing system. Today most all formulas and forward contracting systems use the cash market as their basis.

The question, as more and more cattle are taken off the cash market and sold on formulas or other contractual agreements, is at what point does the cash market cease to be a valid basis? And if cash is no longer the basis, what should the basis be? The pork industry, Hitch notes, faces the very same dilemma today.

Hitch, like many in the industry, believes it’s important to move the pricing point closer to the consumer on the theory that it would be a more honest representation of what the cattle are really worth.

It’s rumored that Paul Engler, CEO of Cactus Inc., the father, so to speak, of cattle formulas, is negotiating a new formula contract with IBP in which the price of the raw commodity is determined by the value of the meat being sold, a retail basis of sorts.

No doubt several obvious obstacles have to be worked out before such a system could be perfected. One includes the ability to incorporate a system which allows individual identity of the carcass to remain intact beyond the breaking stage. Possibly this wouldn’t be necessary, Hitch says, if enough cutting tests could be performed to predict what percentage the various cuts from a 750 pound YG 2 Choice steer carcass would yield. Once the weights were determined, a formula could then be used to calculate what the cuts are worth.

Another potential sticking point for a retail index formula is that currently there is little information in the way of reported prices for what packers receive for these various cuts on a weekly basis.

Hitch says he isn’t sure exactly how such a formula would be structured, but he does know that there would have to be considerable trust among all parties involved in the transaction.

The alliances and agreements that have developed and are developing among the various segments of the industry, Hitch believes, are a step in the right direction.

"We need more alignment of the segments. At one time beef was the preferred meat. Back then poultry, hogs and beef had relatively the same kind of production system. It’s not that we’ve gotten worse, they’ve simply gotten a lot better than us. Their systems are streamlined; there’s no wasted motion. Pork is getting there. Poultry is already there."

The cattle industry, Hitch says, won’t ever be vertically integrated like the hog industry because the cattle production scheme prevents it.

"Pork producers can put all their hogs in a building and they can take a cookie cutter, so to speak, and make them all come out the same," Hitch says. "Cattlemen can’t do that."

Hitch says he gets nervous when people construct alliances for the sole purpose of obtaining a bigger slice of the pie.

"I don’t think that’s the long-term answer," he says. "It’s not that I don’t want a bigger slice of the pie. I do, but rigging the system so that you can make more money than the other sectors in the industry, that makes me nervous. What I want is to have a bigger pie, and to get a bigger pie we have to have more demand for our product and people willing to pay more money for our product as opposed to someone else’s product.

"I don’t know how we get there, but that should be our goal," Hitch concluded. "We need either better products or a bigger market."