Working Beyond Expectations,
USPB Marks First Anniversary

By Colleen Schreiber

KANSAS CITY — The year 1998 will go down in record books as one of the beef industry's worst years, at least in recent times. It's also one for the record books for U.S. Premium Beef. December 1 marks the first anniversary for the producer-owned cooperative.

To date USPB, headquartered here, has killed 390,000 head of cattle through their two National Beef Packing plants in Liberal and Dodge City, Kansas, owned in partnership with Farmland Industries. They've averaged about 8000 head per week over the last 11 months. Despite the extremely tough marketing conditions, USPB's CEO, Steve Hunt, says it's been a successful year, a year for learning as well as a year for accomplishments.

"Everyone knows that it's been an extraordinarily tough year for the feeding sector in our industry," Hunt says. "Despite that, we’ve had an extraordinary good year at USPB. We have preformed far above our expectations. That’s phenomenal, given that a lot of the cattle slaughtered were already in the pipeline and not designed specifically for our program."

The numbers, he says, speak for themselves. Of the 390,000 head killed, prices paid on cattle have averaged $10 per head premium over the cash market while those in the top 25 percent averaged $40 per head premium to cash.

"For the $55 (share cost) one-time investment, even using average numbers, your return on investment will probably be over 20 percent," Hunt insists. "If you look at the top 50 percent of the cattle that have come through, they've averaged close to a $25 a head premium. That’s a 50 percent return on investment. You can’t beat that, especially in the business we’re in."

He shared numbers from the most recent week's kill list of premium to cash paid across all yards. Average pen size was 150 head. The premium high was $61.36 with several in the $50, $40 and $30 range.

On the other end of the spectrum was a set of cattle that paid a minus $34 a head to the cash market.

"The reason," he says, was that "they graded 29 percent Choice and 19 percent were ungraded; they were a terrible set of cattle. They deserved that.

"On the other end, the cattle were 89 percent Choice, zero heavies; and .7 ungraded. They were what we want."

The idea for the program was first conceptualized by a group of concerned cattlemen in November 1995. They were looking for a way to better link beef producers to consumers and to develop a system in which they would be rewarded for the type of product they were producing. The result was a closed marketing cooperative, which became a reality in July 1996.

In August 1997, USPB took another major step when they entered into an agreement to purchase 50 percent of Farmland National Beef Packing Company, L.P. The sale made USPB equal partners with Farmland Industries in Farmland National Beef Packing Company. The deal was finalized on the eve of Thanksgiving, 1997, and the first cattle were delivered the following week.

Initially, USPB was shooting for a million head commitment from producers. They fell short of that mark, but not by much. To date, 650 producers from 24 states have committed to deliver approximately 700,000 head of cattle annually.

Initial stock was sold for $55 a share. Essentially, the number of shares owned commits the producer to deliver that number of cattle. Delivery rights may be leased or sold, as well.

USPB currently has 38 "certified" feedyard members. Some of these yards lease their stocks to customers with the option to buy in some cases. Members may feed their cattle in a yard of their own choosing; the feedyard does not necessarily have to be a member. In fact, Hunt says, USPB has taken delivery on cattle from 175 feedyards in seven states.

USPB accepts delivery on most any cattle with a few broad exceptions. They will not accept Mexican cattle, dairy cattle, cutting bulls, or heiferettes. Other than that the grid system does the speaking, Hunt says.

USPB, Hunt says, was designed to protect the small producer, and members were involved in the development of their grid system.

"We put this cooperative together because the small producer isn’t able to negotiate a good grid on his own. He doesn't have the bargaining power. It is our goal to help the smaller and independent feeders survive.

"Our grid is the engine," he continues. "It’s what drives producers to produce the right kind of cattle to come through this system."

The grid is tied to the cash price for cattle marketed in Western Kansas, Texas and Oklahoma as reported by USDA. Producers initially tried to avoid tying the grid to the cash market, but in the end it seemed their only option.

Ideally, USPB organizers hoped to develop a value-based system with an index tied to the box or retail price. What they learned while researching the process and trying to develop such a grid surprised them. They learned something that Hunt himself says he can't really explain.

Over the last three or four years, Hunt says, the box index has actually been $20 per head lower than the cash market.

"I’m not sure why that is, but the fact is that in the last five years, the packer margin index has actually decreased $20 a head. I’m not going to defend it, I’m not going to explain it, but it's a fact."

The packer margin index figured by USDA, he explains, is based on the cutout value plus the drop credit, minus the cash price paid for cattle. Though July was a very good month for packers, the month producers tended to focus on, Hunt insists this year will go down as one of the worst in the last five years in terms of packer margins.

"We’ve done the research. We own this company, so I see the numbers every day."

However, he notes, retail margins have widened dramatically. That's part of the reason why USPB believes strongly in their partnership with Farmland.

"I’m not sure how you can be assured that you’re receiving your share without having ownership," Hunt says. "That gets back to how we evolved to this point. We couldn’t figure out a way to solve that problem without ownership. You’re always going to leave something on the table if you don’t have ownership in the company."

The fact that USPB members own their end product, Hunt says, makes up for whatever members might lose out on because of problems associated with tying their grid to cash.

"We still get the full enchilada, because at the end of the year we share in the profits made by National Beef through everything that's sold, either over the counter or through one of their branded products."

Hunt says their partnership in Farmland National Beef has allowed producer members to better understand both sides of the fence, and vice versa.

"Our industry needs to learn and understand more about each other's segments. We've done that at USPB and it's been to our advantage as well as to our partner's advantage," Hunt says. The packer now better understands what kind of premiums are needed to attract the right kind of cattle. We producers, in turn, now understand what kind of cattle work in their system, not only in the plants but under their labels, and what makes the most money for the meat company."

As an example of this communications sharing and understanding process, some USPB producers had the opportunity to see first-hand why packers insist on discounting heavy carcasses. USPB's own grid imposes a $15 per cwt. discount on carcasses over 975 pounds.

"They learn that if a head of a carcass hits the floor because it's too big, that chain stops. It costs over $300 a minute when that chain stops," Hunt says. "Or if the animal makes it through the end of the chain, what they find is that the carcass is too big to fit the box.

"There’s real reasons why we shouldn’t be producing these extra large carcasses," Hunt stress. "They don't work within the system and they cost the meat companies money."

Despite the fact that the industry hasn't yet moved to a retail price index, Hunt says USPB is more convinced than ever that the industry will move to such a system in the near future. The reality, however, is that it will take several of the large players to move there together before it will happen.

USPB has made some changes to their grid. For example, they've increased the transportation credit, which is now equal to about $6 a head if members are delivering from more than 110 miles away. They've also recently increased premiums paid on Certified Angus Beef and prime carcasses to $4.50 and $9 per cwt., respectively, with no thresholds. Other changes are in process and will be announced in the near future, Hunt says.

Perhaps one of the greatest benefits to producer members is the carcass data they receive at no cost. Hunt admits that in the beginning it was a challenge for everyone to learn to trust the data. The age-old syndrome of "I've never produced a bad one" was a recurring theme in the beginning.

"We can start to draw some conclusions from this data," Hunt says. "For example, obviously sorting pays because it helps reduce the outliers, the Y4’s and Y5’s, and the heavy or light carcasses. Genetics, days on feed, implant programs, how aggressive you are in your implant program, does impact the grade. How the cattle have been treated prior to arriving at the feedlot, where they warmed up prior to going on feed — all these factors impact the performance of the cattle."

Many in the industry blame the grid systems, most of which are based on grade and yield, for the glut of overfinished cattle this year. Hunt insists that is not the case, at least for their system.

"There is absolutely no incentive to overfeed cattle through our program. What we've actually found is that we have fewer YG 4's and less days on feed on our grid cattle compared to cash cattle. Our cattle are fed to a specific endpoint."

Cash cattle, he insists, "were fed based on the market. The futures market was high, so there was a tendency to feed cattle longer in hopes of a higher market."

Despite USPB's effort to give producers incentives for producing the right kind of cattle, one industry trend that occurred this past year actually sent the wrong signal at certain times. This year for a week or two, producers saw the Choice/Select spread go negative. In other words, the Choice cutout price was less than that for Select. It was a signal, however, that the co-op itself had little control over. Hunt says it had to do with supply and demand and factors affecting export demand.

"This year we saw one of the highest percentages of Choice cattle in years," Hunt says. "That was due to several factors. Cattle were fed longer, the market was down, futures were at a premium, and so people were holding cattle. The end result was more Choice cattle," he explains.

"Asia has large demand for high quality Choice cattle, but with the Asian crisis we saw a reduction in that demand and a narrowing in the Choice to Select spread."

One way USPB is able to minimize fluctuations in demand is by developing their own labels which target a specific customer/consumer and essentially guarantee an outlet for that product 365 days a year.

Loss of market share, he insists, is the industry's greatest challenge at present.

"We've got to refocus on what our problem is in this industry," Hunt says. "Our problem is demand. We’ve got to refocus on value-based pricing. It is an absolute must to survive in our industry to be able to compete with other meats."

He believes the beef industry is capable of recovering the lost demand, but then adds, "every day we waste, it becomes more crucial. That’s why it’s so important that we stay focused and stay on the path of improving our product."

To do that, he reiterates, information, must get back in the hands of the producers so they can make the changes necessary to meet consumers' expectations.

He stresses the importance of taking ownership in the value-dded process and adding more coordination in the industry versus separation.

"We have so many segments with so many barriers. That’s where we’re getting beat so badly by those who are vertically integrated. I don't like vertical integration, nor do I support vertical integration from the top down. We have believed from the beginning that it must be from the bottom up. That’s why we believe our system is working and will continue to work and get better."

Hunt says the premium to the cash market paid on their grid has consistently improved over the last 11 months.

"That shows us that if you arm producers with the information and the incentives, they will hit the target. Ours have. They have stepped to the plate," Hunt says. "A lot of it is management. Some of it is genetics. If we can improve in a year's time just through management, just think what we can do if we combine the two."

The board of USPB is contemplating another stock offering, possibly as early as spring 1999, though Hunt says nothing has been confirmed.

"Growth is in the future," the CEO insists. "We want as many producers involved as possible, because it is working and it will help the industry and it will help the producers involved."