A FAN OF CHANGE, Jim Schwertner is enthusiastic about what he sees happening to the beef industry. He believes new technologies and collaboration between industry sectors will eventually benefit everyone, or at least those who survive.

Jim Schwertner Sees Positive
Future For People In Beef Biz

By Colleen Schreiber

SCHWERTNER, Texas — Jim Schwertner is more excited about the future of the beef industry than he's ever been before, an excitement that stems from the many changes and new technologies that are beginning to take hold.

He likens the changes occurring today to changes that occurred during the industrial revolution. He calls today's revolution the Internet Revolution.

"I can give you a good argument that we may have zero inflation for the next 30 to 40 years. The reason is that for the first time you know what I know."

Schwertner is president and CEO of Capital Land and Livestock Co., a livestock dealership based in Central Texas.

Capitol got its start in 1946 when the late Eugene Schwertner opened an auction barn in Austin. He named it Capitol Livestock Auction.

Prior to the late 1940s there were few country auctions. Most cattlemen still sold their animals through the larger terminal markets in Fort Worth, Houston and San Antonio, or traded private treaty. Schwertner saw the need for marketing facilities for the smaller operators who only had 30 to 40 head.

The auction barn in Austin was only the beginning. Gradually he expanded by building auctions in neighboring towns. As his reputation grew, his business grew. At one time he had seven auctions: one each in Austin, Lockhart, Pleasanton, Hondo, Karnes City, Terrell and Caldwell.

Sometime in the 1950s Schwertner changed course just a bit. He began concentrating more on his dealership, which had grown out of his auction business. He developed his own niche by buying cattle, strictly Texas cattle, out of the local auctions, sorting them into uniform lots and turning the inventory as rapidly as possible.

Capitol Land and Livestock still maintains that same niche today with son Jim at the helm and sister Sherri Madden and husband Tom by his side. Though they lost their father about a year ago, the family team continues to use what Eugene Schwertner taught them, not only by words but by deeds and actions.

Schwertner worked with his father for 48 years save the four years he was in college. From the time he was about five years old, he was at his dad's side whenever the opportunity arose.

"In the beginning, when we were going from auction to auction, Dad was always talking to me about why he was doing certain things. I can remember times when the market had gone down and he had already bought the cattle, but he would give that guy a little more for his cattle. By doing so he believed he would always have a loyal customer. He believed in sharing the wealth because he figured it would come back around.

"Dad was an eternal optimist," Schwertner continues. "This business was never a real challenge for him. The risk that I thought we were taking, he never saw because he had seen and experienced a lot tougher things in the war."

The late Schwertner had grown up in the farming and ranching business, but at Texas A&M he pursued a degree in civil engineering. Upon graduation, he joined the armed forces and was shipped out to the South Pacific. At Guadalcanal he lost more than half his battalion.

"Dad was a very positive person and he expected us to be that way. He taught us not to focus on the competition. 'Focus ahead, and be an entrepreneur,' he would say."

That entrepreneurial spirit has helped the business prosper for the past 53 years. Today they handle somewhere between 400,000 and 500,000 head of steers and heifers weighing between 300 and 750 pounds.

Capitol buys 40 different classes of cattle broken down into 50 pound increments six days a week. Twenty buyers cover 120 auctions across the state.

"We're not buying cattle on order for a customer," Schwertner explains. "What we're actually doing is speculating on the market. Our hedge is time. Everything we buy today, we’re speculating that we’ll sell tomorrow."

They turn 100 percent of their inventory every 24 hours, a practice unique to their operation. Turning the inventory in that fashion keeps the cattle fresh for the customers, Schwertner explains, and it helps lower morbidity.

About 80 percent of their cattle come out of auction barns; the remaining 20 percent come straight off the ranches. Capitol has always used the hub system whereby everything that is bought is shipped to their facilities at Schwertner and resorted into uniform truckload lots.

When cattle arrive at the "hub," each animal is sorted three ways based on weight, quality, and breed mix.

Most of their employees start out working in the yards sorting cattle. Two years of training here prepares them to become a buyer.

"They know after working here what we want to buy each day for every category," Schwertner explains. "The category," he adds, "never changes. Buyers talk to someone at headquarters twice a day and they're told what to pay for each category."

Schwertner graduated from Texas Tech University with an agricultural economics degree in 1974. He considered going into the aviation field, but by his senior year he knew that his calling was back home in the family business.

Schwertner has lived through four cattle cycles and his late father at least seven or eight. The family operation, he says, has survived by sticking to their plan.

"We're trying to develop a product or an animal that will be the most efficient all the way through to the end user," Schwertner explains. "Basically, we're trying to take chaos and turn it into something efficient.

"Our strategy is to take on as little risk as possible," he continues. "We have a plan for moving the product and we stick to the plan and we don’t waver no matter how tough it gets. It's a plan that has survived 53 years and that’s a pretty good test."

The other key ingredient to their success, Schwertner says, is their employees.

"Learning the system and understanding the philosophy is one thing, but having people who are loyal and who will stick with you and where you’re headed is real important."

There are several divisions within the family business. In addition to the dealership, the main division, they also farm 20,000 acres right around Schwertner. It's all no till farming — permanent grass used for grazing. This part of the operation goes hand in hand with the Schwertner Select program, a backgrounding program initiated about 10 years ago.

"We're offering a value-added service to our customers," Schwertner explains. "Most of the cattle we buy are calves that haven’t been weaned. Through this program we buy the cattle like always but sell them to a customer f.o.b. here," Schwertner explains. "We put the calves out on grass stocked at a rate of one head per acre for 45 days. We have self feeders in the pastures. We give them all their shots and get them used to being away from their mothers so that when they go to the feedyards or stocker operations they perform more like an adult."

A full-time veterinarian monitors the health program on the Schwertner Select cattle. A certain protocol is followed in terms of health, but Schwertner says there's something about green grass that can't be bought in a bottle.

"If you’ll put those cattle back into the natural environment, Mother Nature will take care of a lot of those problems," he insists.

Improperly weaned calves, Schwertner says, cost the industry $80 a head.

"If you background your calves, you'll have about a 1.25 percent death loss compared to four to five percent if you go straight to the feedlot with them."

More people would follow such programs, he believes, if there was a better way to identify those animals that had been through such a program and if there were better guarantees that a producer would be paid for going the extra mile.

Schwertner says their program has been successful. They handle some 175,000 head a year through this program alone. The cost is $1 per head per day for the 45-day period. Financing is available and customers are guaranteed no more than a two percent death loss. He insists that buyers pay a premium for these Schwertner Select cattle.

The other division of the family business is the trucking operation, Capitol Land and Livestock Trucks, of which they own 25 and lease another 40. This division is managed by Schwertner's brother-in-law, Tom Madden.

The family is still in the auction business on a limited basis with interest in the one at Lockhart, but in an indirect way the auctions continue to be their bread and butter because they are the primary source for their cattle.

Auctions, Schwertner insists, will always be an integral part of the industry, especially in the southern U.S.

"That’s partly because of the climate," he says. "We don’t have the weather elements to deal with here, so most producers keep their cows with the bulls year-round. The average rancher brings a handful of head to the market. He doesn't have enough for truckload lots. That producer has to have a place to market his cattle and that's why the auctions will survive and flourish."

Auctions, he insists, keep competition alive in the industry.

"A lot of people think that country cattle bring a premium, but our data shows that cattle sold at auctions really have a more competitive edge because there’s so many more people bidding against the cattle."

Capitol is also involved in a joint venture with Excel, McDonald's and Friona Industries. Most of the information is proprietary, but the Beef Advantage Program, which was initiated five years ago, has been a test market for the use of source verification and ultimately a branded beef product.

McDonald's, Schwertner says, is a partner in the program first and foremost for food safety reasons.

"This is more of a laboratory for them," he explains. "They want to make sure that they have a wholesome product they can believe in and ultimately that their customers can believe in.

"Today few are willing to put their name on a product and take responsibility," he continues. "How are you supposed to get people to believe in a product if you’re not willing to stamp your name on it and stand behind that product?" he asks.

The BAP partners developed a source verification system together. This tracking system involves the use of electronic eartags which several companies are making now at an average cost of about $2 per head.

Some in the industry are worried about the potential liabilities that come with source verification, but Schwertner counters that the industry has always had liability and this technology could potentially eliminate some of this liability.

"Auctions have always been required to have some kind of tracking system, i.e. backtags. It just hasn't been done electronically."

Another reason, he says, that some are fighting source verification is that they are afraid they may have inferior animals that won't fit what the consumer wants.

Through the Beef Advantage Project, Schwertner says they've learned what animal best fits industry specs.

"Today, the animal that fits the box best is an animal that is half or more English, a quarter or less Brahman and a quarter or less exotic. If you have an animal that fits that spec, the odds are 80 percent of the time it will be a better animal and will probably bring a little bit of a premium," he insists.

There is also technology on the horizon, Schwertner says, that will help the industry source cattle and better predict how those animals will do.

"Right now I can buy 1000 head of cattle on a ranch that all look alike. I can feed them and slaughter them and they’ll be all over the scale as far as grade and yield, but they all looked alike when I bought them.

"So the old adage, 'one iron, one brand, one ranch cattle,' that’s not true. Our research shows that they’re no more consistent than if you go to the auction and buy them one at a time.

"As a matter of a fact," he continues, "it’s really the opposite. If you have your people trained, you can do a little bit better job visually buying them one at a time through an auction rather than as a whole group."

DNA testing is the key to the new technology, Schwertner insists. The technology for this test has been developed but for now it's mostly cost-prohibitive.

"Couple this test with source verification and electronic tracking, and we have part of the puzzle fixed."

Anyone who is even remotely involved with the cattle business knows that the last several years have been trying times for everyone. Schwertner, who is serving this year as chairman of the Texas Cattle Feeders Association, says brighter times are definitely here.

He attributes part of the beef industry's past struggles to producers' inability to get a clear signal of what the industry — ultimately the consumers — want in a beef product.

"There have been lots of signals, but those signals are changing all the time, which makes it difficult for producers to figure out where they need to be," he explains.

"In the 1950s and 60s it was the English blooded animals because they graded well. Then the consumers began complaining that beef had too much fat, so in the 1970s the industry went to more of a crossbred type animal that was leaner. In the 1980s we really overdid it when we went to the exotics and we got the carcasses too big. In the late 1970s we got into boxed beef because retailers and restaurants wanted something more consistent, with ribeyes that were all the same size, etc., and we were producing ribeyes to the extreme of 21 to 22 inches and the consumer didn’t want that. Now we are changing back to an animal that isn’t quite as big but one that is still a little leaner than what we had in the 1960s."

Schwertner believes the distinct lines between the various segments of the industry will gradually become less distinct as fragmentation is replaced with the beef industry's own form of vertical integration.

"The one thing I learned through the BAP program is trust," he says. "We (partners) all trust each other, and for the first time in my life I’m able to focus on the production end and not worry about market risk and who's doing what to me. There’s a lot of merit to that."

Will vertical integration put the small producer out of business?

"Absolutely not," Schwertner insists. "I hear that all the time. The reason they’re scared of vertical integration is that they don’t understand the industry. The chicken and hog industries are able to vertically integrate because it doesn’t take much real estate or capital per unit to raise a chicken or a hog. They raise them in a confined area so it takes a whole lot less capital.

"To vertically integrate cattle is almost cost-prohibitive for one entity to do the whole thing from production to slaughter," he continues. "It takes too much real estate to own one cow unit. Also, the weather and the demographics are a big factor. We can’t raise the same kind of cattle in South Texas as they do in South Dakota and vice versa. There’s a lot of elements that Mother Nature gives us that prevent us from doing what the hog and chicken industries do."

Schwertner predicts that with vertically integrated partnerships the cycles will level out some. More specifically, he believes everyone will participate together in the up and down markets.

"We'll never change the oversupply of chicken or pork or the Asian crisis or the oversupply of beef, but we can flatten out some of these ripples in the marketplace where one segment is making money and the other is not. That’s what’s wrong with this industry and we need to fix it. The pork and poultry industries have figured that out. We’ve got to be able to let everyone participate when it’s good all up and down the line."

He doesn't foresee less competition with an increase in vertical integration. That's because Schwertner believes with these partnerships there will be more value added products available on the market. HEB, he says, is a prime example of a company which has taken inferior cuts and turned them into real profit makers.

The beef industry, he insists, needs a change in philosophy.

"Every morning those of us in the cattle industry wake up asking, 'how can I get more money for my product?' The computer guys, on the other hand, are waking up and asking, 'how can I make my product cheaper and sell more of it, and how can I change it in six months where it’s cheaper and better?'

"Do we want more gross dollars or more profit?" Schwertner asks. "I think we want more profit."

The beef industry, he says, is at a crossroads in the way it markets fat cattle. More and more are selling cattle on the rail or on some type of formula after the animal has been slaughtered rather than on averages in the cash market. Source verification and DNA testing will likely further the use of these methods of marketing cattle.

"Once producers figure out which animals are bringing a premium and which ones aren’t, they’ll get in line. Even though they might still be selling cattle every week, it’s not that hard to change the kind of bull they’re using to get the right type of animal. We have to send them a clear signal as to what is actually bringing a premium," he reiterates.

Some in the industry believe Texas cattle might suffer at the hands of value-based marketing, but Schwertner says it's an age-old misnomer that Texas cattle don't perform as well as those to the north.

"We've bought cattle from all over the U.S. through our BAP project, and cattle in Texas do just as well and in some cases even better because our cattle in Texas usually yield a little better," Schwertner insists.

The current grading system, he believes, is somewhat antiquated and as technology increases he predicts that the industry will move away from the use of the grading system to focus more on uniformity in taste and tenderness.

"There are some pork producers who are making 30 to 50 percent increase in margins because they're guaranteeing the consistency of their product. That’s where the beef industry has to go," he insists.

The beef industry, Schwertner says, must look at the big picture, and that big picture is the consumer.

"We shouldn’t do anything in the industry unless it benefits the consumer. That’s the key.

"It's amusing to me all these things we’re talking about and focusing on that have nothing to do with profitability," Schwertner continues.

"Things like price reporting. Price reporting, in my opinion, tells me there’s lots of folks in the industry who don’t understand how the marketplace works. Anyone can find the price of any product any day, any time, on the Internet or through various publications, TCFA, etc. or they can call USDA. We already have price reporting. It's just that everyone thinks the other guy has a little bit better piece of information, which is nuts. We all have access to the same information. We just want someone else to do our work for us."

The days of arbitraging the market are rapidly coming to a close, Schwertner says.

"Always in the past, every segment in the industry has tried to make money by outtrading the guy below us or above us. Anyone in the commodity business has made money arbitraging the market. I would try to get a piece of information ahead of what you would get and try to out trade you. Those days are gone. That’s changing fast because of the technology out there."

Schwertner doesn't believe, however, that the beef industry will ever totally do away with the cash market, though in likelihood there will probably be a day when 50 percent or fewer of the cattle are traded in the cash market.

"A lot of people have sold cattle on the grid, not because they had better cattle but simply so that they could get kill space. There’s been more cattle out there than there is kill space, but that’s beginning to change."

Schwertner is excited about the future, not only because of the technological advances being made in the industry but also because it appears that the loss in beef's share of per capita consumption is finally beginning to level off.

"I think our generation has decided that with our income levels it’s okay to eat a little more beef. And maybe we're not as concerned about some of the propaganda about beef that we have heard over the years. A lot of research has been done to show that beef is a healthy product."

Change, he says, must be embraced to prosper in the future.

"Change scares a lot of people, but we can't stop change," Schwertner says. "For me, change has always been exciting, an opportunity.

"We’re seeing a lot of folks fighting and shooting each other in the foot. That’s not all bad, because the entrepreneurs and those who want to get out there and hustle will be the ones who will survive.

"We're in the business to make a better product for the consumer," he continues, "and anyone who is scared of that doesn’t want to help the industry long-term and help make us all more profitable."