National Farms CEO Stresses
"Rational" Business Approach

By Colleen Schreiber

The Second of Two Parts

KANSAS CITY — Because of its size, National Farms, like many large corporations, is often accused of driving prices up, be it in real estate or the cattle market, but CEO Bill Haw says the company has always been disciplined in their buying.

"We almost never lead the price up," he insists. "We tend to buy very large tracts of land for which there are very few buyers."

His love for the Flinthills has led Haw and the company to fight ardently to keep the tallgrass prairie in its original state, but Haw says there's no question that the Flinthills will face urban sprawl.

"The tallgrass prairie will disappear altogether unless something is done to stop it. Already, along the stretch of I-35 there are billboards cropping up. Some property owners have allowed brush to creep in and we're seeing some year-long smaller cow outfits that overgraze, that don’t burn, that allow brush to invade."

What’s the solution? Haw believes the first best hope is in large tract land ownership by people who have the capital and the concern for the land to preserve it forever. Voluntary view easements in which landowners place restrictions on the land not to allow it to change are a possible solution, he says.

Haw and Ed Bass have been actively involved in the Tallgrass Prairie Preserve, though Haw says they didn't encourage the start of the park.

"I personally tried to buy the Z Bar Ranch before the National Park Trust bought it," he notes. "Once it was purchased, Ed Bass entered into a long-term lease with the park to operate it as a cattle ranch. Our feeling is that if it's going to be a park, we want it to be one that heralds ranching as a means of preserving the prairie land."

The Flinthills are an integral part of the success of their operation in that the cattle operation lies in the heart of the region. It is strictly a stocker operation, and Haw, not surprisingly, isn't willing to reveal too many trade secrets.

"There is a niche for someone who is willing to own the cattle from very light weights, not including owning the cow, and selling them fat and aligning oneself with the packers so that you get paid for quality performance," Haw says.

Haw is of the opinion that simply buying feeder cattle to feed through custom feedyards is a bad use of money.

"Such a practice, particularly if you don't have somewhere else to go with the cattle before the feedlot, if you just buy feeders, I almost guarantee that you're going to go broke over a period of time. There are figures out there to prove this," he insists.

That's one of the reasons the CEO is so adamant about owning a "rational" ranching operation that is operated to maximize profitability and not perpetuate a lifestyle, and another reason he believes alliances are so important.

National Farms intensively studies and analyzes the market prior to the initiation of their buying season to determine what they believe to be the best value at the time. The size of cattle, i.e. weight, that they buy from year to year, Haw says, depends strictly on the market and availability.

The buying for National Farms or the Bass and Haw interests is taken care of by four or five buyers, each with defined but large territories. Ultimately, all Mexican transactions funnel through Jim Runyan at Kansas City-based Swift and Henry.

The buying season for Flinthills cattle generally begins in October, sometimes September, depending again on the market, and continues until April.

"Our needs are large, but because we buy them over long periods of time, we don’t influence markets nearly as much as people give us credit for," Haw insists. "We have very large needs, and those needs require us to buy cattle not only over a long period of time but from a variety of sources."

Cattle are overwintered on leased ranches in South Texas or on wheat pasture in Oklahoma. There are no good wintering deals, Haw says.

"Wintering costs are always high, but it takes us that long to do a good job of buying the cattle if we want to stock the numbers we need for our Flinthills country."

Cattle come to the Flinthills in April in the spring of the year and stay through July 15. Sheer size, however, Haw says, is forcing them to begin varying that practice somewhat.

"It's very difficult to move that many cattle at one time," he explains.

Ideally, Haw says, their benchmark is a 550 pound steer to two acres for 90 days. Haw figures it takes about 20 cents a pound to take a steer from 300 pounds to 500 pounds in the Flinthills or about 30 cents a pound if the cost of capital for ownership of the cattle over that time is included.

National Farms is absolutely focused on minimizing health problems. Thus, as for specific kinds of cattle, Haw says, the only kind they're interested in is the "low management kind."

"Simplicity, simplicity, simplicity. That's our hallmark," the CEO remarks. "The bigger you get, the more crucial good management becomes. We run our feedlots with less than half as many employees per thousand than the industry averages, and we don’t do that by accident or because we’re smarter than anyone else; we do it because our plan is not to get involved in high management situations," he stresses.

"We don't look for cheap cattle. We won't buy heifers because heifers require more management."

Though Haw says he appreciates the value of preconditioned cattle, National doesn't generally buy many because most precondition cattle are young calves. National prefers yearling cattle and they will pay up for them.

National is known to be a volume buyer of Mexican cattle. Minimal health problems, he says, is one reason they rely so heavily on Mexican cattle and the primary reason they tend not to buy cattle out of the Southeast. Mexican cattle, Haw says, not only are healthy, but they tend to grade well, too. It's not unusual for a pen of Mexican steers to grade upwards of 70 percent Choice.

Though he wasn't willing to prescribe what he looks for in his Mexican cattle — or any cattle for that matter — Haw describes them as cattle similar to No. 1 Okies.

"There are a wide variety of Mexican cattle in terms of condition, class, care, etc. If managed properly and fed long enough, they tend to work very well on the formula."

In terms of getting cattle to grade, Haw says, age is probably more important than genetics. Mexican cattle, he explains, tend to be older because they are undermanaged and generally raised in poor conditions, therefore are lighter than domestic cattle at the same age. Haw says he learned this primarily by working with cattle buyers like Jim Runyan and David Winters of Del Rio, Texas, both large dealers of Mexican cattle.

For those reasons, Haw says, the formula works particularly well for Mexican cattle. In fact, he believes it’s the only way to market Mexican cattle, simply because they tend to be discounted when sold on a live basis. A recent close-out sheet on a set of Mexican cattle out of California paid a $5 cwt. premium.

Other than the fact that the formula has proven itself worthy, Haw says the primary reason he initiated formula selling was because "the old way didn’t seem to make any sense.

"I've always been a pragmatist who believes that there isn’t any point in accepting things because other people do it. When I got involved in the livestock business, my first thought was that the way cattle and hogs were sold was about the dumbest thing I’d ever seen. Relatively unsophisticated sellers with relatively small numbers pit their wits against very sophisticated buyers with an unlimited amount of knowledge."

The buyers, Haw believes, are better equipped because they have legions of people looking at hundreds of thousands of cattle every day.

"They don’t just have anecdotal thoughts that they saw some empty pens somewhere; they have a whole information-gathering network that enables them to be very knowledgeable."

The other thing that bothered the CEO was the adversarial relationship in which producers considered their only customer to be their enemy.

"That doesn't make any sense," he insists.

To originally sell the formula idea to the packers, he played on the fact that in his opinion, live selling was also a totally inefficient way for packers to gather their inventory.

"While we were building our first mega hog operation, I proposed to the packer that we would give them a specified number of hogs a day that would be within three days of the same age; they would have identical genetics and they would show up the same time every morning, but for that the packer had to pay me $1.50 over the top of the market."

Haw didn't talk to the buyer stations. He knew they wouldn't like the idea because ultimately it would put them out of a job. Instead, he went straight to the top, and those at the top bought the idea.

Since the beginning of its time, there's been real resentment among cash sellers toward formula buyers, and Haw says he understands their position.

"The fact is we have to have some basis, and right now the cash market is the best basis we have. I understand that it irritates the cash sellers and I even understand why it irritates them, but in my mind the important thing is making this transition from cash selling."

Cash selling, he says, is a disaster for the industry because it encourages least quality sales and bad eating experiences and ultimately a continual degradation in market share.

"Our industry will disappear if we continue on that road," Haw insists.

Haw believes formulas as we know them today will evolve as much or more over the next 10 years as they have over the last 10 years. The CEO believes there will continue to be many different formulas in the future, but for the most part, they will be indistinguishable from each other.

"What the marketplace wants will determine what the formula is," he remarks, "and what we want is predictably high Choice and Prime meat. Right now there isn't enough of that available."

National Farms, Haw contends, has a real say in how their formula is developed in that they've never had a contractual agreement with anyone that obligated them to send cattle to anyone.

"If the formula isn’t working, then we go to the packer and we work through it and find some middle ground."

The ultimate answer, Haw believes, lies in developing a true value-based system with real incentives and real discounts based on the end product and the signals being sent by the consumer.

Despite the controversy, Haw is of the opinion that those involved in such agreed-upon formulas are truly being paid for their product today.

"What makes the world go round is price incentives, and packers, especially in the hog world, absolutely understand that. They pay enormous premiums to acquire the product they want. Beef packers right now are paying about a $10 premium for Prime and $9 or so for Choice. That’s a signal to me that I’m going to give them all the Choice and Prime cattle that I can."

Still, because of the basis issue, many continue to ask the question — premium to what?

"Premiums that are not based on market differences but on quality differences," Haw contends. "I want the basis ultimately to be on what the packer sells the box for, sells the ultimate product for, but the accounting for that is absolutely a nightmare. They can identify the value of a whole carcass, which is a good predictor of the value of the carcass in a box, but that's as far as it gets because we haven't found a good way of tracking all the parts of a carcass."

Haw dismisses the idea of many that such formula arrangements are simply an easy means for packers to guarantee numbers.

"I can’t get into the packer’s head," Haw says. "I do know that the hog business went from virtually all live selling to 85 percent formula selling, and during a very short period of time the average genetic quality and uniformity of the product increased unbelievably well."

Haw is such a passionate believer in value-based marketing that he's willing to suggest that the cattle industry, similar to the hog industry, will shift virtually to 100 percent value-based marketing in the near future.

"It just makes sense," he insists. "What our company has chosen to do is ask the packer what it is they want; what will you pay me a premium for, and then we deliver it. It's a very simple concept."

Not everyone in production agriculture will survive the changes. Not everyone has survived even to this point, he points out.

"The cattle industry, unfortunately, has been a capital-consuming business, not a capital-creating business," Haw remarks. "Darn right we need a faster rate of change, and it bothers me as much to see people digging in and trying to live in the past as I seem to bother people because I’m trying to be at the leading edge of change."

The current cattle cycle, he says, has been tougher than any other in his opinion because it's gone on for a longer period of time when most had long predicted an upturn. It's also dramatically different from the 1970s bust in that the seeds for that cycle, Haw says, stemmed from a belief that there was an insatiable demand for beef.

"We believed then that no matter how much we produced there would always be a demand for more. We found out the hard way that wasn't the case."

Today's problems, he contends, are mostly related to an eroding demand for the product.

"We’ve not only not been able to grow the industry, we have had to continue to shrink numbers because losses kept coming. We've been trying to shrink the cow herd as fast as demand is shrinking."

Despite the apparent struggles, Haw says he's more optimistic about the future of the cattle business than he's been in the last 20 years.

"We are changing," he insists. "We are becoming more business-like. And even though a lot of people don’t like to hear this, we’re becoming more business-like because we’re becoming more concentrated and thus more cost-effective."

The cattle industry won't ever mirror the hog and poultry industries for obvious reasons, primarily that the packers are not likely to invest the necessary capital or have the necessary capital to amass the production needed at the cow-calf level.

"I can’t imagine that the cow-calf business will be anything other than a highly fragmented business dominated by people who just sort of want to have a few cows," Haw says.

He does believe however, that the days of the producers as price takers is coming to an end.

"Producers will align ourselves with other people up the chain and we’ll be producers to packers just like people who make batteries for car manufacturers, and we’ll do it on a cost-plus basis," he explains.

Another seemingly bright spot is a reported stabilization from the downward demand curve.

"In the last six months we have seen the first encouraging signs that demand might actually be improving. It’s somewhat hard to believe after watching it go in one direction for 25 years and then overnight it's turned. It's encouraging, but we better be pretty careful about believing it too early."

Another particularly bright spot, Haw says, is in the export market.

"I believe exports will continue to grow to the point that we will virtually stop exporting grain in any other form except meat."

As for the future of National Farms, Haw's 10-year focus is to stabilize the company more than it's ever been over the 25 years that he’s been CEO.

"There will be a tremendous focus on increased stocker and feeder operations," he remarks. "Individually we will probably continue to acquire Flinthills land, and as a company we will probably need to continue to increase our feeding capacity. I suspect that we will also align ourselves even closer to the packer, but I don't think we'll ever buy a packing house. The packing business is not true production agriculture. It's very different, and not one we choose to be involved in."

Cross-mutual ownership, however, is not out of the question.

"We'll focus on relationships that make sense for both of us."

Haw doesn't particularly believe there is a problem in terms of packer consolidation.

"One great advantage that we have over other countries is that we have packers who are willing to invest tremendous amounts of money to increase efficiency and accept a very low return on their investment in order to deliver a relatively cheap product to the consumer."

Packers, he believes, are rapidly realizing that they can no longer just be in the commodity business.

"They're realizing that they have to address consumers’ needs. That philosophy is rapidly becoming part of the culture of the packer. It never has been before. The packer has always bought a commodity for a price and shoved that product at the consumer and said take it or leave it."

Though there are many issues fanning the flames in the cattle industry today, Haw says loss of market share must be the industry's top priority.

Haw has no plans of turning over the reins at National Farms anytime soon.

"I love what I do. I go out to play every day. It’s very important for me to be close to the land, livestock and the people who do the real work," he remarks. "I have kind of a puritanical passion for doing something intrinsically important; it's more important than money or fame. Food production and interacting with the land and the active creation of something ... it's a very basic thing in most human beings."