University of Wisconsin Center for Wisconsin
Rural Cooperatives, Jan./Feb. 1998, pp. 4-6.
Published by the Rural Business and Cooperative Development Service
A Co-op for the Cowboys: With U.S. Premium Beef, cattle producers are taking the reins to capture beef profits from the ranch to the retail shelf
The last four years have been tough for Kelly Giles, a third generation cattle rancher from Ashland, Kan. "They've probably been the longest haul my family can remember," says Giles, whose operation markets several hundred "fat," or finished, cattle a year in the southwest corner of the state. "We've watched prices for a finished steer drop from 84 cents to 54 cents a pound," he says. "And we've watched a lot of equity flow out of U.S. cattle operations."
Like Giles, cattle producers across the United States have been struggling through tough times in the beef business. They've been confronted by shrinking consumer demand and a 25-percent drop in beef's share of U.S. mea consumption. And they've met with falling prices and eroding profit margins, which has forced several hundred thousand cattle producers to leave the business in the last several years.
But all that could soon change. Hundreds of cattle producers in 23 states are blazing a new trail they hope will lead to better days for the beef industry. Together, they have formed a new cooperative called U.S. Premium Beef (USPB), purchased a substantial interest in a major beef-processing company, and are pocketing a new share of profits with a value-added strategy.
"This has never happened before," says Terry Ryan, a USPB board member who manages HRC Feed Yards Inc. in Scott City, Kan. "Cattle producers have never before bought into a packing company or become part of a vertically integrated system where they own a piece of everything from conception to consumption."
Commitment to Members, Consumers
At the heart of U.S. Premium Beef, members say, is a solid commitment both to cattle producers and to consumers. "USPB is giving cattle producers the opportunity to achieve more value and higher net returns," says Giles, another USPB board member. "At the same time, we're working to give consumers a product that meets their demands for safety, quality satisfaction and convenience."
The idea behind USPB, formed in 1996, is not only to allow members to retain ownership of their cattle but to own a stake in a processing company and share in the profits all the way to the retail shelf.
"We're taking control of our product and having ownership of it closer and closer to the consumer," says Mark Gardiner, a USPB board member whose family has been in the Kansas cattle business since the 1880s.
So far, USPB is sitting high in the saddle. The new co-op now owns a significant share of Farmland National Beef Packing Co., through which it is processing 9,500 head of cattle a week. USPB has moved its headquarters from Manhattan, Kan., to Kansas City, Mo., where it has offices in the same building as Farmland National Beef. It employs six staff members, including chief executive officer Steve Hunt. The new co-op also maintains a field office in Dodge City, Kan.
All this, of course, hasn't happened overnight.
"It took two years to put this together," says Ryan, "but we had very positive reaction from producers right from the start. All the people involved have the same target: to regain beef consumption in the United States."
Still, USPB founders had to buck a few home-on-the-range traditions to form the cooperative.
"We, as an industry, can either decide to work together and compete," Gardiner noted in 1996, when USPB was getting off the ground, "or we can maintain our romantic cowboy independence, fight amongst ourselves, and become totally irrelevant."
Hitting Bottom First
While forming USPB was a step many felt was long overdue, it might not have happened if times hadn't been so tough for the beef industry.
"We've all struggled as beef has lost market share over the past 20 years," says Gardiner. "Beef has been a generic product for a long time. The approach has basically been, 'Beef: eat it, darn it, it's good.' There has been no accountability for quality. And we haven't been very creative in how we marketed it."
That's where beef's major competitors, poultry and pork, have stepped ahead. The "white meats" have been doing a far better job in developing value-added products, like flavored buffalo wings, and gaining in market share in the process.
"The beef industry has lost 25 percent market share in the last 20 years to pork
and poultry," says Bill Miller, USPB's chief marketing officer. "Part of that has been our own inability to produce a consistent, convenient product that's priced competitively with pork and poultry for the value received."
"We know that demand for beef has reached a peak," Giles says. "And we know that the only way to increase that demand is to change our product. That's where a branded, value-added business comes in."
Many in the cattle business also have been troubled by industry consolidations and the rise of "mega-producers." In a trend to reduce costs, fewer and larger beef operators are emerging. With nearly 98 percent of the nation's cattle producers in operations that handle fewer than 500 head, it's becoming harder for the small and mid-sized family businesses to command much power in the marketplace.
In addition, vertically integrating the beef industry offered some daunting challenges to USPB. For starters, the industry is made up of several competing segments, from cow-calf producer to stocker to feedlot sector to packer.
"All compete against each other," says Miller. "It's been difficult in the past to bring the industry together under one umbrella, which is why USPB is unique."
Says Gardiner, "The beef industry has been very segmented—too John Wayneish. We're the rough, tough cowboys, very independent. The lack of working together has bred less unity."
Another challenge facing the start-up of USPB was the industry's traditional lack of incentive to produce higher quality beef. Cattle producers say they get the same amount on the cash market—say, 64 cents per hundredweight—whether they sell professional cattle or "sorry" ones.
"The economic signals have been blurred," says Gardiner. "Up until now, the best way has been not to raise the best quality. It's been to take a mismanaged animal that you buy cheap on the cash market and upgrade him to average."
He adds, "In USPB, we're trying to make a direct economic incentive to do the right thing and produce the best product. Dollars will make people change."
For those trying to get USPB off the ground, there was also the problem of a "mature" market. With beef demand seemingly at its peak, fewer and fewer ranchers have been entering the business. The average age of a U.S. rancher is 57 years old. Many have been worried that their ranching heritage is on a downslide.
"When you cannot bring in young people, that spells the end of an industry," says Giles, 38. "In Clark County, Kan., where I live, I know of only ten producers younger than age 40. When you're just ten years away from retirement, you're not willing to risk your neck on a new kind of investment.
"But this is a new generation of cattle producers," he adds. "It's not just one of age, because there are plenty of older ranchers in USPB, but of an industry coming forward to take the reins."
USPB Is Born
Spurred by the struggling industry, a group of Kansas cattlemen formed USPB as a closed co-op (limited to members) on July 1, 1996. The new organization then embarked on a membership drive. Members could join with a lifetime fee of $500 plus a registration fee of 50 cents per head of cattle that would be delivered to USPB. (The registration fee later was raised to $2 a head.)
At the same time, USPB officials began to look at ways to enter the beef- processing segment. They ruled out custom processing as well as building a new processing plant.
"We wanted to be a partner with a beef processor in every sense of the word, in taking the risk as well as the reward of bringing our beef through value- added processing," says Miller. "We could have a minimum of risk if we had the right partner."
USPB found that partner in Farmland National Beef, a subsidiary of Farmland Industries. Farmland National Beef is one of the four largest beef processors in the U.S. It sells to wholesalers and retailers, and has worldwide sales offices. It operates two plants in Kansas: one in Dodge City and the other in Liberal. In Farmland National, USPB saw a partner with experience, a successful track record and expertise in research and marketing.
"Farmland has excellent management and has shown a profit over the past few years," Ryan says. "And it's wholly owned by producers, which fits in with us." Farmland National also came with a big bonus —it owned two Premium brands: its
Farmland Black Angus Beef and its Farmland Certified Beef labels. It also marketed beef under the Certified Angus Beef brand. All three represented the quality— and price premiums — USPB leaders were seeking.
On July 31, 1997, USPB signed a letter of intent to purchase up to 50 percent of Farmland National. To make its purchase, USPB then launched a stock offering at
$55 per share. The offering closed in late November. USPB matched the amount of stock raised with a loan from CoBank. On Dec. 1, 1997, USPB became part owner of Farmland National. It marked the first time cattle producers had entered an equal-partnership pact with a beef packer.
"We settled on Farmland National because it's one of the leadmg companies in the nation for adding value to products and its philosophy fits with what we are trying to do," Miller says. "USPB is a good fit because we bring a known source of beef and a consistent quality."
"Farmland National is the No. 1 packer in the U.S. for value-added products," says Gardiner. "By owning the processing plant, co-op members are paid not only for the value of the meat but also for hides, pharmaceuticals and all associated co-op products."
USPB officials won't disclose what percentage of Farmland National their co-op owns, but say it is between 25 and 50 percent. In fact, USPB launched another stock offering in December 1997, which closed a month later. With the new stock, USPB bought more shares of Farmland National.
A Successful Start
Today, USPB comprises all segments of the commercial beef industry, "from start to finish," Miller says. That includes purebred producers, commercial cow-calf producers, backgrounders, farmer-feeders and custom cattle feeders. USPB's six board members represent every one of those segments. Membership numbers are confidential, but officials will say they total in the hundreds. USPB’s long-term goal is to process more than 1 million head of cattle a year.
So far, USPB officials are pleased with the co-op's progress.
"The top 25 percent of members' castle are averaging a premium of between $20 and $25 per head over the cash market," says Miller.
In addition to patronage dividends they'll be eligible for, USPB members gain an added benefit. Through the co-op, they get feedback information on carcasses and a complete breakdown for each animal marketed through USPB. And they get it within a week of processing.
"Under the USPB program, animals will ultimately be identified from ranch to retail product," says Gardiner. "The producer is paid actual value for each animal rather than an average price, as in the past. The result is to establish accountability, good or bad, for each animal that can be traced back to individual producers."
The burden will now be on the cattle producers to move quality beef through marketing channels. They say they're ready.
"Knowledge is power," Gardiner adds. "You can make much more educated decisions about your breeding program when you know the total value of each animal."
A Fighting Spirit
If nothing else, USPB has brought new hope and a fighting spirit to cattle producers in the country's mid-section. The success of this new beef cooperative, say those involved, will benefit many.
"If this works as we envision it, there will be three winners," says Miller. "The cattle producers will win because they can take their beef all the way through value-added processing. The co-op will win because Farmland National's value-added products will bring greater margins. And the consumer can have a higher degree of confidence that he is buying a product of higher quality and consistency."
"The consumer has told us they want, and will pay for, a good product," Ryan says. "The industry hasn't been providing it but in the future, we will. As USPB grows and demand picks up again, it will help the entire industry."
Says Giles: "Without USPB, the consolidation of the big three beef packers would continue. A producer's only option would be to raise cattle on contract for them. We would lose our independence, and once we do that, we would revert to a commodity product at the mercy of supply and demand again."
Although USPB is riding into a new age, echoes of the rough, tough cowboy endure among its members as they seek to surmount their difficulties. "If we can remember all of USPB's advantages and work together," says Gardiner firmly, "we can whip 'em."