The Cost of Meeting Consumer Demand(s)

www.iowabeefcenter.org

The Cost of Meeting Consumer Demand(s)

John LawrenceExtension Livestock Economist and

Director, Iowa Beef CenterIowa State University



Increased demand• Increased demand for beef

–Grown steadily since 1998–Consumers pay more for same

amount–Quality, convenience, carbs

• Increased demand on beef–Moving from “trust me” to “prove it”


Third Quarter Beef Demand Index, 1980=100

0

20

40

60

80

100

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

200

4

Source: Research Institute on Livestock Pricing


Quarterly Per Capita Beef Consumption and Choice Steer Price

$50

$55

$60

$65

$70

$75

$80

$85

$90

$95

$100

14.5 15.0 15.5 16.0 16.5 17.0 17.5 18.0

34

1491

21

311141

5242

54

4451

2494

04

13

3212

0102

53

43

33

93 2203

23

92

Source: Livestock Market Information Center


Product Definition • Commodity markets

– One item - one price

• Value-based markets– Measured, graded, and sorted at

harvest

– Price difference based on measured traits

– Produce to impact measure/grade


Product Definition• Certified marketing programs

– Typically a product specification

– Determined at harvest

– USDA lists over 50 “certified” beef programs

– Over 60% are Angus programs


Product Definition• Certified production programs

– Certify process

– May prescribe standards

– Example: Organic, Non-hormone treated beef


Product Definition

• Certify the capacity of the operation to produce to spec– ISO9000

– Process Verified

– Quality System Assessment


Commodity World• All beef is beef• Minimum standard to qualify• Low cost producer of the minimum wins• Minimum standard is rising as are costs

– Feed ban signatures, COOL

• Grades define various minimums not products


Product World• Some beef is different• Differentiated on attributes and

brands• Consumers pay more for different

– Attributes– Processes– Brands


Certified programs• USDA lists 55 certified beef programs

– 34 Angus programs– 3 Hereford programs with breed claim– 2 were Process Verified

• Red Angus Assn and PM Beef

1/20/05


Angus Certified Programs• Angus Upper 2/3rd Choice or Higher

• Angus Multi-Tiered (Prime, Upper 2/3rd Choice, Low Choice, and/or Select)

• Angus Choice

• Angus Select or higher

• Angus Utility or higher


Differentiated products• Detectable attributes

– Marbling– Guaranteed tender– Grass-finished

• Credence attributes– Content: nutrients, fatty acids– Process: natural, free-range, non-GMO


Beef Quality Defined by Grade

• Current system

• Commodity – Value based

• Growing incentives

• What are the costs


Choice - Select Boxed Beef Price Spread ($/cwt)

$-

$2

$4

$6

$8

$10

$12

$14

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004


Weekly Choice-Select Boxed Beef Spread

$0

$4

$8

$12

$16

$20

$24

$28

$32

$36

1 5 9 13 17 21 25 29 33 37 41 45 49

$/c

wt

2000-04

2003

2004


Assessing the Cost of Beef Quality

Cody Forristall, Cody Forristall, Gary May and Gary May and

John D. Lawrence John D. Lawrence Iowa State University


Objectives1. Quantify the relative profit contribution

in feedlots, comparing carcass premiums and feedlot performance.

2. Compare feedlot profitability to cow characteristics and maintenance costs to determine if the least cost cow produces the most profitable steer.


Tri-County Steer Carcass Futurity Data• Long standing steer test• Extension participation• 7 feedlots with common protocol• Data from over 50 producers• 1147 Calf-fed steers• 1996-1999 marketing years


Data Collection• Individual weights

– In, out, and during feeding• Marketed in 2-3 drafts/year• Measured carcass data

– USDA QG and marbling score– Calculated YG

• Cornell model for individual FE


Standardized Betas for Regression Variables by Choice-Select Spread

4.00 50.36 -38.7 49.3 -9.3 22.4 2.0 43.3

8.00 52.61 -35.6 44.4 -8.2 19.7 1.8 54.7

12.00 58.00 -31.8 38.5 -7.2 15.3 1.8 61.7

16.00 65.77 -26.3 31.1 -5.3 12.9 1.1 65.1

Ch-Sel Std DevSpread Net Ret FE HCW FC REA KPH MAR

Standardized Coefficients (%)


Cow Stored Feed Cost

• Developed index

• Cow weight and BCS

• Relative to average of BCS 5 cows

• Based on average cost for BCS 5


Cow Data

• 542 head with cow data

• Small subset!!!!!

• Could not fit a regression– R-square = .11 and no significant

variables


Cow Cost vs. Feedlot Return

Feedlot Return

Cow Cost

Low $41.10 $146.13

High $32.47 $166.58

Cow Cost


Contingency Table

Feedlot Returns

Cow Cost Low High

Low 43% 57%

High 57% 43%


Summary

• Premiums increasing for quality• Biological tradeoffs impact profits• Marbling explains greater share of

profit differences as C-S grows• Early results suggest cow costs and

feedlot profits negatively correlated


Feeder Cattle Quality

• Grid premiums

• Feedlot performance

• What influences these economic traits?

• Is it the feeder cattle?


Effect of postweaning disease on carcass traits, feedlot performance and mortality.

Number of treatments

0 1 2 % Change

Prime, % 1.9 1.1 0.9 -52.6

Premium Choice, % 21.5 19.5 15.2 -29.3

Low Choice, % 48.8 43.4 42.8 -12.3

Select, % 25.2 30.1 30.5 +21.0

Standard, % 2.6 5.9 10.6 +307.7

Yield Grade 1 & 2, % 52.3 65.8 71.7 +37.1

Yield Grade 3, % 44.9 32.8 28.1 -16.8

Yield Grade 4 & 5, % 2.8 1.4 0.2 -2.6

ADG, lbs. 3.24 3.13 3.07 -5.2

Mortality Rate, % 0.1 3.7 8.7 +8600Source: Busby, Strohbehn, Beedle, and Corah


Effect of postweaning disease on net dollars returned.

Number of treatments

0 1 2

Quality Grade Premium $17.66 $7.82 PAR

Yield Grade Premium PAR $3.87 $6.09

ADG Bonus* $24.87 $8.68 PAR

Death Loss Discount** PAR -$37.39 -$89.05

Treatment Cost# PAR -$19.14 -$44.47

Net $ Returned $42.53 -$36.06 -$127.43

Difference -$78.59 -$169.96

*Based on the lbs of additional carcass weight gained during the feeding period.**Accounts for cost of gain investment and lost carcass value. # Includes medicine, labor and chute/equipment charges.Source: Black Ink Basics


The Proposed NAIS SystemNational Database

USDA Required

Third Party

Database

Potential Industry Use

Feedlot PackerAuction

BarnCow/Calf Producer


Other Measures of Quality

“Quality is not a destination but a continuous journey”

- Dr. W. Edwards Deming


Changing Demands• Retail sector

• Export sector

• Domestic consumer sector


Retail sector changes• More powerful and demanding

retailers– 10 firms with 49% market share– Walmart + Sam’s 17%– House brands and exclusive suppliers– Liability issues– Outsource inspection and compliance


Retail sector changes• European influence

– 2 of top 11 US grocers are European– 4 of top 10 world grocers are European

• Chain Captain model– Retailer is in consumer protector role– US consumers still trust USDA for safety– Others are not a trusting of gov’t


European lessons• Chain Captain model is costly

– Safety is competitive issue– Must be audited to sell– Multiple audits– Multiple issues beyond safety

• Feed use• Animal rights• Worker safety


Animal rights• McDonalds plant verification• FMI and NCCR guidelines• SWAP certification• TQA certification


Export Market Demands• Age verification

• Non-hormone treated program

• Traceability– Customer countries

– Competitor countries


Age Verification

• May have value to packer– Coordinate slaughter

– Export offal

– SRM removal

• USDA-AMS protocol


Meat Standards Australia• MSA Guaranteed Tender

– Animal: Age, grain-fed, % Bos Indicus

– Slaughter plant: Electrical shock, grading, aging

– Retailer: Sale date, cooking

– Enforcement and traceback if needed


Willingness to pay– Lusk, guaranteed tender steak

• No label: 51% pay $1.23 premium• Label: 61% $1.84 premium

– Feuz and Umberger, grass v grain fed• On average $1.61 more for grain-fed• 23% paid $1.36 premium for grass fed


Willingness to pay– Loureiro and Umberger, US Certified

• Premium for US Certified over no label

– Sitz, Calkins, Umberger, and Feuz• US v. AUS grass-fed and CAN

grain-fed


Preference

AUS /

CAN

US Average

US Prem

No Pref

AUS $1.38

19.0%

$2.23

64.5%

$1.20

16.5%

CAN $1.37

29.3%

$1.63

44.0%

$0.38

27.0%

Source: Sitz, Calkins, Umberger, and Feuz

Consumer Willingness to Pay for US, Australian and Canadian Steaks


Consumer Choices

• Commodity– One “average” product

– One “average” price

• Products– Individual products

– Individual prices


Verify label claims• USDA wants definition of terms

– Protecting consumers from fraud– Branded product needs to assure

compliance with stated claims– Reputation and liability– Cost of enforcement on top of cost to

produce special attributes


Victim or Opportunist • Most under manager’s control

• Some changes require production response (genetics, nutrition)

• Some changes require management response (information and communication)


Quality management systems• A producer directed management

system to assure that the producer– Capable of meeting the requirements

– Document that requirements are met

– Information to evaluate production and marketing opportunities when they arise.


Quality management systems• Various models available ranging in

complexity, cost, and flexibility

• 3rd party verification to have value

• Examples include– ISO 9000:2000

– USDA Process Verified

– ISO 14001


Quality System Assessment• USDA Program

• Agricultural Marketing Service, Livestock and Seed Program, Audit, Review, and Compliance Branch– BEV

– COOL


QSA Program Requirements1. Quality Management Systems

2. Management Responsibility

3. Human Resources - Competence, Awareness, and Training

4. Product Realization

5. Measurement, Analysis, and Improvement


QSA - Measurement, Analysis, and ImprovementCustomer Satisfaction

• The company must monitor information relating to customer perception as to whether the company has met customer requirements.


"There is only one boss. The customer. And he can fire everybody in the company from the chairman on down, simply by spending his money somewhere else."

- Sam Walton


Where to Start

• Say what you will do.

• Do what you say.

• Be able to prove it with documentation and records.


Where to Start• Written description of operation

• Retrievable information system– Describe how and where you keep

information

– Keep it simple but sufficient to back up claim

• Information to run your business


Quality management systems• Cost associated with developing

management system, audits, and certification

• Benefits include – Market access– Market flexibility– Better management– Lower costs


Rising Demands on Beef• Widening Choice-Select spread

• Consolidating retail sector

• Brands with claims and liabilities

• Consumers looking for choices

• Rising commodity standards


Rising Demands on Cattle• Quality grades outweigh feedlot

performance at higher C-S spreads• Health/treatment impact grading• Age and source verification • Greater value from calves that have a

sound health program and genetics to grade

• IF YOU CAN PROVE IT!!!!


Cost of not meeting demands• Commodity market will continue

– The minimum will continue to rise

• Missed opportunities if you are not eligible for value added markets

• May lose to pork or poultry, and some beef producers will lose to other beef producers


Cost of not meeting demands

Although your customers won’t love you if you give bad service, (or a bad product) your competitors will.

- Kate Zabriskie, founder Business Training Works

www.iowabeefcenter.orgwww.iowabeefcenter.org

Thank You

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The Cost of Meeting Consumer Demand(s)

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