The beef packing business has gone through many trials and tribulations since the early 2000s. Most of the big packers changed hands in the early to mid-2000s. JBS came in around 2007 and bought Smithfield Beef, they tried to buy National but antitrust laws killed that idea and they bought Five Rivers Feeding. Iowa Beef Processors (IBP) was purchased by Tyson and U.S. Premium Beef bought a significant share of National Beef. Cargill was the only one that didn’t have new owners.
I can remember back in the ’80s and ’90s when beef packers had a net profit margin of 1 to 2 percent. These guys had to get big to make any money; volume was essential. But something changed. In recent years packers have widened those margins to 7 and 8 percent, and the second quarter of this year JBS reported a 20 percent margin—that’s earnings before interest, taxes, depreciation, and amortization.
How did that happen? I spoke with economist John Navlika at Sterling Marketing and he told me that 15 years ago at a National Meat Association meeting in California he told the audience that the packing industry will go into further processing of the cattle they slaughter to get more value out of these cattle.
He said that packers across all species finally figured out where the real money was to enhance their business. And, lo and behold, packers have figured out that killing livestock and selling primals or whole chickens wasn’t so good. They could cut them up and earn more—value-added products. Remember when chicken wings became popular? Now there are entire restaurant chains that specialize in chicken wings.
These packers finally listened to consumers, and they learned what quality really was, which convinced them of the need to add value. Consumers didn’t want to buy a steak with an inch of fat on it, but they wanted well-marbled beef. Remember the war on fat which took us into the hot fat trim experiment, which failed?
Then packers expanded their business model to cut steaks and produce various grades of ground beef, and to make sausage. They got closer to the consumer and learned what consumers really wanted. Seems like the closer you can get to the end user, the more profit you’re able to earn.
Think about it: A lot of cattle producers sell halves and quarter carcasses to end users; you probably do some of this yourself. Consumers will pay a premium for quality and the unique qualities you provide as a cow-calf producer. I know one rancher in Illinois who told me he has meat sales booked halfway into 2021. I used to think that cow-calf producers didn’t know what quality beef was because the only beef in their freezer was from downer cows—just joking.
National Beef is a unique packer. They were owned by U.S. Premium Beef, a group of ranchers, who at one time concentrated on quality premium cattle. They would take their better cattle and cut them for their Kansas City Steak Company. It’s a mail order company, just like Omaha Steaks but a whole lot better. Again, further processing is making the money. There is no real profit in just slaughtering cattle. You need to add value to the beef.
A quick look back in history: In the ’60s IBP came along and introduced boxed beef to the industry. Purchasing a box of just ribeyes was a big deal back in the day. The industry quickly moved away from carcass beef. Boxed beef saved in shipping costs and helped build a beef distribution network. And packers can do more with the trim than a retailer.
Then cooked beef came into the picture and Harris Ranch beef may have been the first to offer precooked tri-tips in the California market. I remember Bob Peterson, CEO of IBP, said that one day he thought IBP would only sell cooked beef. That was because of food safety and the liability issues associated with fresh product.
There have been lots of cattle producers who tried to get closer to the consumer for enhanced earnings. If done on a small scale, it works well. Where most get into trouble is when they decide to build a packing plant and try and process some volume.
There are quite a few outfits starting to sell their own beef. They find a niche market like grass fed, all natural or whatever the attributes are. Start small and see where the enterprise takes you. — PETE CROW
