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Around the same time period, the Red Angus Association of America (RAAA) developed a grid-marketing system with Monfort. This was part of RAAA becoming one of the suppliers to a large foodservice company’s Angus branded-beef program. When Schiefelbein left AGA to join Monfort to oversee their value-based marketing programs, Monfort became the leader in the move to price cattle based on their actual merit.
For the purpose of this article, let’s first set a definition for formula versus grid marketing. In general, with formulas, the basic value systems all spin off of how cattle perform against plant averages. A grid generally has set premiums and discounts for most value components that remain constant during the year. Today, most value-based systems are hybrid, where the year-round plant average is built in as a constant threshold that cattle must either perform above or below to earn a premium or avoid a discount.
The problem with formulas as they were designed is they were self-defeating. As producers sent ever-better cattle into a plant to earn a premium, that would improve the plant average they would be competing against and thus lower the premium the cattle could receive. Grid marketing solves this problem but does not account for seasonality of value differences that are a reality in the industry.
RAAA initially set out by using Dolezal’s Boxed Beef Calculator to build a system that was based on boxed beef values. This was a great system in concept, but the problem was packers don’t always make money. Everyone would sell their cattle based on boxed beef values when packers were in the flush, but would run back to the cash market when packers were losing money.
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The exercise of trying to develop the boxed beef system did provide the base values within the system, and when Schiefelbein moved from AGA to Monfort, it was the base system that led to Monfort becoming the leader in value-based marketing. RAAA and Schiefelbein also worked together using Dolezal’s Boxed Beef Calculator to show Monfort management that the value was being spread equitably between producers and their packing company.
Lessons learned from the early years
1) Establishing a favorable base price is the key to a profitable grid. If you start with an artificially low base price, you are not likely to come out ahead through so-called premiums. Early formulas or value-based grids usually started out with the practical top as the base price. That was appropriate because the best cattle at the time were the ones that went the value-based pricing route.
When pricing went to regional averages or the five-state average, a lot was lost in return to producers. Today, there are many systems to formulate base price, but whether it is a negotiated base, regional or five-state average, regional or five-state average plus money on top, or the practical top, establishing a base price that is equivalent to what cattle should bring on the cash market is necessary.
2) Most of the big brands like Certified Angus Beef (CAB) or house brands like Cargill’s Sterling Silver—which is a CAB clone—are cooler sorts, which has made CAB a valuable de facto grade. This established Premium (upper two-thirds) Choice as an important source of value to the industry.
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3) The first National Beef Quality Audit came out in 1991, and it was embarrassing in terms of the value that was being lost. Too many horns were causing too much bruising. Too much of the meat was tough, and there were inexcusable findings, like a large number of injection site lesions in the loin. If the industry was going to continue selling its product to consumers, it needed to clean up its act.
4) Beef being produced was far too inconsistent. People were crossbreeding, but it wasn’t what you would call planned crossbreeding. Therefore, a pen of cattle going to the packers would have soup to nuts on the load.
5) Perhaps the biggest benefit to value-based marketing at the time was the producer’s ability to schedule their cattle when they thought they were ready, and not the packer buyer, whose standard answer was “give them another two weeks on feed.” Feed prices were very high at the time, and feeders learned that cattle with high genetic potential to marble didn’t need nearly as many days on feed to grade well, while having great closeouts and yield grades.
Marketing improvements
Since those early days, value-based marketing has expanded greatly. Most cattle base prices are formulated from their region or from the five-state average. When value-based marketing first began, it was frowned upon by most feeders as captive supply. Instead, feeders would sell their whole show list—the good, the bad and the ugly—at one price, which was a real inequity to their customers who were feeding different quality cattle at that yard. Although the industry learned how few days cattle could be fed in the early days, they now switched to how long they could be fed.
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This meant over time, feeders went from targeting four-tenths of an inch of back fat for finished cattle to six-tenths of an inch—a 50% increase—knowing the final weight in fat would end up on the rail and not on the floor. This added significantly more payweight to the carcasses. With cheap feed this worked great, but it remains to be seen what the future brings.
Many people think that yield grades and carcass weight are really nothing to worry about, but this is wrong. Yes, the premiums for Prime have risen dramatically, but much of the yield grade premiums and discounts, as well as “out cattle” discounts, have remained remarkably stable. Even though the Premium Choice branded beef programs started to take Yield Grade 4 carcasses into their programs, the discount for having excessive Yield Grade 4s and 5s will still sting you.
As indicated before, most grids and formulas have morphed so that there are now allowances. For instance, a pricing system may give a producer 10% Yield Grade 4s before they get discounted. This is essentially the formula system, where the plant average for the year is built in, and the producer has to exceed or stay under these thresholds to receive the value of the cattle.
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Finally, at one point USDA wanted to better define what Angus beef was. Both the American Angus Association (AAA) and RAAA had a seat at the table. AAA’s stance was “Angus beef” should be based on quality, while Red Angus took the stance that it should be genetically defined. USDA took neither recommendation, so any given Angus product didn’t necessarily need to be high quality or have any significant Angus genetics in it. The number of Angus product lines exploded, and it was hard to know what the product was just because it was labeled Angus. However, in the mind of consumers, “Angus” became synonymous with “quality.”
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RAAA dropped out of the Angus branded beef programs in 2017, allowing Angus to write a black-only specification. Now, RAAA is back in, with the ability to supply Red Angus-influenced programs only, and they added a phenotypic path to go with the traditional “yellow tag” genotypic program. Now a consumer can go to the store and potentially buy an Angus-influenced product, a Red Angus-influenced product, or one that is blended with both an Angus and Red Angus claim that came from either predominantly red or predominantly black cattle.
Key learnings in recent years
1) Cattle can be made really big by making them really fat, but the consequence is inefficiency at the end of the feeding period and too many sudden deaths of market-ready cattle.
2) There has been an explosion in program cattle, with retailers and wholesalers in the plants demanding products that meet certain specifications. There is money to be made here, but cattle need to be aimed at a program that fits the genetics of a producer’s cattle, as well as their management and feed resources.
3) The USDA Agricultural Marketing Service’s new Cattle Contracts Library Summary is a great new tool to see price discovery on what these programs are paying in a value-based system. It only started in February 2023, but over time, it will become an essential tool for making risk management and profit potential decisions.
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4) Packers want really big cattle, and there are no signs of that backing up, but at what price to the commercial cow-calf operations? Many commercial cow-calf operations are getting their cow herds out of bounds for their circumstances in terms of cow size, as well as growth and milk potential. Far too many commercial producers are not making enough payweight to pay for the extra maintenance and lack of longevity in their cow herd. We need a commonsense middle ground here.
5) Last, we need to be worried about foreign ownership in our processing sector. While all packers want to make a lot of money, it was felt that domestic owners would never kill the roots of the tree that feeds them, which are the cow-calf and feedlot sectors. This may not be assumed with some foreign owners.
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It is an exciting time in the cattle industry. With record-short cow numbers, and many areas experiencing more moisture, we could be looking at a great year in terms of profitability. But no cattle can be profitable without the right genetics, management and a targeted market.
