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The Cost of Meeting Consumer Demand(s)

www.iowabeefcenter.org. The Cost of Meeting Consumer Demand(s). John Lawrence Extension Livestock Economist and Director, Iowa Beef Center Iowa State University. Increased demand. Increased demand for beef Grown steadily since 1998 Consumers pay more for same amount

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The Cost of Meeting Consumer Demand(s)

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  1. www.iowabeefcenter.org The Cost of Meeting Consumer Demand(s) John Lawrence Extension Livestock Economist and Director, Iowa Beef Center Iowa State University

  2. 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”

  3. Source: Research Institute on Livestock Pricing

  4. Source: Livestock Market Information Center

  5. 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

  6. Product Definition • Certified marketing programs • Typically a product specification • Determined at harvest • USDA lists over 50 “certified” beef programs • Over 60% are Angus programs

  7. Product Definition • Certified production programs • Certify process • May prescribe standards • Example: Organic, Non-hormone treated beef

  8. Product Definition • Certify the capacity of the operation to produce to spec • ISO9000 • Process Verified • Quality System Assessment

  9. 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

  10. Product World • Some beef is different • Differentiated on attributes and brands • Consumers pay more for different • Attributes • Processes • Brands

  11. 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

  12. 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

  13. Differentiated products • Detectable attributes • Marbling • Guaranteed tender • Grass-finished • Credence attributes • Content: nutrients, fatty acids • Process: natural, free-range, non-GMO

  14. Beef Quality Defined by Grade • Current system • Commodity – Value based • Growing incentives • What are the costs

  15. Assessing the Cost of Beef Quality Cody Forristall, Gary May and John D. Lawrence Iowa State University

  16. Objectives • Quantify the relative profit contribution in feedlots, comparing carcass premiums and feedlot performance. • Compare feedlot profitability to cow characteristics and maintenance costs to determine if the least cost cow produces the most profitable steer.

  17. 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

  18. 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

  19. Standardized Betas for Regression Variables by Choice-Select Spread Standardized Coefficients (%) Ch-Sel Std Dev Spread Net Ret FE HCW FC REA KPH MAR 4.00 50.36 -38.749.3-9.322.42.043.3 8.00 52.61-35.644.4-8.219.71.854.7 12.00 58.00-31.838.5-7.215.31.861.7 16.00 65.77-26.331.1-5.312.91.165.1

  20. Cow Stored Feed Cost • Developed index • Cow weight and BCS • Relative to average of BCS 5 cows • Based on average cost for BCS 5

  21. Cow Data • 542 head with cow data • Small subset!!!!! • Could not fit a regression • R-square = .11 and no significant variables

  22. Cow Cost vs. Feedlot Return Cow Cost

  23. Contingency Table

  24. 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

  25. Feeder Cattle Quality • Grid premiums • Feedlot performance • What influences these economic traits? • Is it the feeder cattle?

  26. 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 +8600 Source: Busby, Strohbehn, Beedle, and Corah

  27. 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

  28. National Database USDA Required Feedlot Packer Cow/Calf Producer Auction Barn Third Party Database Potential Industry Use The Proposed NAIS System

  29. Other Measures of Quality “Quality is not a destination but a continuous journey” - Dr. W. Edwards Deming

  30. Changing Demands • Retail sector • Export sector • Domestic consumer sector

  31. 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

  32. 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

  33. 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

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

  35. Export Market Demands • Age verification • Non-hormone treated program • Traceability • Customer countries • Competitor countries

  36. Age Verification • May have value to packer • Coordinate slaughter • Export offal • SRM removal • USDA-AMS protocol

  37. 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

  38. 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

  39. 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

  40. Consumer Willingness to Pay for US, Australian and Canadian Steaks Source: Sitz, Calkins, Umberger, and Feuz

  41. Consumer Choices • Commodity • One “average” product • One “average” price • Products • Individual products • Individual prices

  42. 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

  43. Victim or Opportunist • Most under manager’s control • Some changes require production response (genetics, nutrition) • Some changes require management response (information and communication)

  44. 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.

  45. 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

  46. Quality System Assessment • USDA Program • Agricultural Marketing Service, Livestock and Seed Program, Audit, Review, and Compliance Branch • BEV • COOL

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