Premiums prove that value-based marketing works
By Doug Rich
Steve Hunt was the inaugural speaker for the Henry C. Gardiner Lectureship at the annual Kansas State University Cattlemen’s Day. Hunt was president and chief executive office of U.S. Premium Beef for 17 years. He recently stepped down from that position and is now an advisor to USPB.
In 1996, when USPB was started, there were several challenges facing the beef industry. Hunt said these challenges included integrated and efficient pork and poultry industries, a broken beef marketing system, limited information transfer from beef packers back to beef producers, distrust amongst sectors in the beef industry, and diminishing beef quality and consistency. From the beef quality audit in 1991 to the beef quality of audit in 1995, the industry had done little to address these challenges. The industry was efficiently producing live animals but this system did not reward quality. Hunt said at that time a lot of cattle were not bringing enough and a lot of cattle were bringing too much.
“We were not out to reach a consensus; we were out to solve the challenges facing the beef industry,” Hunt said.
At that time there were many groups working to changed the beef industry and fix the marketing system. Hunt said USPB is just one of those groups. All of these groups were looking for a way to get accountability back into the beef production and marketing system. USPB proposed to do this with three key elements.
The first was value-based pricing on every animal coming into his or her system. At that time very few cattle were fed to a meat point and very little carcass data had been sent out on the cattle being produced. No more averages. Every animal would be paid on a meat basis.
The second element was information transfer. They would find a way to identify every carcass and get that information back to the producer within 48 hours at no cost to the producer.
The third element was packer ownership. This was not an easy decision for the fledgling business.
“Producers owning processing was a giant leap but one we were committed to at least try,” Hunt said. “We wanted the most efficient way to communicate from consumers, through processors, to the producer.”
At that time 90 percent of USPB members had never delivered to meat program like this before. Hunt said for this reason they keep it simple focused on yield grade, quality grade, hot carcass weight, CAB qualifiers, and weight qualifiers. They encouraged their members to take average cattle and take small steps.
During its first year of operation USPB paid producers an average of $8.63 per head premium over the cash market. The top 25 percent earned a $27 premium over the cash market. Hunt said in 2012 the average premium was over $60 a head on average. The top 25 percent received close to $120 a head premium over the cash market.
“Producing cattle to a meat end point is a whole new proposition,” Hunt said.
USPB and other alliances were attempting to shift High Plains production from live animal to a meat-based performance measurement. The outcome was that they created value that did not exist before.
“Value-based marketing has pushed hundreds of millions of dollars out into the producers pockets and into the processing business,” Hunt said.
In the future Hunt said we will continue to see product segmentation. This might include additional segmentation for natural, for humane handlings, and even feeding programs. There will continue to be additional offerings from all processors.
Hunt said there would be continuing calls for regulatory marketing as it pertains to the cash market.
“Our market determiner in this region of the country is the cash market so it is very important,” Hunt said. “We need to watch the cash market and make sure it continues to be competitive and that we are trading enough cattle in that market to make it a good indicator of what the value is. Today it is competitive and we will know when it is not.”
In the future Hunt said there also will be continued conversation about voluntary versus mandatory identification for cattle. Hunt said he thinks mandatory identification should be part of the discussion. Mandatory identification is like an insurance premium.
Hunt said the cattle industry needed to do a better job of using social media to tell their story.
Looking back at the last time he spoke in Weber Hall in 1995, Hunt said the beef industry has done an amazing job in meeting the challenges it faced. The beef industry has experienced a phenomenal turn around in that time period, maybe the greatest in the history of the industry.
Doug Rich can be reached by phone at 785-749-5304 or by email at email@example.com.