Motivation factors for beef processor-producer linkages Motivation factors for beef processor-producer linkages

Summary A survey was conducted of the 15 largest beef processors to identify the mix of pro-curement practices being used and to understand reasons motivating recent processor-producer linkages. Processors are shifting away from cash-market live, fed-cattle trade, which represents only 36% of cattle procured by survey respondents in 1999. Processor-owned cattle feeding represents only approximately 5%, where it has been for more than a decade. Various other forms of pricing such as carcass weight, grid, and formula represented the largest portion of purchases at 49%. Processors indicated the two most important reasons they get involved in contracts and marketing agreements with producers is to secure higher and more consistent quality cattle. Assuring food safety was also a motivation for linking more closely with cattle producers. In the future, processors felt these motivational factors would increase in importance. As cattle feeders explore grid pricing and alliance opportunities, it is important they understand why


Introduction
The U.S. beef industry is undergoing marked transitions in the way livestock and meat products are marketed and the way price discovery occurs.The once dominant negotiated cash markets are shifting to longterm contracts and marketing agreements.The purpose of this study was to determine current marketing and pricing methods being used by beef processors.The current and expected mix of pricing methods for fed cattle were estimated by the processors.In addition, major motivating factors for changing beef processor-producer linkages were assessed.
Results of this study will contribute to a better understanding of the important coordination mechanisms that affect market efficiency and performance in these industries.This study will also offer insights into the changing industry organization that will be useful in strategic planning by industry members.The complexities of mandatory livestock-and meat-price reporting (from recent federal legislation) will become more clear as the variety of methods employed in the marketing system are documented.Finally, the information from these surveys should be useful in assessing issues raised in court cases alleging illegalities associated with "captive supplies" in the beef industry, and proposed legislation to eliminate processor vertical integration and long-term contracts with livestock producers.

Procedures
During April 2000 the largest 15 beef processing firms were surveyed to determine current procurement practices and to discern processor perceptions on why the beef value chain has moved to more formal agreements.
Survey responses were received from 11 of the 15 packing firms, representing 72% of cattle slaughtered.The processors were telephoned, asked to participate in the study, and were faxed a survey form.

Results and Discussion
Processors are shifting away from live cattle cash market purchases to more longterm contractual and/or value-based grid purchases.However, negotiated cash market pricing arrangements still remain dominant.Only 5% of cattle slaughtered by survey respondents were owned by them and either fed in their own lots or other feedlots.This represents little change over the last 15 years.In 1999, survey respondents reported 36% of cattle were purchased on the cash market on a live weight basis, and 29% on a carcass weight or grid (carcass merit) basis (Table 1).Thus, approximately two-thirds of cattle slaughtered were cash market acquisitions.
Long term (more than 14 days) formulapriced contracts linked to the cash market accounted for 20 percent of 1999 purchases."Cash market" included live cattle or wholesale beef prices reported by USDA, processor cattle purchase cost averages, retail beef prices, or futures market prices.Four percent of cattle purchased were via short-term contract arrangements based on the Chicago Mercantile Exchange (basis contracts, or fixed price based on futures-market prices, with deliveries typically several months in the future).Three percent of the cattle were acquired under risk and profit-sharing, market contract arrangements with cattle feeders, but not owned by processors while in the feedlot.
Cash market purchases by processor buyers are based on their expectations of likely carcass quality.However, a large number of cattle feeders sell all of their pens, perhaps with several owners, at the same live or carcass price, allowing little distinction for quality on a lot-by-lot, or carcass-by-carcass basis.Cash market purchases based on carcass merit are increasing in the cash and contract markets.In 1999, at least 35% of cattle purchased on contract or in the cash market were priced based on carcass merit but some processors did not break that out in their responses.Most cattle fed by processors were also transferred to their processing operations based on carcass merit.
Processors were queried regarding the importance of specific reasons they and cattle producers enter into contracts and marketing agreements.The two most important reasons cited by processors were to "secure higher quality cattle," and to "secure more consistent quality cattle" (Table 2).Both of these responses had an average score of 4.0, with 1 being not important to 5 being very important.These were also expected to be most important (and even more important at 4.2) in 2004.Improving risk management, reducing plant operating costs by maximizing slaughter plant capacity utilization, and assuring food safety were the next most important reasons (average scores of 2.8 to 3.0 in 1999).All three of these items also are expected to become more important, with 2004 ratings for food safety at 3.7 and plant operating efficiency at 3.5.The low importance (average score of 1.8) attached to the assertion that contracts enabled processors to purchase cattle for a lower price may be because contracts and agreements do not enable processors to lower prices paid for cattle, as shown in recent USDA-sponsored studies.Securing adequate cattle quality and quantity are the primary factors motivating beef processor use of contracts and marketing agreements with cattle producers.
Processors perceived that producers' primary incentives to enter into contracts and marketing agreements were to secure a quality premium and obtain a higher price for cattle (Table 3).Processors felt that, in the next five years, producers would benefit from marketing agreements primarily for these reasons, as well as to obtain detailed carcass data.

Table 3 . Processor Survey Responses Regarding Importance of Contract and Marketing Agreement Incentives to Cattle Producers a
a Scale: 1 = not important, 5 = very important.