Why collaborative supply chains?

By Bruce Cobb, executive vice president, production, Certified Angus Beef, and Nevil Speer, independent consultant

“What’s the market going to be?” Historically, that served as the primary question for many cattle producers. That’s understandable. When operating in a commodity framework, the revenue side of the business always gets the most attention. One, it’s easy to track (for most beef operations there are only a few big checks per year). And two, it’s psychologically rewarding (and sometimes discouraging) to receive those checks. Traditionally, many producers inherently have linked their perceived success to “the market.”

But that’s a commodity mindset. Therefore, it constrains producers to simply being price takers; they’re forced to wait on the market and simply hope it works out in their favor. That ultimately means the success of their business is largely out of their control.

And it means all cattle get priced the same. However, cattle are NOT fungible! Huge value differences exist among any given set of cattle. And meanwhile, since the beginning of 2021, the weekly Prime-Choice wholesale spread has averaged around $42/cwt. (yes, you read that correctly!). That’s equivalent to nearly $400 for a 950 lb. carcass that achieves Prime versus Choice, respectively. Meanwhile, the Choice-Select spread has been only $17/cwt. (or $160/head) during the same time frame.

Related: Quality and consistency: Stay the course

In other words, the upside of achieving Prime is worth two-and-a-half times more than the penalty for cattle grading Select (and yet the business remains persistently focused on the Choice-Select spread as a meaningful signal).

Why is that happening? Because consumers increasingly understand, and are willing to pay for, quality grade differences. That’s best detailed by Certified Angus Beef research detailing the fact that premium quality grades (upper 2/3 Choice and Prime) outperform commodity Choice in terms of ensuring a favorable eating experience (i.e., avoiding the risk of purchasing a “tough” steak, as shown in the graphic).

Given that reality, the business objective should be focused on hitting the premium quality grade target (Prime or Upper 2/3 choice) with greater consistency. That is, every participant in the supply chain has a role to play in working towards making that happen on a more predictable, repeatable and consistent basis.

Commodity-based systems can’t make that happen. They’re based on adversarial negotiations, defined by win-lose transactions with little regard for mutual benefit. Moreover, they operate on a catch-as-catch-can / hit-or-miss perspective where everyone gets paid on averages. And perhaps most important, no real communication or feedback exists up and down the supply chain.

Related: Cattle markets: Reflecting on the bigger picture

For progressive producers, that’s not good enough. Instead of asking, “What’s the market going to be?” the question begins to change with something more like, “How do we increasingly capture value opportunities available in the business?” In other words, there becomes a new intentionality – making production and marketing decisions based on value-added price signals provided from consumers and shared through the supply chain.

Over the long run, though, that can only happen in the structure of working with like-minded people across the supply chain – seedstock, ranchers, backgrounders, feeders and packers – seeking the same sort of goals. And therein enters the concept of collaborative supply chains – ones that recognize that everyone should benefit as determined by the ultimate end value (e.g., Prime 950 lb. carcass).

Imagine a business where stakeholders in a collaborative supply chain do just that – collaborate. A system where open communication and data sharing becomes the priority, thereby enabling producers to escape being paid on averages. It’s a system that enables production to hit the ultimate consumer target with greater consistency – and every participant is rewarded for their respective contribution to value creation.

Related: Cattle auction prices react to futures market volatility

That’s happening now. For example, National Beef, through U.S. Premium Beef (USPB), is the first packer to offer a grid premium for cattle enrolled in the AngusLink Genetic Merit Scorecard (GMS). Cattle with a Beef Score of 100 to 149 qualify for a $5/head premium; lots that score 150 or more receive a $10/head premium.

The data speaks for itself. Those cattle in GMS outperform even the top 25% of those not enrolled in GMS (see Table below); the overall premium difference is nearly $14/head, respectively. Cattle feeders can readily identify feeder cattle already enrolled and know their Beef Score before purchasing; the higher the Beef Score, the more genetic potential for generating additional premiums on the grid.

That sort of system ultimately allows producers greater control and enables them to escape the commodity trap. So, instead of crossing your fingers, hoping the market works in your favor when it comes to sell, there’s a real plan with real rewards already in place. Moreover, shared financial rewards also help smooth revenue volatility from year to year.

Every dollar that comes into the business ultimately is derived from the consumer. Better genetics, management, communication and collaboration all help to make that happen with greater frequency. And in the end, working together in systems that reward those efforts seemingly establishes a virtuous loop: hitting the target creates more come-back customers – and, in turn, underpins consumer demand, thereby creating the need for even more high-quality beef.