Are Co-ops The Answer?

Are Co-ops The Answer?
— by Lee Pitts

Some have suggested the remedy for what ails the cattle business is a dose of rancher owned co-operatives. But that too has been tried. The fourth largest beef packer in the country is a co-op. We´ll let you decide whether it´s a cure or a curse.

Farmland Industries is the largest farmer-owned co-operative in North America. A member of the Fortune 500, the co-op´s 1998 sales were $8.8 billion, derived from 50 states and 90 countries around the world. You can add in another $4 billion in sales earned from Farmland´s “strategic alliances.” The highly diversified company is owned by 600,000 farmers and ranchers in the U.S., Mexico and Canada and has major business interests in crop production, livestock feeds, petroleum, grain processing, pork and beef packing.

The Farmland co-operative System encompasses 1,500 local co-operatives, acquired since 1929 when Farmland originally set up shop as the Union Oil Company. Some would have you believe that “strategic alliances” are new in the world of business but Farmland had its beginnings as a strategic alliance when six farmer-owned petroleum co-ops joined together. In 1935 the conglomeration of co-ops became known as the Consumer Cooperative Association with 239 co-ops under its ever expanding umbrella. By 1950 the company had become a powerful force in agriculture selling herbicides, insecticides and chemicals to its farmer-members.

Today Farmland has an asset base estimated at $3 billion which includes fertilizer plants around the world, the largest petroleum refinery in the Midwest, grain elevators, feed mills, beef and pork plants and a transportation fleet that includes more than 4,400 rail cars, 1,060 trucks, interest in 100 dry cargo barges and several ocean going vessels. Farmland markets and trades agricultural products around the world through a partnership with more than 60 other firms. In 1966 Farmland Industries acquired it´s present name, became North America´s largest farmer co-op, and proclaimed they were…”Proud To Be Farmer Owned .”

A Producer Owned Brand

One of the goals of Farmland is to shorten the distance from the ranch to the consumer´s plate. With their purchase of National, they became the fourth largest beef packer, handling 2 million head annually at plants in Dodge City and Liberal, Kansas. Farmland was already working with local and regional co-ops to produce branded pork products that sell in stores such as Food 4 Less, Price Choppers, and through food service companies like Sysco. With the purchase of National, Farmland hoped to duplicate their success in pork with consumer friendly beef products.

Farmland National Beef Packing, as it is now known, packs 4 million pounds of top quality beef per day into 50,000 boxes for sale to over 600 customers. Farmland National Beef exports Prime and Top Choice beef to 38 countries around the world including Japan, who buys 1.5 million pounds of their boxed beef monthly.

The backbone of Farmland´s cattle program is Farmland Supreme Beef Alliance. Established in 1995, it is a collaborative effort of three agribusiness entities: Farmland Industries, Farmland National Beef and Agri Beef. The latter is a family held business begun in 1968 that is a highly diversified agribusiness with emphasis on cattle feeding. Highly respected in cattle circles, Agri Beef operates in 18 western states with ranch and feedlot operations, feed supplements, a veterinary supply distribution company, mineral exploration, livestock trading and exporting. With their expertise in cattle feeding it was only natural that Agri Beef became the managing partner of Supreme Cattle Feeders, which is where all the cattle for Farmland´s branded beef program are currently being fed.

Farmland merchandises the beef produced by Farmland Supreme Beef Alliance (FSBA) through their own Farmland Black Angus Beef label and through Certified Angus Beef (CAB). FSBA claims to supply the only producer-owned brand in the meat case, although other regional firms might justifiably dispute that claim.

To qualify for the Farmland program every animal must be at least 50% Black Angus: All English crossbreds are allowed. The only continental breeds accepted are Charolais, Simmental and Gelbvieh. Brahmans and dairy cattle are excluded. Farmland claims they, “Ensure quality by raising our Angus cattle in the Midwest where we produce a consistently marbled selection of Choice Black Angus Beef.”

Formula Feeding

Like most strategic alliances currently being pitched to cattlemen, FSBA claims that their program rewards ranchers for producing a superior end product. Cattle enrolled in FSBA are sold under a value-based marketing formula to Farmland National Beef. Their pricing structure guarantees “the western Kansas practical top cash price the week of sale, less $1, with a carcass base point of Select, Yield Grade 3 with incentives for higher quality carcasses that grade Prime, CAB and Choice. To date FSBA producers have captured premiums as high as $53 per head.”

Those taking part in the FSBA program don´t have to retain ownership, they can also sell direct to Farmland. The feeder cattle price for contracted producers is based on the Cattle Fax price for the week prior to shipping. Cattle must be of uniform weight in load lots. Premiums are paid on a four tier preconditioning program with higher premiums paid to ranchers who retain at least 50% ownership. It costs $2.50 for every head enrolled in the program and if detailed carcass information is desired an additional $1.50 per head is assessed. Like similar programs, Farmland has a list of preferred purebred suppliers that includes some of the best Angus breeders in the country such as Gardiner, Sitz, N-Bar and others.

The Farmer´s Friend?

Farmland goes out of its way to portray itself as the farmer´s friend. They made headlines in December when they announced an unprecedented move to establish the first ever floor price for the market hogs it purchased. As the sixth largest pork processing operation in the country, with four packing plants and 9 processing facilities, Farmland expects to process 8 million hogs this year, which is about 15% more than last year. In the midst of the worst meltdown in the hog industry in forty years, Farmland established a $15 per hundredweight floor for market hogs that met its specifications. Only producers who had previously sold hogs to Farmland were eligible. “We are deeply concerned about the farmers who supply us with market hogs,” said Gary Evans COO of Farmland Meats Group. “Establishing a floor price is an essential step to help our farmer-owners through one of the toughest economic periods in the history of the pork industry. This floor price is proof positive that Farmland is… “Proud To Be Farmer Owned “.

In making the announcement Evans said, “The concept of establishing a floor price was developed after the co-operative´s leaders studied several ideas put forth during their annual meeting. Farmland typically buys hogs at competitive prices, markets pork products under the Farmland brand and then pays out its profits to livestock producers and local co-ops in the form of patronage refunds. “Because we are the nation´s only producer-owned pork processor, we felt a moral obligation to attempt to provide assistance to our producers,” said Evans. “We need a stable supply of high quality hogs over the long haul If this helps producers weather the economic storm, then we´re doing our job”

“We recognize that a floor price is not the total solution, said Henry Fehrenbacher, an Illinois pork producer and Farmland member. “Nevertheless, for hundreds of producers it could mean the difference between staying or leaving.”

Left Out In The Cold

Some in the meat trade weren´t overly impressed by Farmland´s gesture. Mike Callicrate, a Kansas cattle feeder and industry observer, scoffs at a $15 offer for hogs considering the high retail price of Farmland´s hams and bacons. Callicrate thinks that with the current industry structure even a co-op like Farmland can´t help ranchers much. “The co-op becomes the greedy corporation,” he contends. “Consider Farmland´s recent announcement of investing in a export grain elevator in Argentina. I wonder where they are going to ship the grain from Argentina or what U.S. farmer market they are planning to displace?” asks Callicrate. For sure, Farmland makes no bones about exploring growth opportunities around the globe.

Even if Farmland National Beef would like to be known as the rancher´s friend, they can´t give away the farm and expect to survive. IBP, ConAgra, Cargill and Farmland control about 87% of the nation´s beef slaughter. As the world´s biggest packer IBP is known to provide price leadership. With one look at the numbers you can see why. IBP has a daily beef kill capacity of 38,000 head in 13 plants. ConAgra can process 23,600 a day in 8 plants; Excel, (a division of Cargill) can kill 21,800 cattle per day in 5 plants and Farmland has a daily kill capacity of 8,700 in just two plants. Even though Farmland National is number four they are a long way back of the pack and therefore must abide by the informal guidelines established by IBP.

According to Callicrate, “Court documents show IBP´s captive supplies, the cattle available to the packer without bidding or negotiating price, to be as high as 122% in recent years. This, in addition to the packer´s willingness to co-operate with each other rather than compete (IBP trades cattle with other packers) has virtually eliminated the market that producers depend on for a fair price.”

“Court reports also indicate that now Farmland National Beef, like the other packers, is virtually absent for extended periods from the cash market,” says Callicrate. “Before National Beef was purchased by Farmland, National was considered a premium quality packer and the last of the cash market traders. IBP, Cargill and ConAgra all had large captive supply inventories to draw from thereby disadvantaging National in the market. Independent feeders who have long depended on National Beef to buy their cattle are now being left out in the cold unable to sell their cattle. These are the same cattle, the cash market cattle, that set the base price for nearly all the packer´s captive supply deals.”

Musical Chairs

“It was common knowledge in the industry that Farmland National was on the brink, a victim of IBP´s death march, “contends Callicrate, “when much needed producer capital was raised in a deal with U.S. Premium Beef (USPB). “The deal appears to be a win-win for Farmland and a lose-lose for producers, considering the new money came with the much needed price lowering captive supplies.”

“Falling for a sales pitch sounding like the old days of the penny stock brokers,” says Callicrate, “many desperate farmers and ranchers scratched, borrowed and leveraged their last precious belongings to buy into what many felt was their only hope of salvation… U.S. Premium Beef.” But when USPB then signed on to Farmland National´s program it allowed Farmland to capture captive supplies and then act just like the big boys. According to Callicrate, “USPB now has the potential of providing half of Farmland National Beef´s cattle needs from outside the competitive market.” And that is how a co-op became what Callicrate calls, “Just another market crushing, packer empowering captive supply deal.”

Mike Callicrate contends that in such arrangements “cattle feeders have come up short after paying significant premiums for higher quality cattle, only to receive the same and at times less than what the lowest quality cattle were bringing in the cash market. Additionally, these feeders say they are forced to feed genetically poorer performing cattle (higher grading English cattle versus faster growing crossbred cattle) and must feed their cattle longer, incurring higher feeding costs in order to collect razor thin premiums while at the same time trying to dodge the deep discounts of the price determining grid.”

Callicrate contends that Farmland is, “Not a friend of the farmer.” The problem is that no matter how well intentioned Farmland may be, in today´s cattle industry they are forced to play the captive supply game. Either that or disappear, and then what good could they possibly do? At least Farmland is rebating to their members a patronage refund, some eighty million at this point in their fiscal year. That´s not much on sales of 9 billion but it´s more than you´ll get from IBP.

In quoting a cattle feeder Callicrate sums up our dilemma as we experiment with co-ops, strategic alliances and other means of surviving current economic conditions. “The last few years it´s been like a musical chairs game. Everyone is rushing to the empty chair, not realizing that the chairs are in the gas chamber.”