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HUNTIN' DAYLIGHT -- GONE PUBLIC

by: Wes Ishmael

Just about the time more than one Chicken Little had predicted the beef industry would be dropping its dally and turning ol' Lighten' out to pasture for the last time, it's a whole new ballgame. Beef demand has been marching North for better than a year, calf and feeder prices are up and a load of producers have the best shot at profit they've had in years.

Snubbed to a different post, the folks who always choose the pale horse forgot one simple, perpetual reality: Like them or not, these days are tomorrow's good old days.

By the same token, even the greatest optimist since General Custer bought ripe bananas on his way to Montana, has to be amazed at how much of the American public is believing in the beef industry's future good old days. Since the beginning of the year, eMerge Interactive blasted on to the scene with its CattleinfoNet™ –a national cattle business infrastructure that may well revolutionize the way cattle business is done if it's successful—and over $120 million from investors during its Initial Public Offering of stock. These are dollars from outside the industry pouring in with profit in mind.

Then, this fall, America's beef packing juggernaut, IBP, already a public company agrees to sell to a financial holding company for about $2.4 billion in cash plus $1.4 billion in acquired debt. Although the deal appears far from done, what with some shareholders filing suit, the point is a slug of investors believe that betting on beef is good money.

The New Beef Economy?

“Just because there is one IPO of a beef-based company and then IBP sells, several months apart, doesn't say anything relative to the total market. There are three events of that magnitude every day in the technology market,” cautions Wayne Vanderwert, a cattle producer who also owns Vested Interest, LLC, a financial consulting and mutual fund investing firm at Columbia, Missouri. “But, it may signal the beginning of a trend in agriculture where we look to outside funding to do some of the things we want to do.”

Indeed. “We are a vehicle for the general public to invest in agriculture, which has not occurred like this in the beef industry before,” says Scott Crain, DVM, executive vice-president of strategic planning for eMerge Interactive. “Wall Street is here because they see that there is a lot of money to be made by helping cattle producers make more money.”

For the record, eMerge Interactive is building the CattleinfoNet, which is intended to be a national cattle business infrastructure similar to the national communications infrastructure established by AT&T. In the case of Great-Grandma Bell, the common infrastructure they provide allows local phone companies across the nation to provide their customers with national access. In the case of eMerge (look for a detailed story in the January issue of Western Cowman), their CattleinfoNet is supposed to allow cattle to flow more efficiently through the system at less cost and stress.

Investors have climbed on the eMerge bandwagon, says Crain, “Because they saw that this is a massive, fragmented industry that has to find a way to recover lost economic efficiency and add value.” These investors are staking a sizeable pile of jingle that eMerge's notion is the vehicle, or one of them, that will accomplish that.

Although eMerge aims to build and own an infrastructure linking the islands of industry segment self-interest—the white space around the industry assets rather than the industry assets themselves—eMerge is already the largest marketer of feeder calves and cattle in the nation. By the end of this year, they say cattle buyers will have accessed approximately 3 million head through its CattleinfoNet and the CattleinfoNet Interactive Facilities™ it owns. These facilities—long-time brand names in the business—including auction barns and order buying firms provide the physical backbone for their infrastructure, or the gateways through which the actual cattle change hands. Through aggressive future acquisition and franchising, eMerge plans to touch some 8 million head—about 25-30 percent of the feeder cattle trading any given year—by 2004.

“We brought over $120 million of outside investment into this industry and we are using it in a way we think will benefit the industry,” says Chuck Abraham, eMerge CEO. “Make no mistake, we are here to make money, but if we're going to make a dollar, we have to do it by putting an extra $2 into the producer's pocket first…We intend to be here for a long, long time, so whatever is good for the industry is good for us.”

In round numbers, eMerge estimates close to $3 billion is lost in the industry each year due to production and procurement inefficiencies alone, inefficiencies they believe they can help corral.

Bottom line, not only are dollars flowing into the industry that it can use to try some new ideas, the sheer scale of investment—the investors behind the investment—say these dollars should be around for the long haul.

Ogling the Till

Plus, Vanderwert explains public companies, by design, must jump through lots more accounting and monitoring hoops than private business. So, it's not like all of this investment is occurring unobserved, floating the impossible dreams of modern-day snake oil salesmen. “The stock price is set in the market every day. There is a huge amount of scrutiny when you take that step,” says Vanderwert.

With that in mind, as the public invests more money into the beef industry, the industry itself is on trial as much as the companies commanding the investment. Unfortunately, it is not a track record without blemish.

“Early on in my discussions with people about raising public money for the beef industry there was a general attitude from the investment community that the industry doesn't have a very good reputation for taking care of its investors,” says Vanderwert. Whether it was a shaky land deal, a promise of instant success on a should-be grand champion bull, or a can't-miss cattle feeding opportunity, all private, as always a handful of apples past their prime have built a reputation the rest of us have to live down.

Shifting the Mindset

Keep in mind, dollars from outside the industry, via public investment, allow the industry as a whole the opportunity to diversify its risk.

As well, public beef companies can offer a gauge, albeit a sometimes capricious gauge of belief in the future fortunes of the industry. “The marketplace is a leading indicator, based upon people's expectations of the future performance of a company,” explains Vanderwert. “As an example, the beef industry is a very cyclical market. A few years ago IBP stock made a tremendous run up in price at the beginning of the downturn in cattle prices. That makes sense.” As more cattle became available and packer acquisition costs dropped, packer profit potential increased.

“Then, the price of IBP stock dropped almost simultaneously as the price of stock in publicly held retail food companies increased, and that told me it was a reflection of profit moving from the packing sector into the retail sector,” says Vanderwert. “So, there are signals out there, but they have to be interpreted.”

Moreover, when it comes to public investment in the beef industry, Vanderwert believes producers must learn to sort through some innate emotions. For example, he explains, “There was a lot of criticism leveled against IBP from the beef industry several months ago. There were some ridiculous comments made from the industry about IBP's responsibility to beef producers. IBP, like other public companies, has a responsibility to only one group of people and that is their shareholders.”

Besides, some producers have long used investment in public beef-related companies to diversify their own risk. “I think it's a good financial move for someone in production agriculture and beef production—since there are so few opportunities to invest publicly in beef production—to invest in a portfolio of supply, processing and retail company stock,” says Vanderwert.

Logic says the diversification strategy of public investment works this way: When cattle prices are low, profit in public processing companies should increase, followed by increased profit in public retail companies. Then, when cattle prices rise, all of this should occur in the opposite order. But, ownership in each phase over time means that a producer should have a crack at catching the profit wherever it happens to be.

“It's like watching a snake swallowing a rat whole,” says Vanderwert. “There is a bubble of profit in some segment of the industry and someone is going to make it, so if you diversify your interest across the entire industry you have a chance to share in the profit wherever it occurs.”

And too, Vanderwert points out packers like IBP operate on a profit margin of about 1.5 percent today, retailers at 3 percent and fast-food restaurants at about 6 percent.

“So, it tells us we have to get the product as close to the consumer's mouth as we can. When you look at the whole chain today, the segment with the most time, resources and risk committed—the producer—is at the bottom of the totem pole for profit margin.”

On either side of the fence, then, public investment may help producers take advantage of the loftier profits that exist closer to the consumer.

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