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HUNTIN' DAYLIGHT -- TURNING VALUE INSIDE OUT

by: Wes Ishmael

“Arguing over issues such as captive supply and the beef check-off is equivalent to rearranging the deck chairs on the Titanic,” said Jim Whitt a business management consultant who was addressing the 2002 annual convention of the Texas Cattle Feeders Association (TCFA). “If the population of the world eliminates beef from their diet, will it have an effect on your business? Regardless what segment of the industry you're involved in, the consumer is the one we ultimately have to satisfy. That means we have to work together to create a value-added business model.”

That notion is not new, nor is the way the industry has gone about trying to craft such a model thus far. As Whitt said, quoting psychologist, Abraham Maslow, “When the only tool you have is a hammer, you tend to see every problem as a nail.”

Arguably, in the case of the beef industry that means that value-added attempts thus far have revolved around attempting to build a premium product, then earn a premium price for it. Case in point are the growing number of brands bending the meat case beneath their weight.

While some products do command a premium, in volume the winning hand revolves around offering a higher value product for the same basic price as a commodity product. As Scott Crain, DVM, co-founder and CEO of VeriPrime, Inc. explains, “In reality, you can never really get a long-term premium across an entire market. In the case of beef, for example, catering to a national market means you must have enough supply of a given product for retailers to draw from. Until there is enough supply, since they can't access it, there is no premium. Then, once there is enough supply for them to access, the premium becomes the new commodity standard, and there is no premium for the new standard, merely discussions about discounts on the product that falls short of the new standard.”

Crain isn't dissing retailers. He's just voicing the reality of commodity evolution in the beef industry and others.

Spun differently, Bill Rupp, executive vice president of Excel Corporation, who was on a packer panel at the TCFA convention, noted: “The problem is that demand for beef has declined over the years, while ranch-to-packer costs have gone up. This means the amount of money to be shared by the rancher, feeder and packer has declined. This poses a real dilemma to the industry…How do we increase the revenue stream and make all segments of the industry viable. The answer lies in improving demand.”

New Ways for New Days

Of course, another answer may lie in holding the hammer but viewing challenges as something other than nails. The answer could lie in viewing the added-value equation in a completely different way. At least that's one reason so many cattle feeders have already signed up as members of the innovative new VeriPrime organization.

In a nutshell, Crain explains VeriPrime is an open, non-stock, for-profit corporation, owned and directed by its members. There is no cost to join. Members can come and go any time they please. While they are members, however—in this case cattle feeders (more later)—they agree to market the consumer assurance attributes of the cattle they feed through VeriPrime for a consumer assurance service fee that will be levied at the point of retail purchase.

Say what?

“We've spent over 18 months and more than $1 million trying to figure out how producers could be paid for the growing number of assurance attributes consumers are asking for, such as animal welfare, BQA training, and the like, without attaching the value to the price of the product itself,” says Crain. “With our service fee model, the fee is paid by the consumer, apart from the beef trade. It represents an entirely new revenue stream rather than merely trying to slice up the same old dwindling margin a different way.”

Perhaps an example will help. Better than a year ago, fast food giants, at the behest of consumer activist groups, demanded packers provide them assurance none of the product they were buying had ever been fed mammalian protein; if packers wouldn't provide assurance, they wouldn't buy from them. So, packers demanded feedlot suppliers provide affidavits stating the fed cattle they were sending had never been fed mammalian protein. Feedlots in turn demanded it of producers and so on. While that seems fine and dandy, the affidavits in most cases are just that. There is no third-party auditing and verification to prove there is no mammalian protein in feed rations.

With the VeriPrime model, Crain explains if retail members wanted such verification, the packing, feedlot, stocker and cow/calf members would figure out how to put such a system in place and what each segment would need to be paid to provide the service. If the retailers agreed to assess the service fee, the system would be implemented; if they didn't it wouldn't be. But at least producers wouldn't have to absorb the costs of providing an assurance service consumers weren't willing to pay for.

Still confused? You would be in plentiful company. The VeriPrime concept represents such a brain-bending twist to the way we've been taught to think in the beef business, it takes a while to sink in.

Bottom line, think of it as the ultimate capitalistic democracy. You don't do anything extra until the buyer agrees to pay for it; and neither of you are in business until you agree how the service will be provided and for what price.

For anyone who thinks this notion is either too simple or too pie-in-the-sky, Crain says within a month's time of gathering up feed yard members, the membership already represented 9.2 million head of the annual fed cattle supply. That's roughly 38 percent of all the fed cattle, and that was gathered with a handful of information/recruitment meetings in Kansas, Oklahoma, Nebraska and Texas.

Crain is the first to admit it's a good 40 foot flip of the loop from cattle feeders signing on to getting packers and retailers recruited as members, the next stage of VeriPrime development.

But, when was the last time folks representing that many cattle agreed to anything? If you come up with something let me know.

Plus, Crain points out this type of service-fee organization has been established before. Perhaps you've heard of Visa.

In fact, Crain says VeriPrime is embracing the same model pioneered by Dee Hock, which resulted in Visa. Today, Visa does some $1.75 trillion in transactions annually. Visa itself is the clearinghouse for the service fees attached to those dollars; at the end of the year the organization basically has no money, everything it has taken in has been disbursed to members, to maintenance of the infrastructure that makes such transactions possible, and to self-insurance.

If successful, Crain envisions that VeriPrime would not only be the Visa of the beef industry, but of agricultural commodities in general. In fact, Crain says folks are already lined up in other protein industries to launch VeriPrime depending on what the organization can get done in beef.

“Retailers have made it clear to us that while they're interested in verified assurance of their beef products, they want a verification solution for the entire meal, the meat, the vegetables, the grains that went into making the bread and all of the rest,” says Crain. Prior to recruiting feed yard members, VeriPrime had already secured enough retail interest in their unique concept to move forward.

Pay or Get Paid

Besides, it's not a question of whether or not retailers will demand more verification.

Already retail giants like Albertsons are demanding third-party verification from their suppliers. The way that's working so far is that the chain selects third-party verifiers suppliers must use. You pay to get audited. If you're not up to snuff you pay the same outfit to develop corrective measures that allow you to pass the audit. Then you pay them again to audit to see if the corrective action has brought you up to snuff—thousands and thousands of dollars all told.

Salt in the wound comes in the fact that audit experts point out audits are just that, a measure of whether or not standards are being met. Audits are not food safety plans, for instance. That's another reason Crain is so bullish about the VeriPrime concept.

“With this, members agree on a meaningful consumer assurance plan and how it will be implemented. Ultimately, that should mean the cost of complying to standards demanded by consumers should be less, besides getting paid for the service,” says Crain.

So, the question is who will pay for the verification. “Stand idly by and the supply chain will be forced to absorb the costs,” says Crain. “Stand up collectively and there is a chance to be paid for providing the service.”

It's completely different than anything ever attempted in the beef business, and it's got a better than even shot of working. New money. New revenue. Imagine that.

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