BLACK INK -- MAKING THE MOST OF IT

by: Miranda Reiman

“Suppose we could only make 1 million cars. If the auto industry was limited for some reason, what would they do? Would they make small, cheap vehicles or big, premium, expensive cars?”

An industry observer asked that question at a cattle feeders meeting this summer.

It seemed the answer was obvious: the automakers would have to get the most money they could for every single vehicle.

“They'd be making Escalades, King Ranch pickups and Corvettes. They'd make the biggest, highest-margin premium vehicles they could,” Pete Anderson, Midwest PMS research director, confirmed.

Do you see a parallel with the cattle business?

“We aren't going back to 40 million cows,” he said, “so we've got to maximize revenue from the ones we have. We've got to make the equivalent of Escalades and let somebody else sell Honda Civics.”

The 2017 Escalades have a starting MSRP (manufacturer's suggested retail price) value of $73,395, while a Chevy Suburban has one of $49,915 by comparison.

I know there are many features to consider, but at their core, they are fairly similar: with bench seats both hold eight passengers, both have all the same standard safety features and the conveniences you'd expect of a brand-new vehicle today.

I'm certain it costs incrementally more to make an Escalade—just as I'm certain it doesn't cost $23,000 more. I'd bet the take-home margin is larger on the premium vehicle.

The Escalade's advertisements use verbiage like, “Ambition on a grand scale,” “Beauty, meet brawn,” and “Smart as it is powerful.”

Even as the happy owner of a plain old Ford SUV, I can appreciate the way everything about the Escalade brand says luxury. If I were making cars, I'd rather make an Escalade than a Civic, too.

So what is the Escalade of the beef business? What will consumers continue to buy more of at a higher price?

History and research show us the higher the quality of the beef—in terms of marbling and consistency—the more consumers will pay. Even when all protein prices were especially high a year and two years ago, they still didn't mind paying even more when they were assured by experience that it was worth it.

People still turned to beef. Well, more specifically, they turned to high-quality beef.

Anderson had a plea for the crowd: “The cattle industry must produce big, high-grade cattle to maximize revenue per unit.”

Maybe more than just a few of you already know that.

After all, from 2014 to 2016 so far, Prime production is currently up 37.6 percent, while Select shows a decline of 21.7 percent. Yet premiums for Prime remain strong while discounts for Select have worsened, even with tight supplies.

In a country with only 24 or 26 million head of fed cattle a year, not 40, aiming high seems like the smart solution for making more of less.

Next time in Black Ink® Steve Suther will look at short-term concerns. Questions? E-mail mreiman@certifiedangusbeef.com.







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