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The world's largest buyer of fed cattle has long worked with selected feedyards on a price grid that reportedly rewarded feeders with premium cattle. Now they are offering such a marketing program to the feeding industry in general. In January, IBP announced a new carcass merit pricing program called the Real Time Market Value (RTMV) program in which cattle are bought on a price grid system. IBP, who buys about 9.5 million fed cattle each year, has bought cattle on similar grids from selected buyers for years. The packer is now offering a new price grid to all producers. The company, which in the past has bought about 25 to 30 percent of its cattle on a grade and yield basis, said the new carcass merit program will feature premiums and discounts adjusted on a weekly basis to reflect wholesale beef prices. IBP officials say that the premiums in the new program will be significantly higher than those offered in their traditional pricing system. IBP has not previosuly had much of a premium for Prime or Certified Angus Beef. The new premiums should more closely match what the packer is getting each week for the delivered product. There are times when Prime sells for a two dollar per cwt. premium, and other times when it sells for a $18 per cwt. premium. Bruce Bass, IBP's vice president for procurement, said the program is designed to place the money where the value is. "Then we can send the signal of current market conditions, current demand conditions, back to the cattle producer through those premiums and discounts that we're going to put in place," Bass said. "If you're a producer with high quality cattle, high cutability cattle, it will offer you an opportunity to achieve the real time market condition value for those as opposed to some programs that fix premiums and discounts for an entire year. These premiums and discounts will fluctuate as the year goes on to reflect what the carcass traits are really bringing or are really worth in the market place." While the program offers premiums in the program, the discounts are deep. In their grid for the first week, premiums for Yield Grade One was $6.50. For Yield Grade Two it was $2.50. The discount for Yield Grade Four was $17 and for Yield Grade Five, $22. IBP said it is also intended to provide the company with the superior beef it needs for a new branded product. The packer will start test marketing its own line of beef products later this year. "We're willing to put the value where it really is," Bass said. "Then we send that signal to the producer. That producer, the livestock producer in this country will respond to it. I think, for those people who have better quality cattle, it'll be a good spot for them to market their cattle." Bass said it may not, however, be of particular interest to producers of lower quality cattle. Chuck Lambert, the chief economist for the National Cattlemen's Beef Association supports the RTMV program. He said it rewards cattle producers for providing the beef that consumers want. IBP said the base of the grid pricing system will be determined by the on-going cattle market. Some cattle feeders, however, say that is a rather fuzzy term and claim that the new program is just another way to push prices down. It appears that price discovery will continue to be a point of contention between the packer and cattle feeders. The packer said it will put a price grid out every Monday morning based on what the beef sold for the previous week plus what they feel like is going to happen this week. They won't price cattle directly off boxed beef sales. IBP said it will tell cattle feeders what the premiums will be for the next week. The packer said producers who use it won't be locked into the program. They will not have to commit over a period of time, and there is room for negotiation for delivery dates and prices within the grid. The packer said the new pricing system is the result of cutting tests, research using various product mixes and sampling yield grade distributions at each plant. In a message to cattle feeders who already had marketing agreements with IBP, the packer encouraged them to switch to the new pricing grid. While the main question remains acceptance of the new system, there are still questions concerning the implications of changing the USDA grading system and whether the company will completely stop buying cattle on averages. For years, the cattle feeding industry has been asking the packer to put its name on the front of the product it produces. "IBP's doing that and doing it in a big way," said Jim Gill, marketing director for the Texas Cattle Feeders Association. "They're trying to improve their product for their branded beef program. If they do pay a little premium for that, that's good." Many cattle feeders agree that superior cattle for years have supported the poor cattle going through the system. But many cattle feeders think the new program will have far-reaching results, some unanticipated. Almost everyone thinks there are going to be surprises. Buyers say there are going to be a lot of cattlemen who think they are producing good cattle that are about to find out otherwise. Industry observers say some cattle feeders and feedyards could be in for a shock when they find out that their cattle don't grade as well as they thought they would. USDA graders will grade the quality and yield grade of each carcass and IBP will supply the information to the livestock producer. If there are people out there who don't know how their cattle are grading, this is a good chance for them to learn that because IBP said they'll furnish carcass data free on a lot basis. It will be an educational process. In the long run, the program is expected to force the cattle industry, at least in theory, to produce better cattle. Gill said, that while he has reservations, he would have to view IBP's move as a step in the right direction. "We'll have to wait and see," Gill said, reflecting the thoughts of many of his members. |
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