In the cow-calf sector there is a return on investment issue, said Leland "Lee" Leachman II, a Harvard trained economist, who is CEO of Leachman Cattle Company in Billings, Mont.

"Cattle-Fax has come out and said that stocker operations have the most consistent profitability," Leachman said. "The feeder can average a pretty good return, as we've seen from the growth in that segment, although I'm sure they would argue with that in the current conditions. The packer, of course, makes a percentage on each turn. If you sit back and look at the cow-calf return, it's down around two percent."

The cow-calf segment of the beef industry will not attract a lot of new capital if it's returning only two percent on investment, Leachman said at the International Livestock Congress.

"Even when we take into account the return that can come from the appreciation on the land, that return is still difficult to get above seven or eight percent," Leachman said.

Consequently, cow-calf operations have had to diversify or go out of business.

"We see this trend particularly in the middle sized operations where they are too large to be a hobby operation and too small to really be economically viable as a stand alone entity," Leachman said.

"It's really an indicator of why we have problems in motivating the cow-calf sector to make changes," Leachman said. "It's because such a large portion of that segment is earning such a low return, and obviously, it's not profit driven. Otherwise, they wouldn't continue in production with those kinds of return levels."

In addition to profitability, there are also problems with herd size. Over 50 percent of the cattle in the U.S. are in herds of fewer than 100 head. Less than 25 percent of the cattle are in herds that are profit driven.

The problem is that beef produced by the recreational rancher amounts to a large part of beef supply in the system.

He said producers would fall into two categories -- commodity driven producers and those willing to take the extra steps needed to allow the chain of production to differentiate the product.

The larger producers, Leachman said, have to get into business relationships where they can differentiate their product.

"We feel it is important these relationships supply clear specifications or targets or markets, set clear goals for these cow-calf operators understanding that the change in production that occurs at the cow-calf level takes years and years," Leachman said. "This is probably the hardest part of it for the cow-calf sector. If you give us a signal today, we can't adopt to it very quickly."

Value determination systems are also critical to these business relationships.

"Individual animal information and monetary incentives cause those changes," Leachman said.

Producers, for their part, will have to commit to the relationships and be patient.

Paul C. Genho of the King Ranch said he got into one of these relationships and gave them 12 months to show him how well it would work. Now, he's questioning whether 12 months is long enough for such a system to develop.

There is a problem in the industry right now, Leachman said, concerning how cattle can be aggregated or put together into the same kind of system.

"Obviously, most of the business relationships that occur tend to be between large producers," Leachman said. "It is much harder to go out and reach a 100 producers with 30 cows or less than it is to go to one operator that has five or ten thousand head."

This is a challenge, he said, but it may also be an opportunity for markets, feedlots, and stockers to become aggregators of like kind cattle.

Part of the solution to some of these problems, Leachman said, may be individual animal identification systems.

Precise production, one of the catch phases coming into use in the beef industry, means taking the process down to the individual animal level from the cow-calf segment forward.

The systems that generate objective and meaningful classification to sort the value out on what that product is worth needs to be refined, Leachman said.

"It's much better today than it was five years ago," Leachman said, "but still today we don't feel that the cow-calf sector is getting clear signals on what needs to be produced."

Leachman said that in the cow-calf and seedstock segments there is a lot of talk about tenderness, but there is not a lot of activity concerning the subject.

The genomic information is one way in which products will be differentiated, but it is something that needs further development and refinement.

The information that has been accumulated on various traits needs to be changed into a systems approach and boiled down to profit recommendations.

"It's still very difficult in our segment of the industry to say that this line of genetics is more efficient or more profitable under a given alliance than is another one," Leachman said. "What we want to be able to say is that A is better than B in the particular system that we're producing. Clearly that's what the other species have been able to do within their production systems. We're not able to do that within the cow-calf sector at this time. That's a challenge to us. We've got to develop better systems to do that."

Increase in demand is the goal of all this, Leachman said.

Without a rise in demand, ranching won't be viable and won'tt allow future generations to come into agriculture in the form of cow-calf producers. They won't be operations that can finance themselves and sustain their production systems. ©