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The Cost of Meeting Consumer Demand(s) John Lawrence Extension Livestock Economist and Director, Iowa The Cost of Meeting Consumer Demand(s) John Lawrence Extension Livestock Economist and Director, Iowa Beef Center Iowa State University www. iowabeefcenter. org

Increased demand • Increased demand for beef – Grown steadily since 1998 – Consumers Increased demand • Increased demand for beef – Grown steadily since 1998 – Consumers pay more for same amount – Quality, convenience, carbs • Increased demand on beef – Moving from “trust me” to “prove it” www. iowabeefcenter. org

www. iowabeefcenter. org Source: Research Institute on Livestock Pricing www. iowabeefcenter. org Source: Research Institute on Livestock Pricing

www. iowabeefcenter. org Source: Livestock Market Information Center www. iowabeefcenter. org Source: Livestock Market Information Center

Product Definition • Commodity markets – One item - one price • Value-based markets Product Definition • Commodity markets – One item - one price • Value-based markets – Measured, graded, and sorted at harvest – Price difference based on measured traits – Produce to impact measure/grade www. iowabeefcenter. org

Product Definition • Certified marketing programs – Typically a product specification – Determined at Product Definition • Certified marketing programs – Typically a product specification – Determined at harvest – USDA lists over 50 “certified” beef programs – Over 60% are Angus programs www. iowabeefcenter. org

Product Definition • Certified production programs – Certify process – May prescribe standards – Product Definition • Certified production programs – Certify process – May prescribe standards – Example: Organic, Non-hormone treated beef www. iowabeefcenter. org

Product Definition • Certify the capacity of the operation to produce to spec – Product Definition • Certify the capacity of the operation to produce to spec – ISO 9000 – Process Verified – Quality System Assessment www. iowabeefcenter. org

Commodity World • • All beef is beef Minimum standard to qualify Low cost Commodity World • • All beef is beef Minimum standard to qualify Low cost producer of the minimum wins Minimum standard is rising as are costs – Feed ban signatures, COOL • Grades define various minimums not products www. iowabeefcenter. org

Product World • Some beef is different • Differentiated on attributes and brands • Product World • Some beef is different • Differentiated on attributes and brands • Consumers pay more for different – Attributes – Processes – Brands www. iowabeefcenter. org

Certified programs • USDA lists 55 certified beef programs – 34 Angus programs – Certified programs • USDA lists 55 certified beef programs – 34 Angus programs – 3 Hereford programs with breed claim – 2 were Process Verified • Red Angus Assn and PM Beef 1/20/05 www. iowabeefcenter. org

Angus Certified Programs • Angus Upper 2/3 rd Choice or Higher • Angus Multi-Tiered Angus Certified Programs • Angus Upper 2/3 rd Choice or Higher • Angus Multi-Tiered (Prime, Upper 2/3 rd Choice, Low Choice, and/or Select) • Angus Choice • Angus Select or higher • Angus Utility or higher www. iowabeefcenter. org

Differentiated products • Detectable attributes – Marbling – Guaranteed tender – Grass-finished • Credence Differentiated products • Detectable attributes – Marbling – Guaranteed tender – Grass-finished • Credence attributes – Content: nutrients, fatty acids – Process: natural, free-range, non-GMO www. iowabeefcenter. org

Beef Quality Defined by Grade • • Current system Commodity – Value based Growing Beef Quality Defined by Grade • • Current system Commodity – Value based Growing incentives What are the costs www. iowabeefcenter. org

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Assessing the Cost of Beef Quality Cody Forristall, Gary May and John D. Lawrence Assessing the Cost of Beef Quality Cody Forristall, Gary May and John D. Lawrence Iowa State University www. iowabeefcenter. org

Objectives 1. Quantify the relative profit contribution in feedlots, comparing carcass premiums and feedlot Objectives 1. Quantify the relative profit contribution in feedlots, comparing carcass premiums and feedlot performance. 2. Compare feedlot profitability to cow characteristics and maintenance costs to determine if the least cow produces the most profitable steer. www. iowabeefcenter. org

Tri-County Steer Carcass Futurity Data • • • Long standing steer test Extension participation Tri-County Steer Carcass Futurity Data • • • Long standing steer test Extension participation 7 feedlots with common protocol Data from over 50 producers 1147 Calf-fed steers 1996 -1999 marketing years www. iowabeefcenter. org

Data Collection • Individual weights – In, out, and during feeding • Marketed in Data Collection • Individual weights – In, out, and during feeding • Marketed in 2 -3 drafts/year • Measured carcass data – USDA QG and marbling score – Calculated YG • Cornell model for individual FE www. iowabeefcenter. org

Standardized Betas for Regression Variables by Choice-Select Spread Ch-Sel Std Dev Spread Net Ret Standardized Betas for Regression Variables by Choice-Select Spread Ch-Sel Std Dev Spread Net Ret Standardized Coefficients (%) FE HCW FC REA KPH MAR 4. 00 50. 36 -38. 7 49. 3 -9. 3 22. 4 2. 0 43. 3 8. 00 52. 61 -35. 6 44. 4 -8. 2 19. 7 1. 8 54. 7 12. 0058. 00 -31. 8 38. 5 -7. 2 15. 3 1. 8 61. 7 16. 0065. 77 -26. 3 31. 1 -5. 3 12. 9 1. 1 65. 1 www. iowabeefcenter. org

Cow Stored Feed Cost • • Developed index Cow weight and BCS Relative to Cow Stored Feed Cost • • Developed index Cow weight and BCS Relative to average of BCS 5 cows Based on average cost for BCS 5 www. iowabeefcenter. org

Cow Data • 542 head with cow data • Small subset!!!!! • Could not Cow Data • 542 head with cow data • Small subset!!!!! • Could not fit a regression – R-square =. 11 and no significant variables www. iowabeefcenter. org

Cow Cost vs. Feedlot Return Cow Cost Low Feedlot Return $41. 10 Cow Cost Cow Cost vs. Feedlot Return Cow Cost Low Feedlot Return $41. 10 Cow Cost $146. 13 High $32. 47 $166. 58 www. iowabeefcenter. org

Contingency Table Feedlot Returns Cow Cost Low High Low 43% 57% High 57% 43% Contingency Table Feedlot Returns Cow Cost Low High Low 43% 57% High 57% 43% www. iowabeefcenter. org

Summary • Premiums increasing for quality • Biological tradeoffs impact profits • Marbling explains Summary • Premiums increasing for quality • Biological tradeoffs impact profits • Marbling explains greater share of profit differences as C-S grows • Early results suggest cow costs and feedlot profits negatively correlated www. iowabeefcenter. org

Feeder Cattle Quality • Grid premiums • Feedlot performance • What influences these economic Feeder Cattle Quality • Grid premiums • Feedlot performance • What influences these economic traits? • Is it the feeder cattle? www. iowabeefcenter. org

Effect of postweaning disease on carcass traits, feedlot performance and mortality. Number of treatments Effect of postweaning disease on carcass traits, feedlot performance and mortality. Number of treatments 0 1 2 % Change 1. 9 1. 1 0. 9 -52. 6 Premium Choice, % 21. 5 19. 5 15. 2 -29. 3 Low Choice, % 48. 8 43. 4 42. 8 -12. 3 Select, % 25. 2 30. 1 30. 5 +21. 0 2. 6 5. 9 10. 6 +307. 7 Yield Grade 1 & 2, % 52. 3 65. 8 71. 7 +37. 1 Yield Grade 3, % 44. 9 32. 8 28. 1 -16. 8 2. 8 1. 4 0. 2 -2. 6 3. 24 3. 13 3. 07 -5. 2 Mortality Rate, % 0. 1 3. 7 8. 7 www. iowabeefcenter. org Source: Busby, Strohbehn, Beedle, and Corah +8600 Prime, % Standard, % Yield Grade 4 & 5, % ADG, lbs.

Effect of postweaning disease on net dollars returned. Number of treatments 0 1 2 Effect of postweaning disease on net dollars returned. Number of treatments 0 1 2 $17. 66 $7. 82 PAR $3. 87 $6. 09 $24. 87 $8. 68 PAR Death Loss Discount** PAR -$37. 39 -$89. 05 Treatment Cost# PAR -$19. 14 -$44. 47 $42. 53 -$36. 06 -$127. 43 Quality Grade Premium Yield Grade Premium ADG Bonus* Net $ Returned Difference -$78. 59 -$169. 96 *Based on the lbs of additional carcass weight gained during the feeding period. **Accounts for cost of gain investment and lost carcass value. # Includes medicine, labor and chute/equipment charges. Source: Black Ink Basics www. iowabeefcenter. org

The Proposed NAIS System National Database USDA Required Cow/Calf Producer Auction Barn Feedlot Third The Proposed NAIS System National Database USDA Required Cow/Calf Producer Auction Barn Feedlot Third Party Database Potential Industry Use www. iowabeefcenter. org Packer

Other Measures of Quality “Quality is not a destination but a continuous journey” - Other Measures of Quality “Quality is not a destination but a continuous journey” - Dr. W. Edwards Deming www. iowabeefcenter. org

Changing Demands • Retail sector • Export sector • Domestic consumer sector www. iowabeefcenter. Changing Demands • Retail sector • Export sector • Domestic consumer sector www. iowabeefcenter. org

Retail sector changes • More powerful and demanding retailers – 10 firms with 49% Retail sector changes • More powerful and demanding retailers – 10 firms with 49% market share – Walmart + Sam’s 17% – House brands and exclusive suppliers – Liability issues – Outsource inspection and compliance www. iowabeefcenter. org

Retail sector changes • European influence – 2 of top 11 US grocers are Retail sector changes • European influence – 2 of top 11 US grocers are European – 4 of top 10 world grocers are European • Chain Captain model – Retailer is in consumer protector role – US consumers still trust USDA for safety – Others are not a trusting of gov’t www. iowabeefcenter. org

European lessons • Chain Captain model is costly – Safety is competitive issue – European lessons • Chain Captain model is costly – Safety is competitive issue – Must be audited to sell – Multiple audits – Multiple issues beyond safety • Feed use • Animal rights • Worker safety www. iowabeefcenter. org

Animal rights • • Mc. Donalds plant verification FMI and NCCR guidelines SWAP certification Animal rights • • Mc. Donalds plant verification FMI and NCCR guidelines SWAP certification TQA certification www. iowabeefcenter. org

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Export Market Demands • Age verification • Non-hormone treated program • Traceability – Customer Export Market Demands • Age verification • Non-hormone treated program • Traceability – Customer countries – Competitor countries www. iowabeefcenter. org

Age Verification • May have value to packer – Coordinate slaughter – Export offal Age Verification • May have value to packer – Coordinate slaughter – Export offal – SRM removal • USDA-AMS protocol www. iowabeefcenter. org

Meat Standards Australia • MSA Guaranteed Tender – Animal: Age, grain-fed, % Bos Indicus Meat Standards Australia • MSA Guaranteed Tender – Animal: Age, grain-fed, % Bos Indicus – Slaughter plant: Electrical shock, grading, aging – Retailer: Sale date, cooking – Enforcement and traceback if needed www. iowabeefcenter. org

Willingness to pay – Lusk, guaranteed tender steak • No label: 51% pay $1. Willingness to pay – Lusk, guaranteed tender steak • No label: 51% pay $1. 23 premium • Label: 61% $1. 84 premium – Feuz and Umberger, grass v grain fed • On average $1. 61 more for grain-fed • 23% paid $1. 36 premium for grass fed www. iowabeefcenter. org

Willingness to pay – Loureiro and Umberger, US Certified • Premium for US Certified Willingness to pay – Loureiro and Umberger, US Certified • Premium for US Certified over no label – Sitz, Calkins, Umberger, and Feuz • US v. AUS grass-fed and CAN grain-fed www. iowabeefcenter. org

Consumer Willingness to Pay for US, Australian and Canadian Steaks Preference AUS / CAN Consumer Willingness to Pay for US, Australian and Canadian Steaks Preference AUS / CAN AUS CAN US Average No Pref US Prem $1. 38 19. 0% $2. 23 64. 5% $1. 20 $1. 37 29. 3% $1. 63 44. 0% $0. 38 16. 5% www. iowabeefcenter. org Source: Sitz, Calkins, Umberger, and Feuz 27. 0%

Consumer Choices • Commodity – One “average” product – One “average” price • Products Consumer Choices • Commodity – One “average” product – One “average” price • Products – Individual prices www. iowabeefcenter. org

Verify label claims • USDA wants definition of terms – Protecting consumers from fraud Verify label claims • USDA wants definition of terms – Protecting consumers from fraud – Branded product needs to assure compliance with stated claims – Reputation and liability – Cost of enforcement on top of cost to produce special attributes www. iowabeefcenter. org

Victim or Opportunist • Most under manager’s control • Some changes require production response Victim or Opportunist • Most under manager’s control • Some changes require production response (genetics, nutrition) • Some changes require management response (information and communication) www. iowabeefcenter. org

Quality management systems • A producer directed management system to assure that the producer Quality management systems • A producer directed management system to assure that the producer – Capable of meeting the requirements – Document that requirements are met – Information to evaluate production and marketing opportunities when they arise. www. iowabeefcenter. org

Quality management systems • Various models available ranging in complexity, cost, and flexibility • Quality management systems • Various models available ranging in complexity, cost, and flexibility • 3 rd party verification to have value • Examples include – ISO 9000: 2000 – USDA Process Verified – ISO 14001 www. iowabeefcenter. org

Quality System Assessment • USDA Program • Agricultural Marketing Service, Livestock and Seed Program, Quality System Assessment • USDA Program • Agricultural Marketing Service, Livestock and Seed Program, Audit, Review, and Compliance Branch – BEV – COOL www. iowabeefcenter. org

QSA Program Requirements 1. Quality Management Systems 2. Management Responsibility 3. Human Resources - QSA Program Requirements 1. Quality Management Systems 2. Management Responsibility 3. Human Resources - Competence, Awareness, and Training 4. Product Realization 5. Measurement, Analysis, and Improvement www. iowabeefcenter. org

QSA - Measurement, Analysis, and Improvement Customer Satisfaction • The company must monitor information QSA - Measurement, Analysis, and Improvement Customer Satisfaction • The company must monitor information relating to customer perception as to whether the company has met customer requirements. www. iowabeefcenter. org

"There is only one boss. The customer. And he can fire everybody in the company from the chairman on down, simply by spending his money somewhere else. " - Sam Walton www. iowabeefcenter. org

Where to Start • Say what you will do. • Do what you say. Where to Start • Say what you will do. • Do what you say. • Be able to prove it with documentation and records. www. iowabeefcenter. org

Where to Start • Written description of operation • Retrievable information system – Describe Where to Start • Written description of operation • Retrievable information system – Describe how and where you keep information – Keep it simple but sufficient to back up claim • Information to run your business www. iowabeefcenter. org

Quality management systems • Cost associated with developing management system, audits, and certification • Quality management systems • Cost associated with developing management system, audits, and certification • Benefits include – Market access – Market flexibility – Better management – Lower costs www. iowabeefcenter. org

Rising Demands on Beef • • • Widening Choice-Select spread Consolidating retail sector Brands Rising Demands on Beef • • • Widening Choice-Select spread Consolidating retail sector Brands with claims and liabilities Consumers looking for choices Rising commodity standards www. iowabeefcenter. org

Rising Demands on Cattle • Quality grades outweigh feedlot performance at higher C-S spreads Rising Demands on Cattle • Quality grades outweigh feedlot performance at higher C-S spreads • Health/treatment impact grading • Age and source verification • Greater value from calves that have a sound health program and genetics to grade • IF YOU CAN PROVE IT!!!! www. iowabeefcenter. org

Cost of not meeting demands • Commodity market will continue – The minimum will Cost of not meeting demands • Commodity market will continue – The minimum will continue to rise • Missed opportunities if you are not eligible for value added markets • May lose to pork or poultry, and some beef producers will lose to other beef producers www. iowabeefcenter. org

Cost of not meeting demands Although your customers won’t love you if you give Cost of not meeting demands Although your customers won’t love you if you give bad service, (or a bad product) your competitors will. - Kate Zabriskie, founder Business Training Works www. iowabeefcenter. org

Thank You Are there any questions? www. iowabeefcenter. org Thank You Are there any questions? www. iowabeefcenter. org