For the U.S. beef industry, the fallout from one sick Canadian Holstein continues. On Jan. 12, effective immediately, USDA announced new rules for cattle more than 30 months old; at slaughter, these cattle must be segregated and handled separately, and their Specified Risk Materials must not enter the food chain. The industry is still trying to figure out the implications.
The announcement left feedyard operators scrambling to figure out exactly what they had in their pens. "There was a firestorm at first," says Pete McClymont, manager of McClymont Feed Yard in Holdrege, Neb. "Since the first 30 days, it isn't quite as worrisome from our standpoint what could happen."
So far, he hasn't seen any discounts on cattle going to the packer, but his strategy to avoid them in the future is threefold, he says. "Relying on the character and integrity of the buyers we deal with and making sure they know what we need, trying to be more cognizant if we're buying yearling steers, and buying more source-verified cattle."
The result of the rules that concerns Mr. McClymont most so far is what it has done to risk-management practices. "You used to be able to buy options on feeder cattle you placed in your yard," he says. "That's become too expensive. The premiums on options have gone up because of the market volatility, so now it's become unrealistic to buy options."
The rules have affected operating practices for Ernie Morales, co-owner of Morales Feedyard in Devine, Texas, who has seen discounts of $50 applied to animals that don't make the age cut. "Heiferettes and older steers, either we will not buy them or we'll buy them at a substantial discount," he says. "It affects our grazing program. We may not want to graze cattle as long."
For his yard as a whole, it's not a large problem because he, like most feeders, has only small numbers of animals over 30 months old (though individual pens could have a high percentage). According to Cattle-Fax, between just 1 and 2 percent of fed cattle slaughtered are more than 30 months old.
Paul Hitch, owner of Hitch Enterprises in Guymon, Okla., says he will continue to buy cattle and put them on wheat, though somewhat more carefully. "You've just got to buy them young enough to still make the cut when they're fat," he says. In one of his feedyards, a pen of older cattle had to be railed to Nebraska and received terrible discounts; his company finances some of the pens and he will take another look at that practice. "They might get cheap enough so a guy can afford to own them and take the discount," he says. "Right now, the main issue is inefficiency at the packing plant."
He had a small group of older roping steers ready to sell just as the rule came into effect. "The main packers wouldn't bid at all," he says. "Finally a little packer in Texas bought them." At a substantial discount, of course.
Finding buyers for those cattle is likely to get tougher. "A fed-cattle plant has got to off-rail them; it's a logistical nightmare," says Dave Weaber, director of research for Cattle-Fax. "They'll still have to deal with a few, but they'll eventually say we don't want those cattle coming here."
Tim Schiefelbein, director of live-cattle procurement for Swift and Co., says his company is already there. "We try to avoid buying them at all, but sometimes they're tied to other cattle. We buy them with a severe discount if they're on the border." The discounts $100 is USDA's reported average now is going to get wider, he says, because more and more people won't want them.
Because of that, grid-pricing variables are likely to change, Mr. Weaber says; in revised contracts, there will be more defined discounts for cattle over 30 months.
Heiferette feeders can also expect major discounts in the future. "A lot of heiferettes are over 30 months," he says. "There were a fair number on feed when this happened; those numbers have declined significantly. They will now have to show up in cow slaughter. With their age, a lot of them could make it to Choice in the B maturity category. People made pretty good money on them through time, since they only had cull-cow value otherwise."
Grazing programs for Mexican feeder cattle those 3 and 4 weight cattle that were turned out on pasture and slaughtered two calendar years later will take a hit, too. "They may only see one grazing season then go to feed, or go straight to feed. It will change the economics of what those cattle are worth," Mr. Weaber says. "Now, you can't put that cheap gain on them."
Then there's the long-term loss in variety-meat value, which accounted for $3 to $4 per hundredweight in fed-cattle value. The small intestine can no longer be used. Packers can't trim as close as they used to around SRMs, nor use Advanced Meat Recovery. "Most all hearts, livers and tongues are now going into pet food," Mr. Weaber says.
The overall cost to the industry could be substantial, even though of that 1
to 2 percent of fed animals more than 30 months old, 0.4 percent of those were hardbone or C maturity anyway, using bone ossification methodology. "There are big discounts between Choice and Commercial for B maturity. Anything B maturity will get nailed." From a Select standpoint, the losses might be around $100; from a Choice standpoint, it could be $160. "Because they're getting rolled back, they're getting dinged on all premiums
for Choice and yield grade," Mr. Weaber says.
At the plant
That intersection of the dentition and the bone ossification methodologies can get tricky. "It would be nice if everything was uniform. Right now, one-half to two-thirds of the cattle on the kill floor less than 30 months by mouth show ossification of greater than 42 months," Mr. Schiefelbein says. "So you can have hardbone that aren't 30 months."
Of what he calls "in-betweener cattle," from 28 to 42 months old that get sent to feed and then to slaughter, 75 percent might make Prime, Choice or Select, he adds. "This has deflated that value."
According to Cattle-Fax, 28.8 million fed cattle were slaughtered in 2003. "If people don't take the cattle that grade Choice because of their age, that's not a big number, but say it costs $100 a head to separate this stuff," Mr. Schiefelbein says. "We run 1.5 percent older animals, that's $1.50/head on everything. Multiply that by 28.8 million head and you get $43 million. Who is the cost to? It doesn't matter in the beef industry. If we take the hit, the producer will feel it down the line. I'm afraid it's stuck on us. $100/head is the cost of sorting it out.
"Is the quality going to be more consistent? Is it going to be $43 million more consistent? That's a big question."
Many people are hoping that improved consistency (and, consequently, demand) is another possible outcome of the rule. "Look at the way we grade; getting heiferettes and roping steers out narrows up Choice grade in terms of tenderness and consistency that may cause bad eating experiences," Mr. Weaber says.
And it could make pricing generally more reflective of quality. "Those older cattle have been getting close to the same price as everyone else. A rancher who has that good youthful calf, it's going to be more valuable than ever before," says Mr. McClymont.
So, looking at the bright side, the future could hold a more consistent, quality beef supply, a higher level of consumer assurance and an industry safeguarded. "If consumers don't think food is safe, the USDA's role is undermined," Mr. Weaber says. "We were already doing more than the international standard. Now we're way above it."
But all of this remains to be seen. Some cattlemen, for now, are skeptical, waiting to see what happens next. "It has introduced inefficiencies that don't seem to pay any dividends. You've gotten a little branding point at the public level, but it's debatable whether the public was tuned in enough to give a damn," Mr. Hitch says. "An NCBA poll showed confidence in the safety of beef went up after BSE. But maybe it's the sort of thing you have to do. Maybe it will get Japan to start receiving meat. We can be hopeful."