Leachman: 10% margin will change behavior

Prime Future 171: the newsletter for innovators in livestock, meat, and dairy

I knew Lee Leachman was the real deal, but he recently joined me on the Future of Agriculture podcast, and all I can say is, wow. This guy has some stories and a superpower for business model innovation. I encourage you to listen to the full episode, all 40 minutes & 52 seconds of cattle industry magic.

Before we get to Lee's view of the world, let's start with a contrasting worldview.

A recent series in Beef Central, an Australian cattle industry publication, explored the percentage of the retail beef dollar that the average producer receives. The general sentiment was that the producer does not receive enough of the retail dollar.

The author described how retail meat prices have remained high even as their costs have declined with the increase of case-ready meat, while Australian cattle prices have declined further.

The author explained, "Whilst Meat & Livestock Australia collects data on livestock prices and reports them in the form of indices on a regular basis, nobody seems to collect, hold and interpret beef retail prices to provide transparency at that end of the supply chain.

The result is that purchasers have perfect information on costs of livestock, whereas the sellers (producers) have no information on what consumers are paying and what should be a fair price for their livestock."

This is the typical bottom-of-the-cattle-cycle discussion, regardless of where you are in the world. Variations on this sentiment were rampant in the US the last few years but died down with record high cattle prices. Funny how that works.

I have two questions about the idea of "what should be a fair price for livestock."

First, what is the optimal percent of the retail meat dollar that a producer "should" get? Is it 50%? 90? 99%? It's not hard to imagine that whatever this number is, it will never feel like enough to a producer. Nor will it feel like enough to the feeder, packer, or retailer.

More importantly, so what if the farm gate percent of retail meat dollar is x or y?

The bank doesn't accept percentages, nor do employees or feed suppliers. It's not a practically relevant metric. What do you do differently in your business if you know that you get 32 cents of every retail dollar or 72 cents?

And, the farm gate percent of the retail meat dollar is largely uncontrollable. It's a metric with multiple variables, each of those impacted by multiple other variables.

Almost every one of those variables is outside a producer's control, making it useless…except as motivation to rethink the standard business model.

This brings us back to Lee's insights that flip the commodity, historical, average-driven industry mental models.

Our conversation took place after the announcement that Urus, the global genetics company, has taken a majority stake in Leachman Cattle as part of a global distribution agreement. Lee said the investment was driven by the fact that great products are never enough; it takes a great distribution strategy to be really successful. (I couldn’t agree more.)

Lee also explained that Leachman Cattle first experimented with the cooperator business model to expand their genetic base because it is too costly in cattle to have a large nucleus herd, as opposed to swine & poultry. That constraint helped them build a new business model that has become common in the industry.

He also shared more about how they think about data collection, data analysis, and using data to practically drive more profitable decisions.

That was all background leading up to the punchline(s)…

"One of the strengths of the company (Leachman Cattle) is we have a broad enough genetic base. If you’re willing to spend the money and have a large nucleus herd, you can make faster genetic progress. In our case, we have effectively a large nucleus herd because we’re getting data on 30 some thousand animals a year. Most private breeding companies will struggle to have that big of a nucleus herd because it’s expensive. So really, what we did is we built a database and a business model that built an extensive nucleus herd that was profitable. Not highly profitable, but profitable. When you take that and put it into a value chain where you can monetize the true value of the animals, it suddenly becomes enormously profitable.”

“As we look at what we hope to do with Urus, we want to build systems that capture value for beef ranchers and dairy producers that bring more money back to the farm, and to do that we’ve got to optimize these animals from conception to consumption. And to do that, we’ve got to have enough structure from conception to consumption to pass the value back."

Lee framed the decision point for cow-calf producers quite succinctly:

"So the real question is do you want to work as an independent rancher raising what you think is right, hoping that the market pays you enough to be profitable, or do you want to work in a system that gives you really clear direction on how to build the best cow, the best feeder animal, the best carcass, and then brings the highest possible percentage of those dollars back to the farm?"

Lee calls it a coordinated supply chain and is convinced this is the direction the industry is moving, enabled by technology.

"It has to happen at the farm level. In a dairy herd, we’ve got to mate the right cow with the right bull. In the beef herd, we’ve got to be thinking about the genetics that make the cow and then the optimal genetics to cross with that maternal cow line.”

“That has never been the case historically because historically the system was so broken, so imprecise at discovering value that it really didn’t matter what you raised at the ranch and how you sold it, you were going to get the same thing."

Lee pointed out that the dairy industry consistently uses bulls in the top 1% while in beef the average bull ranking is in the 50th percentile. Why? “That’s the structure of the system. But what if we could build cows that were sired by the top 1% bulls and then breed them back to the top 1% bulls? It changes the whole game.”

I asked Lee what the missing systems are today and what’s preventing us from doing this now. Lee quickly responded, “Nothing. What’s missing is confidence that the differences exist and they can be produced consistently.”

“Without the value chain, my business selling bulls is a tough business because we’re selling a high-cost product. And if we make it elite, we don’t necessarily get paid for making it elite because the people who buy our bulls don’t get paid elite prices for their calves. In a value chain, that changes. Though the differences have to be material enough to justify that…

…when you start talking about a 10% difference in margin in a business that doesn’t really have much cumulative margin, then you change behavior.”

“It’s reteaching an industry that you can make more money by aligning than you can by simply transacting.”

“The beef business today is very transactional; you hear feeders say all the time that you make the most money on the buy, which means if I buy them cheap enough, then I’ll make money. And you can’t argue with that because in the absence of value signals, that might be the only value prop: buy them cheap, feed them cheap, and sell them on average.”

“But what if there was a way to have cattle consistently fill the feedlot that are worth $100 more in the feedyard and $100 more in the carcass? There’s not a feeder in the country that wouldn’t want that. The question is can we measure it, and do they believe it’s there?”

“There are examples in the US of supply chains that are being coordinated and are consistently making money. It’s there, and we have the technology to do it today, but it requires a big shift in mindset."

Worrying about what's the livestock producers’ fair share of the retail meat spend? Transactional & a waste of time.

Joining or creating systems where value signals are easy to distinguish and, by definition, send more value upstream to producers who engage? That's a game-changer.

The whole concept of aligning incentives along a complex & fragmented value chain starts with the concept of better data collection, data analysis, & insights to drive measurably better decisions that get rewarded by the market. We’ll revisit that another time but Lee shared some fascinating insights about their data journey as well.

The future is here; it's just not evenly distributed...

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On a fantastic side note, Lee is confident that vertical integration is not coming to beef, "In the beef cattle industry, there are a lot of people afraid we’re going to integrate like pigs and chickens, and that’s never going to happen. Nobody’s ever said I want to own 3M cows on 60M acres spread across the US. Nobody’s built a business plan for that; that’s not going to happen."

I agree with him on that one too:

Packers don't wanna be cowboys

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