fedgazette

South Dakota "steaks" its reputation on beef branding program

Value-added marketing promotes quality of state's agricultural output.

Kathy Cobb - Contributing Writer

Published July 1, 2006  |  July 2006 issue

South Dakota—where all the women are strong, the men are good-looking and the calves are above average, to paraphrase Garrison Keillor. Well, not all calves. But take calf number 928000026789—he'll produce a steak that's tender and tasty and safe to eat. And it comes with a guarantee from the state and Gov. Mike Rounds.

Value-added marketing is not exactly new in agriculture. But at the behest of Rounds, the state government has taken the unusual step of kick-starting a branding effort—called South Dakota Certified™—that promotes the quality of South Dakota's agricultural output in the hope of convincing consumers to pay a premium on its products. This effort is part of the state's 2010 Initiative, a long-term plan for tourism and economic development.

The initiative's first branding target is the state's beef industry, having launched the Certified program in spring of last year. As the state's largest agricultural sector, with $1.6 billion in cash receipts in 2004, beef wouldn't seem to need the branding push. But because of the beef industry's sheer size and the decentralized nature of cattle ranching—with some 15,000 ranchers all doing their own thing—the state decided it was the perfect choice.

Chart: South Dakota Cattle (In Thousands)
Source: Economic Research Service

And there are other reasons as well. Ultimately, the state hopes to extend the program to more agricultural products there. According to Jafar Karim, director of the Governor's Office of Economic Development, "The genetic lines are such that South Dakota beef is distinctive in tenderness and taste, and thus was a good product to begin with."

South Dakota's effort is not the first attempt at branding beef from a particular region; similar efforts are under way in Iowa and Nebraska, for example. However, South Dakota's program is the only branded beef program to come directly under state government auspices. Karim noted that the state is not getting into the cattle business; it is merely the certifying authority and sets the standards for cattle raising and processing. "The state provides the seal, and it's up to the producers and processors to market the products," he said.

The basic design of the program is to help cattle ranchers become more stable and profitable by virtue of selling a branded product perceived by consumers as high-quality, which allows for premium prices. The program is still in its infancy, and it's difficult to say whether it is, or will be, successful despite its many advocates.

The sales pitch

The program combines the dual retail notions that people attach certain qualities to branded products, and that consumers will pay a premium for high quality. When it comes to food, quality includes obvious traits like taste and healthfulness. But in today's world, it also extends to issues of safety, given concerns over food-borne illness, mad cow disease and even terrorism. People take comfort in knowing where their food has come from, that high standards are being followed—and can be verified when necessary—and, by golly, that it tastes great off the grill.

"It all gets back to value-added. We're moving toward branded products," said John Lawrence, director of the Iowa Beef Center at Iowa State University in Ames. He cited the example of the European Union, which has been successful at labeling regional and geographic products, such as champagne and Swiss cheese. "There's brand equity and greater attention to quality," Lawrence said.

And there's potential here as well because the beef industry is slow to change, remaining one of the few major food sectors with untapped branding potential, according to Joe Roybal, editor of Beef magazine. "The industry is the last to catch on."

Under the South Dakota Certified beef program, a calf's pedigree is traceable from birth to table because it has been fitted with an electronic identification tag, complete with a 13- to 15-digit number that allows the state to record every step of the animal's life, from its place of birth to the slaughterhouse. As a cow moves through growth and processing stages, premises numbers are added, recording each time the animal changes hands, such as when it's sold to a feedlot and finally a processor. Ultimately, it ends up in a store's meat display case waving its South Dakota Certified stamp of quality.

The state's tracking system allows for "complete traceability," said Larry Gabriel, state secretary of agriculture. "That's where the food industry needs to go." South Dakota's program offers the consumer not only the state of origin, but assurances that the animal is raised under some of the toughest animal feed laws in the nation and that animals are fed at least 50 percent corn during the finishing period of the last 100 days. Producers and processors must receive training and certification before being licensed by the state and the U.S. Department of Agriculture. And all program participants are regularly audited to ensure their compliance with program laws.

Since the program's inception, 120 cattle producers and 11 cattle processors have been licensed to use the South Dakota Certified label, with 20 additional licenses pending. The enrolled figures represent about 20 percent of cattle processors; but with just 17,000 cattle in the program, that's less than one-half of 1 percent of the state's 3.75 million head of cattle as of January of this year.

That's not to say the program is a failure. Indeed, as state officials stressed, it's too early to have any meaningful measures of the program. Animal enrollments are low in part because each has to be enrolled at birth—that's the only way to track an animal's history.

Karim, the economic development director, was reluctant to quantify either the costs or the benefits of the program to the state this early, but he noted that the processors and producers assume the costs of implementing the program—so in that sense the program has not cost taxpayers much. The Certified beef program does not yet have a separate line item in the state budget, but is currently being run on existing resources. According to Karim, if the program keeps growing, it will need dedicated funding and staff.

Bottom line is bottom line

But when the proverbial cows come home, has the program helped the cattle industry make more money? That's not particularly clear right now. There are some anecdotes to that effect, as well as some nonmonetary successes, but not much in the way of conclusive evidence.

Participating in the program increases a rancher's costs, particularly on the front end. It costs a producer $100 annually to be licensed in the program, and 50 cents a head. Fees are in the process of being amended to include a fee to transfer possession, according to Gabriel, the ag secretary.

Chart: South Dakota Cash Farm Receipts for Livestock (In Millions of Dollars)
Source: USDA/NASS South Dakota Field Office

But the costs to implement the program on the ranch—the time and technology necessary to tag and track animals—are considerably higher. Craig Hanrahan, owner of Big Stone Ranch in Philip, raises calves for later sale to feedlots. He said via e-mail that qualifying for South Dakota Certified cost an additional $4 per head by the time he placed the electronic ID tags and went through the rest of the recording process.

Hanrahan said that most of his extra time is spent record keeping, but he figured that he recovered the cost of enrolling in the Certified beef program. "It is a bit difficult to judge exactly what the premium was for the certification, but I believe in the future there will be an obvious premium for cattle enrolled in the South Dakota Certified program," Hanrahan said.

Some ranchers are reporting operational benefits from the program. John Haverhals, owner of Haverhals Feedlot and Marshall John's Beef in Hudson, said the Certified beef program gives producers an opportunity to develop overall better practices.

The state keeps information on the weight and grade, as well as other useful data, and the rancher has the opportunity to study the history of the animal and use the information to improve ranching techniques.

"There's the ability to benchmark what kind of beef product" their ranch produced and tweak their ranching practices over time, said Haverhals. "I can tell in real-time information if a calf has gained two pounds or four pounds in a day, by checking the tag at the chute where they get vaccinations. These are all economic factors." Participating in the program brings additional costs, like software training time for his workers, but also offers certain efficiencies to his operations on the back end—like bar code readers "no different from a box of cereal passed across the supermarket checkout counter."

Some ranchers, including Hanrahan in Philip, are seeing increased interest in the open market. When his calves were ready for sale at an open livestock auction, Hanrahan specifically advertised to buyers that are also in the Certified program. Though he wasn't sure if his calves were bought by other program enrollees, "I do know all those interested in the calves felt a bit more at ease bidding, since they were South Dakota Certified," he said. "It is evident to me the time spent to make the effort of being South Dakota Certified will be recognized in the market when I sell."

Indeed, word of mouth may have already spilled outside the state. Hanrahan said he had much more interest from out-of-state buyers than in the past. "I know the fact that they were enrolled in South Dakota Certified enhanced the interest of out-of-state buyers," he said. "Those buyers had confidence they were buying quality cattle that have been handled right."

Some anecdotes suggest that processors are paying more for Certified cattle. Kevin Leiferman, owner of Mid-Dakota Meats LLC in Winner, said his costs are higher in the program because he pays Certified producers more, and because he has to keep each animal separate and track each cut of meat from that carcass. He generally pays Certified producers about 2 cents more per pound, or an average of $10 a head, and barely recovers his costs on the final product. "I'm just glad to sell beef from South Dakota," Leiferman said, "as long as I'm not losing money."

Currently, only 10 percent of the meat Leiferman processes is certified under the program, and that goes mostly to restaurants. Leiferman estimated that the markup on the final product comes to about $1 more per pound on steaks. But the premium doesn't apply to all products—Certified ground beef goes at the same price or less as does noncertified beef. "Remember we're in the heart of beef country." In the long run, however, Leiferman believes that as the market grows, he will make more money on Certified products.

Though ranchers are an obvious target for the program, the state hopes the beef-processing industry gets more involved as well so the state retains more of the value-added created by the program. Currently, more than 60 percent of South Dakota cattle are processed out of state. Gabriel, the ag secretary, said the state lacks major processors, which in turn limits how much beef can be marketed under the Certified label.

To market, to market

The biggest unknown is whether consumers will be willing to spend extra dollars to get South Dakota Certified beef. "While the consumer is willing to pay a premium, we can't predict how much they're willing to pay," Gabriel said.

Other matters also complicate the consumer picture. For example, the price of beef is already high, with across-the-board record profits earned by beef producers last year. That has a dampening effect on program participation because ranchers don't believe they need it to earn a good return.

Logan McClelland, director of the Nebraska Corn-Fed Beef program in Lincoln, said his program is struggling in part because of current high prices. "We had a successful program, but record high cattle prices affected that. People don't take time to establish a brand when they're making money."

The cattle industry in South Dakota has also benefited in a backhanded way from several years of drought, which forced some ranchers to cull herds. Today, the state has fewer cattle than it did three years ago, not to mention about a thousand fewer ranchers—a restriction in supply that benefits those still standing.

But nothing's forever, particularly when it comes to agriculture and high prices. According to Roybal, of Beef magazine, "There is a tipping point where beef can get so expensive that the consumer will turn to other sources of protein, like chicken and pork." If demand slackens, so will prices.

A go-slow approach

Though the program encompasses only a tiny fraction of the state's cattle herd, sources said a go-slow approach is the smart route. "It takes a lot of work to get a program up and running," said Roybal, pointing out that "developing the supply is necessary before you can supply the customer."

Lawrence, from Iowa State, agreed that it is important to start a program slowly. But he also pointed out that there is a "chicken-and-egg scenario" that can keep a program from ever getting off the ground. If ranchers don't see a better return for their efforts, joining the program is not worth the trouble.

McClelland, from the Nebraska Corn-Fed Beef program, said that successful brand programs start out small and accept slow growth rates. But he's somewhat skeptical about branded beef programs. "I respect [South Dakota] for wanting to make something happen," he said, "but you always have to look at the market."

The matter is two-pronged: Supply needs to be established and, at the same time, someone has to take a risk on the sales side to convince consumers that the additional quality is worth a premium price. Size and scale are very important, McClelland said, noting that smaller volume has higher costs. Supply has to be consistent, and everyone has to have patience for premium prices to take hold. When they do, they have to be high enough to reach all the way back to the producer.

McClelland said the supply side is good, with ranchers producing higher-quality beef. But the marketing side is not so good. A governmental seal of approval might be useful, but it's not exactly an aggressive sales tactic.

"We have to sell the concept of branding. In agriculture, we always start at the front end," McClelland said.

One steak at a time

Haverhals, the Huron feedlot owner, joined the Certified program in August 2005. Out of 4,500 cattle in his feedlot, about 20 percent are Certified, or about 900. He credits Rounds and the program for making it possible for him to sell directly to consumers. "The component that excited me was the branding of the product. … [Rounds] created the whole system of producer interaction, something I couldn't do by myself, but it was a huge help to me, and I seized the opportunity."

Haverhals sells his meat to out-of-state individuals online and to corporate buyers as well as wholesale directly to customers largely in the Sioux Falls area.

While the program goal is growing processor capacity, the demand needs to be created first, Haverhals said. "One of the things I've learned having done international travel is that each country wants validations from other countries," Haverhals said. "That's what excites me—the state is the validator and brings credibility to the market. It's huge."

Successful or not, the Certified beef program probably can expect a lot of copycats deluging consumers with new, high-quality, branded-beef options. "Nothing kills a premium faster than success," said Lawrence, from Iowa State. And besides the Iowa and Nebraska beef-branding efforts, Roybal mentioned other niche market beef products, such as Safeway stores and Cargill teaming to sell beef with a "guaranteed tender" label.

But certain trends also appear to be working in the program's favor. For example, the demand for source-verified products abroad is increasing. And once Asian nations reopen their borders for beef imports—as Japan did in late June—predictions are that the market value will soar.

Most of the Certified beef is marketed within South Dakota to stores and restaurants and on the Internet, according to Karim. But "we hope when borders open in Japan that marketers will be poised." Groundwork has already been laid, as some Asian countries are following the Certified beef program, he said.

"In an export market, this [South Dakota] program would be part of the future," McClelland said.

The state is watching the beef program carefully, and if it continues to grow and prove successful, other South Dakota products that distinguish themselves from commodity products may be considered for branding. Future state certified products may include bison meat, pork, lamb or honey.

The future of South Dakota's Certified beef and other similar branding programs may be determined by the nation's agricultural philosophy. As a new federal farm bill comes up for discussion, "there's one interesting thing to watch," said Iowa's Lawrence. "What will we have: commodity agriculture or small regional brands to compete on quality and consumer preference, instead of competing on the basis of the lowest costs?"

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