Where’s the Beef? Traceability Boosts Profits

By Thomas R. Cutler

CFO’s and other financial executives from the food and beverage industry often grimace over the price of regulatory compliance, asserting these governmental mandates create expenses that go straight to the bottom-line. In fact, traceability can boost profits. Several published, large-scale university studies confirm the high potential ROI (return-on-investment) from installing Positively Assured Traceability systems. ROI’s of greater than 300% are verifiably documented.

Rigorous statistical analyses, in addition to anecdotal evidence, are now available from several credible sources, demonstrating the profitability in traceability. These newly published studies are being labeled “value traceability.”

Iowa State University published “The Value of Third-Party Certification Claims at Iowa’s Feeder Cattle Auctions” by John Lawrence, a renowned ISU agricultural economist, and his colleagues. The study extensively analyzed the sale of over 150,000 animals from 105 auction barn sales at nine different Iowa auction markets comprising 20,051 different lots of cattle with a median lot size of five head. The study sought to determine how much value was added by a third-party traceability claim in a real-world, buyer-seller relationship. The researchers acknowledged the difficulty of their task, noting, “While auctions are very efficient at bringing buyers and sellers together for price discovery, signaling the value of cattle at auctions framework is often a challenge. This is particularly true for unobservable traits such as vaccinations and previous management of the cattle …The root of the problem is that buyers cannot assess the quality of cattle at a low cost, and sellers have incentive to overstate the condition of their animals. Third party programs, such as state-sanctioned green or gold tag preconditioning programs, or similar private company programs, have potential to mitigate this problem provided that buyers trust the integrity of programs and procedures.”

The experimental design looked at two up-stream cattle management practices – pre-conditioning vaccination and a 30-day weaning period for the animal (two animal-specific attributes), and whether the information about the animal came from (1) a third-party traceability certification system, or (2) only the seller’s word. For the first time, a study separately tracked the value of both the process performed on the upstream food products, and the value of providing third-party traceability to ensure downstream purchasers that certain upstream processes and practices had actually been performed. The study showed that third-party traceability clearly added substantial value to the animal, providing better than a 330% return on investment. To reach this conclusion, the study created an econometric equation for determining the final market price for an animal (given a number of animal-specific and market-specific variables) including the study design process and traceability variables.

Animals with the same claims, but only supported by the seller’s word and not supported by a third-party traceability system produced premiums of only $3.40 cwt. versus $6.15; the difference between these two premiums ($6.15/$3.40) is $2.75 per hundred-weight. This is the implied value the market is placing on establishment of a formal “value traceability” system. For a typical 600 pound animal arriving at the market, the premium from a third-party traceability system would amount to about $16.50 ($2.75 x 6). With a typical cost of about $5 per head for all costs associated with individually identifying an animal, tagging it, and enrolling it with a third-party traceability provider, the total return to the grower is about 330%.

According to Richard Ross, Director of Industry Relations for TraceGains, a leading SaaS (Software-as-a-Service) traceability/profitability solutions provider, “As the concept of “value traceability” becomes even more understood in the business world, the return on investment may be even higher than 330%. The marketplace still does not fully recognize all of the benefits of either the upstream preconditioning attributes studied, nor the full benefit of having a third-party traceability system supporting the claims.” It is likely that when these concepts are more commonplace, the value associated with an animal with these upstream attributes and with a third-party traceability claim will increase. There will be even more value for the whole chain when downstream purchasers, many owners removed from the upstream owner who administered the value-added processes, realize additional benefits from the attributes that are certified.

The results of these data are statistically significant based on a very large number of real-world, market measurements. A second recently published study by Pfizer Animal Health and Colorado State University documents the value of third party verified claims. Using sale data from seven Superior Livestock auctions, the Pfizer-CSU study analyzed more than 422,000 cattle. In a beef cattle preconditioning program such as Pfizer’s Select-VAC program, the added value of preconditioning with third party verification is over $7.60 per hundred-weight (or $45.60 per head on a 600 pound steer). This $7.60 per hundred-weight premium found by the Pfizer-CSU study is in line with Iowa State’s observed value of $6.15 per hundred-weight premium.

As expected, when more upstream attributes are certified by the third-party traceability system, additional value is added. Pfizer’s data shows that an additional value of $1.77 per hundred-weight ($10.62 per 600 pound steer) is added to the animal for adding age and source verification to the preconditioning attributes (vaccinations and minimum weaning period). The implication remains that when additional attributes that have market value are added, the return on investment can continue to increase.

TraceGains’ Ross concludes, “CFO’s and all food and beverage business executives can improve their profitability by adding Positively Assured Traceability programs to their current operations. Rather than driven solely by quality professionals attempting to meet regulatory mandates, cost-efficient profitability results are driving the imperative to these traceability profit boosters.” The efficacy of traceability extends throughout the entire food supply chain, from grower producer to aggregator; from manufacturer or processor to distributor…all the way to the grocery retailer. Traceability as a profit center impacts much more than beef…just ask tomato-growers.

Author Contact:
Thomas R. Cutler
TR Cutler, Inc
Email: trcutler@trcutlerinc.com
Website: www.trcutlerinc.com

About Author
Thomas R. Cutler is the President & CEO of Fort Lauderdale, Florida-based TR Cutler, Inc, (www.trcutlerinc.com). Cutler is the founder of the Manufacturing Media Consortium of three thousand journalists and editors writing about trends in manufacturing. Cutler is a member of the Society of Professional Journalist, Online News Association, and American Society of Business Publication Editors, as well as author of more than 300 feature articles annually regarding the manufacturing sector. Cutler can be contacted at trcutler@trcutlerinc.com.

Printer Friendly

Email Page

Sponsor Message