Miranda Reiman:
Welcome to the Angus Conversation. I'm your host Miranda Reiman with my co-host, CEO of the American Angus Association, Mark McCully. And Mark, we just got done talking to two gentlemen in a part of the industry that we don't always get to touch.

Mark McCully:
We did, and it was, you and I have talked the cattle feeding business is, I almost called it a black hole sometimes because I think for a lot of seedstock folks, they really, they understand you feed cattle, but I don't know that when you start thinking about all of the factors that go into the cattle feeding industry, all of the things that go into sourcing cattle, managing cattle, marketing cattle, and then the different types of operations and all of the specialization. We had truly a specialist today and Dr. Pete Anderson, that is, he is a consulting feedlot nutritionist, and a lot of folks don't maybe even know that role exists. And I think I know going to grad school, and I did a program in ruminant nutrition more on feedlot management, and that's where I started to get my eyes open to all of the intricacies of the cattle feeding business. And boy, there's some really great people in it.

Miranda Reiman:
I remember my very first story trip for CAB, I think I'd been on the job all of two weeks and Steve Suther sent me out with a camera and a voice recorder. We couldn't record on our cell phones yet, but a voice recorder and some MapQuest directions. And I went out to western Nebraska and got to be in some feedyards. And I think, man, all I have learned from that first story trip to now almost 20 years later is, I am also like you, always just very interested in the feedyard sector and the cattle feeding sector. And I think that the further that I am over on the association side, maybe the more removed I get from it. So it was really fun for me to hear some of the new and upcoming technologies, to hear some of the ways they're looking at the markets today that weren't that way 10 years ago, 15 years ago.

Mark McCully:
Great. And I think some really great takeaway messages, I hope, for folks in the genetics side of business. Obviously, we think about designing a product that fits our environment, but a product that also has to work for all of the customers down the line. It's easy to go all the way and think about the consumer, but we also have a customer in the cattle feeding, some cattle feeder that will own these cattle or an investor that will own these cattle and feed them, and they give some really nice perspective into what's important for them and where we've made some nice progress and maybe where we have some room to improve.

Miranda Reiman:
So Tom Fanning was our other guest, and he is there at Pratt Feeders and would have a lot of experience across multiple yards now down there in Kansas and Oklahoma. And so that was fun to hear his perspective too, but one question I asked them at the end, Mark, I didn't ask you the random question of the week, so I'm going to ask...

Mark McCully:
You let me off the hook.

Miranda Reiman:
Yeah. Well I'm not going to let you off the hook, so I want to know, I asked them at the end, the random question of the week, to describe when they feel like they're doing what they were meant to do. And Tom did not anticipate that he would be in the cattle feeding business. I'm kind of guessing you didn't anticipate you would be in that office at 3201. What are some of the days when you know you're doing what you were meant to do?

Mark McCully:
I do have a lot of days when, and it's the little things. It is never the big things. It's the little things. It's the member that you talk to that is having success in their operation. Maybe a first generation, maybe a fifth generation that they've maybe got someone coming back to the operation or they're excited about some growth that they're getting ready to take on. It's gosh, this summer when we were getting to talk with a lot of those youth that are excited about the business and getting ready, they see Angus cattle and the Angus breed as a place they want to be. That's pretty reaffirming to me that we're where I'm, I guess, supposed to be. And it's sure fun to watch that success that the Angus breed enables and, as an association, how do we best serve those members? So awfully very reaffirming. How about you?

Miranda Reiman:
I would say that my favorite days, of course, are either on the ranch or at conferences with members. Just anytime I get to be with breeders, commercial producers, and cattle feeders and for the same reasons, right. I think we all do this job for the same reasons. We do it to serve the breeders and keep the folks on the ranch, those kinds of things. But I would say that, even as I asked that question today, I was kind of smiling thinking I never imagined I would be podcasting. That's not what print journalists envision in their life, but...

Mark McCully:
Ruminant nutritionist either.

Miranda Reiman:
Yeah, that's right. But after having a conversation like we had this morning, I think those are also some of the moments when I think, hey, this is what I was meant to do. So hopefully to all of our listeners, you will enjoy this conversation as much as Mark and I did.
 
Well, welcome to the Angus Conversation, guys. We have Pete Anderson, director of research with Midwest PMS, and Tom Fanning, manager of Pratt Feeders. So Pete, we'll maybe just start with you. Undergrad at K-State, master's and PhD from Michigan State. You work with both the nutritionists and the clients there at Midwest PMS. I guess from what I understand, you kind of marry the science part of the business with the business. Is that right?

Pete Anderson:
Yeah, that's a big part of what I enjoy. I started my career as a scientist and have evolved into some business positions and I enjoy both. I like to have one foot in each of those. So yeah, I do enjoy that. So I work a lot both internally with our nutrition team, our operations consulting team, and then our own operations and then also a lot with customers, which I enjoy very much.

Mark McCully:
Pete, you and I have a mutual hero and mentor in Dr. Harlan Richie, and I tell you, when I was at grad school, you were just a little before me, but I, Harlan used to, if I had a nickel for every time Harlan says, Pete Anderson, Pete Anderson, Pete Anderson, I got to meet this Pete Anderson guy. No, I know one of Harlan's favorite students and one I know he was most proud of. He talked about you all the time and you currently serve as chair of the Harlan Ritchie Symposium there at the Midwest Animal Science meetings. We've been working together on that fun symposium to one, recognize Harlan, but also continue his spirit of curiosity and research and practical production research and moving the industry forward. So, Harlan was a champion.

Pete Anderson:
Harlan Ritchie was a great inspiration to me, a great mentor. A big part of how my career has evolved has been based on what I learned watching and spending time with Harlan, so it's an honor to serve on that committee. It's a treat to have Mark as part of the committee and it's a lot of fun.

Miranda Reiman:
So we say Midwest PMS, all of our audience should know exactly what that is, but for a lot of our Angus breeders that maybe don't live in this feedyard space, why don't you explain what Midwest PMS is and what services you provide?

Pete Anderson:
Sure. We provide nutritional supplements, liquid suspensions, and also dry feed and commodities and consulting services for feedyards and to a lesser extent dairies. So we have a team of PhD nutritionists across the major feeding states. We have production facilities in those same states, and so we have, I like to say, if the last time you had a steak or cheeseburger, there's a pretty good chance we had something to do with it. Which I think for this audience is pretty often I would imagine.

Mark McCully:
Midwest PMS has been around 50-plus years, something like that, been around for a while.

Pete Anderson:
We're a family-owned company—more than 50 years old and two families own it—and it's really a fantastic company that a lot of people don't know much about because we're kind of stealth. We try to fly under the radar and just provide good service for our customers.

Miranda Reiman:
I like that. Well, speaking of people that have probably touched a lot of cheeseburgers, I guess Tom Fanning, you would fall in that category, as well. Manager of Pratt Feeders. Honestly, when I went to write out my outline, I almost put manager of Buffalo Feeders because that's where I first knew you as a longtime CAB partner yard and, of course, one there in the Pratt group, but recently took over as manager of Pratt Feeders, graduated from Oklahoma State University, served in the Army before you went on to get your master's, is that right?

Tom Fanning:
Yeah, that's right.

Miranda Reiman:
Then worked for Cargill and then, of course, to where I knew you first there at Buffalo Feeders. So tell me just a little bit about your journey to where you're at today.

Tom Fanning:
Yeah, so I grew up in northwest Oklahoma. Joined the, enlisted in the Army as a private when I was 17, was commissioned as a second lieutenant in 1986, graduated with an ag econ degree from Oklahoma State and went on active duty in the military. Kind of a fun fact, my unit guarded the Persian two mobile nuclear missiles and warheads during the Cold War and I was in Europe when the wall came down and Reagan made the famous speech at the Berlin Wall. After the first Gulf War was over, I got out of the military as a captain and went to work for Cargill in their cattle feeding division and the Texas Panhandle. I was in several feedyards there and was able to get a lot of experience as a mill manager, as a feed manager, bunk reader, cattle manager, cattle procurement, and wound up back home in Buffalo, Oklahoma, which is about 20 miles from where my wife and I grew up, and we were able to raise our three children near their grandparents and got to be able to start a cattle operation of our own there.
 
So for the last 22 years, I've been the manager at Buffalo Feeders, which is part of the Pratt Feeders organization. In June, they asked me to take over as the general manager for our group and we have four feedyards. We have Buffalo Feeders, which is a 32,000-head feedyard in Buffalo, Oklahoma; Ford Feeders, which is a 50,000-head feedyard just east of Dodge City; Ashland Feeders, a 17,000-head feedyard at Ashland, Kansas; and then Pratt Feeders here in Pratt, Kansas, which is a 37,000-head feedyard. And our focus is primarily custom feeding, so 70 to 80 percent of the cattle in all of our feedyards would be owned by cow-calf stocker operators throughout the United States. We focus on trying to help them successfully market and manage their cattle and improve their bottom line by extending their ownership period and capturing the genetics that they're putting into their cow herd.

Mark McCully:
Well Tom, first, thank you for your service and, I guess both to Tom and Pete, as you guys started into your education, did you both have goals of ultimately being in the cattle feeding industry or was that always the plan?

Tom Fanning:
Well, I definitely had no goals of being in the cattle feeding industry. I was at a family reunion and ran into a friend of mine who was from Groover, Texas, who had recently graduated from Tech with an ag econ degree, and I was still in the military and he told me about Cargill and Caprock Industries. I was familiar with Cargill, of course, and so I called 'em up and it went from there.

Mark McCully:
The rest is history.

Tom Fanning:
Yeah.

Mark McCully:
Pete, when you headed up to East Lansing, was this the ultimate goal or were you going to stay in academia or what was the plan?

Pete Anderson:
I always knew I'd be in the cattle business somewhere. I grew up in Minnesota, which is a great state, but not a big cattle state, and so that's why I went to Kansas State for my undergrad. I wanted to get closer to the cattle business and that was a great decision. And then I went to Michigan State for a variety of reasons and that was a great decision too. The only job I ever wanted was to be university professor and that was the first thing I did. I was on faculty at the University of Minnesota for a few years but didn't quite move fast enough for me, I guess maybe would be the description there. I had a chance to work both on the cow-calf side and on the feeding side, and I enjoyed both of those. Then I entered industry, went to work for a company called Syntax Animal Health, and they moved me to southwest Kansas, right at the center of the cattle feeding universe, and I just really love the feeding side of the business and been there ever since.

Miranda Reiman:
Very good. What part of Minnesota are you from? A Minnesota native has to ask. So I know.

Pete Anderson:
Steel County, Owatonna, so yeah, just a little bit north of the Iowa border, the blackest dirt that God ever created and a little bit of a short growing season, so we can't quite grow as much, but a great place to grow up, really was.

Miranda Reiman:
Absolutely. I'm just down the road in Martin County, so I know all about that good black dirt and the long winters.

Pete Anderson:
Also true.

Miranda Reiman:
Yeah, very good. Well, I guess thinking through timelines of when you guys started your career and you started in the beef business, talk me through what the cattle industry looked like at that time or what were some of the bigger, maybe, concerns you were dealing with or the bigger topics you were talking about then?

Tom Fanning:
Go ahead, Pete.

Pete Anderson:
Biggest changes I've seen in my time is the way we market cattle and the cattle that we are marketing. And when I was early in this business, there weren't many cattle sold on grids. There weren't many formulas there wasn't. It was mostly weight only and southern states it was live weight and northern states it was carcass weight, but we just sold everything by the pound and everybody's pounds were worth more or less the same as everybody else's. And changing from a time when calibrated 45 or 50% Choice as an industry to where we are now with tremendously high quality, it's been a lot of fun. It, it's a great educational experience, been a great teaching opportunity for me with our clients and the companies I've served, but we really had to learn some of that. But the changes we made, both genetically and management-wise, have really been funded to help producers learn how to market those cattle, learn how to do things differently, learn how to manage for carcass value, and I think we create a great product now and I don't think that has always been the case. I think early in my career, the National Beef Quality Audit would say that some meaningful fraction, maybe 30 or 40% of the eating experiences, were dissatisfying or unpleasant. I don't remember what the terminology they used, but it almost never happens now. We put a really, really good product on the plates now.
Mark McCully:
How about from your eyes?
Tom Fanning:
I would say through the ´90s and 2000s and into the current decade, it's just been a continual improvement in almost every aspect of what we do. The genetics have changed dramatically, and I think I saw the biggest leap in quality of cattle coming out of that 2012 to 2013 drought. And the nation's producers really took the opportunity to improve their cow herd when they rebuilt and to come back with a higher quality of bull on those cattle. So when you see southern states cattle that are averaging 75 to 85% Choice, that is a huge improvement. Just like Pete said, in 1998, the nation's average was 54% Choice. This last 12 months it was in the 84% range, and that's nationwide. The other thing that I've seen that's been a lot of fun to be on the ground with is just all of the improvements with technology.
So, when Pete and I both started, we really didn't have the internet. We really didn't have cell phones, we really didn't have GPS tracking, we didn't have AI technology. We had feed cards, we had a calculator, and we got up really early in the morning. So, in the army, we used to say we do more before 9:00 AM than most people do all day. Well, you can say that in the feedyard, as well. We do more before 9:00 AM than most people do all day. And the technology changes has been wonderful, really improved the quality of life of the cattle and the employees.
So, we've taken a lot of great tools from a lot of good technology companies and employed them in our feed mill and our feed delivery in our office systems. And then you couple that with the improvements in feed technologies and additives that have helped us maintain gut health, for example, with direct-fed microbials or improve endpoint management with dressing percents or just you can keep naming each of those things. And when the industry finds an issue, we put resources to it and we figure out how to fix it. And it's been really interesting to see those kind of changes throughout the last 25 to 30 years.
Pete Anderson:
Tom makes a great point and we mentioned the quality and there's been tremendous improvement there. But I think also if you look at other issues, if you look at whether it's injection sites or food safety, the safety of the product that we create, or the way the animals are handled or the way that our employees, the employee experience in the feedyards, I think all of those things are dramatically better than they were. I think we've really, really professionalized the industry and it's one I think anybody can be proud to be part of now.
Miranda Reiman:
When you think about all that technology that you have, I think immediately to all the, I mean you have so much more data to make decisions on and those kind of things, how do you manage it? So it's not just data that sits in silos, but so you can actually use it to make decisions?
Pete Anderson:
Well, that's one of my pet areas. I love numbers and I love to use data to make decisions, but you're right, Miranda, data by itself is not useful. Data has to be turned into, and these are my definitions, but we have to turn it into information. In other words, we have to put it in a system where we can ask and answer questions and get reliable, accurate numbers from the data that we have stored. Then once we have the information, we can look at it, then we have to turn that into knowledge. Then we have to incorporate the scientists and people with Tom's kind of experience to really understand what the numbers mean, what they're telling us, and then we have to change behavior and make decisions based on that and do something better and different. I spend all day every day doing that and I just enjoy the heck out of that and work with some other guys who are great at that and it's fun for me.
But you're right, you have to have the systems to do that and you have to have the discipline. A big part of what we've done on the academic side is learn ways to look at big data sets and understand what are the boundaries, what are the rules, how do we interpret those sorts of things? Just because one number is different than another, that doesn't mean we should react to it, but we've learned how to analyze some of that stuff. So that's a long way of saying that we're way better at that than we used to be. We've got better tools, both hardware and software, and I think we've learned things. I think we have better brains as far as looking at that kind of stuff too, and it's a lot of fun for me.
Mark McCully:
Tom, you guys are, you mentioned a large percentage of your cattle are retained ownership. So coming from either the source or the stocker, do you find yourself with more information in your hands today to maybe change the way those cattle or adjust to how those cattle are managed or marketed or, I mean, you're still also running collectively a great big feedyard where the ability to customize sometimes gets a little challenging pen to pen. So how do you handle that information that you get from the rancher or the source?
Tom Fanning:
Yeah, so that's a really good point. Twenty years ago we had one data point average in-weight, one data point average out-weight, one data point for dry matter conversion and average daily gain. But through the last 15 or so years, we individually manage every individual animal within that group. So actually what we have is if it's a 100 head in that pen, we have 100 data points on in-weight, a hundred data points on out-weight, a hundred data points on average daily gain and conversion and everything else that goes with that. And now what we've been able to do is just back that up and we're adding sire data and dam data from the female that they come from and what ranch location. Some of these ranchers may be spread out over several counties or even states and they have different genetics, they have different environments, they have different feed stuffs in those areas.
And so all of those cattle have slightly different outcomes or performance variables. And what we've learned through experiences over the last four or five years, particularly through Covid, is when the packing plants slowed down and extended days were put on a lot of these cattle, I think the industry learned that the genetics can support a longer feeding period and a bigger outweight, and we have to let the cattle fulfill what they're capable of. And I think we've all been guilty of having a mindset that 1,450 is the out-weight. Well, 1,450 might be the out-weight, but it might be 1,550, it might be 16 and a quarter. It depends on the genetics, the end weight, the feedstuff, the history, the health profile of that animal, and what is your goals and what is your target. So I'm not sure if I talked around your question, but I think that's the biggest thing that I see is we have now just exploded the data possibilities and we can help a rancher, a cow-calf operator, sort his cow herd and never look at his cow herd, right?
We can sort his cow herd based on the report we get from the packing plant and our feed performance on what are your best performing cows, what are your least performing cows? And if we can throw in the sire data on top of that and you can start seeing which sires are providing you with the most revenue for your herd, it helps you make those decisions when you go to those bull sales and you're looking at, well, these are the four bulls I like, but maybe they're a little too high, maybe they're not too high.
Miranda Reiman:
Our breeders will like to hear that. I was just thinking to steal Pete's terms basically then you're taking your performance data and your carcass data and making it information for your customer, making it more performative for them.
Mark McCully:
Yeah. You talk about 1,600 pounds, 1,700-pound out-weights. Did you guys, is it still a surprise to you guys that we're finishing cattle as big as we are or is this just been obviously coming as we put more cattle on grids and get paid on carcass weight and genetics. And where's the ceiling?
Pete Anderson:
I'm not that surprised that we have outstanding cattle. I think we've always had more potential in at least some of the cattle than we realized. But the transition from selling live weight to selling carcass weight and then, ultimately, selling quality has taught us a lot about what happens at the end of the feeding period. And so if we focus only on live feed conversion or live cost of gain, we're always going to sell the cattle shorter because of so much what happens at the end of the feeding period is deposition of carcass weight and creation of carcass value that doesn't show up in the live numbers. So as we made that transition, we've made 'em a lot bigger and we found which ones are better. I think we still have more to learn in that regard. There's still a lot of cattle that we don't know very much about.
There's still a lot of blunt instruments we use to value feeder cattle. What color are they? What sex are they? Do we think they're fat or not? And what zip code did somebody put 'em on a truck? We need to know more than that. So I really hope better genetic diagnostic tools are coming. I hope better health diagnostic tools are coming so we can value them even more precisely, but we'll find out. Some of these cattle are absolute superstars and it used to be thousands and now it's hundreds of thousands that can do stuff like that.
Miranda Reiman:
Do you think that knowing the genetics helps you sort of, I don't want to say, maybe it is, mitigate the risk of taking them that heavy, right? If you take a group of cattle that don't have the genetics to go that heavy, you're going to end up with a lot of discounts. But if you know the genetics behind them, maybe you know which ones you can push and which ones you just want to get gone earlier,
Pete Anderson:
It would deal in probabilities, right? These cattle are more likely to do a thing. These cattle are less likely to do a thing. I've got three kids and they don't all look exactly alike, but knowing something about these cattle will help us to improve our odds of getting 'em to the right end point.
Miranda Reiman:
Sure. Is that something, Tom, that you've had to work to, like, retrain your brain on a little bit? I mean, you said we know the cattle need to be 1,450. How do you go out and decide which ones to keep feeding longer?
Tom Fanning:
Absolutely. It's the history that we have from repeat customers from year over year over year, and we can watch them as they change genetics and we can see the changes in dry matter conversion improvement and carcass improvement and then out-weight improvement. The primary drivers in my view of profitability is, number one, is the out-weight, right? That's the biggest driver. And then the efficiency that you can get to that weight—how efficient are those animals? What's their dry matter conversion? What's their average daily gain? And then what is the quality of that weight you're putting on? So those three things combined, we've been able to continue to reach new levels. One of the things that we always talk about is is that carcass too big, is that ribeye too big, and the packing plants are built and you can't just raise and lower those rails. So most of the grids around have an 1,100-pound ceiling before discounts happen on the heavy carcass weight. Well, that's on a 65% dress. That's a 1,700 pound steer, right? That's a big steer.
Miranda Reiman:
So, Mark, that's the ceiling is what he's saying.
Mark McCully:
Until they make the rails higher.
Tom Fanning:
Until we make the rails higher. But one of the things that's driving the packers to want those bigger carcasses is, as we have fewer cattle available, the more pounds they can put on each rail, the more throughput they have. We're driven not so much on an out-weight, but it's to try to hit that optimum endpoint that puts the genetic potential and the economic value where they come together. And so if we can have, if that's 1,475 or 1,520, it doesn't matter to me as long as we're finding that endpoint that we're letting that animal get to its potential. And we haven't exceeded the economic value of doing that. So to me, that's the goal on every animal. Every group of cattle has value. It is capturing and optimizing the value of that genetic set that you have.
Miranda Reiman:
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And now back to our conversation.
Mark McCully:
Pete, you talked about that, you gave a great presentation at Feeding Quality Forum of just helping us think about that and helping customers, helping our industry, find where those optimums are. Maybe speak about that as you think about it. How do we use the data, the technology, to try to find some of those optimals from a profitability standpoint?
Pete Anderson:
One of the things we've learned over the last decade or two is that at the end of the feeding period, the vast majority of weight that's deposited is carcass weight. As much as 80, 85, sometimes even 90% of the weight gain. So the cattle may only be gaining 2-1/2 or 3 pounds a day at the end, but that might be 2.2 or 2.4 pounds of carcass weight. So when you do the arithmetic based on the carcass value created, you're going to make different decisions and you're going to feed the cattle longer. In general, when we're marketing cattle on grids, they're going to increase in value as they get heavier, as the quality grade profile improves, because the quality grade profile drives the value to a far greater extent than the yield grade profile. So quality grade gets better, more the cattle move from Select into Choice, from Choice into Premium Choice, from Premium Choice into Prime.
The cattle are also moving from Yield Grade 1 or 2 toward Yield Grade 4 or 5. And so we have to figure out where is the right place to market those cattle to maximize that value. But, in general, the quality grades drive that equation to a far greater extent than the yield grades do. And so that influences us to push the cattle to heavier weights and higher quality until we get, like Tom said, either a weight penalty or an excessive number of overfat penalties, Yield Grade 4 and 5s. And the cattle we've got now can do a lot of that.
Miranda Reiman:
How much of that is there, where you need to be working maybe with your packer buyer and some of that to also optimize when you can get those cattle slotted for harvest? And, I mean, how important is it to have good relationships with your packer, I guess, is the question?
Pete Anderson:
Well, I think it's really important, but whatever industry we're in, suppliers need to work with the people who consume that supply. And so I think we need to work with 'em and, hey, they need to work with us, too. And there's been some antagonistic relationship between feeders and packers over the years, but when both of us work together, we get a way better product and a better outcome for everybody.
Mark McCully:
Tom, you mentioned during Covid, when obviously the world got backed up and I think maybe there was times finding those spots to get those cattle harvested was harder than maybe what it ideally would've been. But we learned some things through that period, I guess, of time too,
Tom Fanning:
Right. And I don't think it's beneficial to have an adversarial relationship with your packer buyer. It's, to me, each one of those representatives that they bring to the feedyard to look at our cattle each week is an extra set of eyes to help me evaluate. Because what we are doing is trying to get to that optimum end point. And, back to that previous question, yeah, the things that we learned through them, I mean, I truly believe they were trying to get the fattest cattle slotted first and they were looking at multiple feedyards and each one of us were worried about our particular situation, our particular customers, and we worked through it. And you could get frustrated or you could not get frustrated, but at the end of the day, we worked through it, we got out through the other side, and I think we built some strong relationships in just knowing that everybody was trying to do the best we could through that situation.
Mark McCully:
Backing up a little bit, you guys, I'm probably guilty from being at Certified Angus Beef as long as I was of talking about premiums, premiums, premiums, right? And we also know the world has discounts on the other side of that. I think maybe for folks that don't think about this a lot or feed cattle, they would think the goal is to avoid any and all discounts and yet, at times, that's not necessarily how the market structure is built in terms of Y4s and 5s or heavies. How do you guys approach that? What's the, I mean, obviously we don't want them, but you're also still trying to market groups on averages, so how do you think about discounts?
Tom Fanning:
I'll go first, Pete, then you can fix my answer. How about that? So being involved in some of the very early grid programs, the discounts always beat you harder than the premiums reward you, typically, right? But today, the market structure with the market price $0.85, 0.90, a dollar above the cost of gain, the economic value of that, getting that carcass on those last two or three weeks on feed, that really increases that Prime and high Choice and Choice grade. Yes, you're going to build a few more Yield Grade 4s, you're going to increase that. You're going to get up there to that heavy discount threshold. As long as you have a model built that is anticipating those increases and you're staying within that economic threshold, we're still trying to optimize that total carcass value for that group that's going. Part of the way we avoid the discounts though, backing up just a second, is by sorting those cattle extensively. We have all of those individual weights coming in. We have all of those individual weights at re-implant, and we're doing a minimum of four and sometimes five sorts in a group of cattle. We'll have ultra heavies, heavies, mediums, medium lights, and then the non-performers, and we'll have those are all in separate marketing groups. So we're sending groups to the packer that are very uniform and the standard deviation of the out-weight is narrow. It's 40-50 pounds instead of 120. So that really allows us to get right up to the threshold of those discounts without going over the edge.
Pete Anderson:
Tom said a couple of things that I just really, really, really agree with between this paragraph and previously. We want to add as much weight as we can. The sorting helps to do that because of narrowing that standard deviation. You can move the mean up so significantly farther and you can get more out of the highest performing cattle when you do that, and still minimize discounts. I don't think the right number of discounts is very often zero. As Tom said, it's a modeling exercise to balance those cattle that are increasing in value versus those that are decreasing in value, and what's the right time in data, market, all of those. And, of course, the market's moving and we have to think about what the replacement cost of what would come into the pen after them would be, and some other decisions like that. But for the most part, adding a lot of weight to those cattle that are capable and getting as many into the higher-quality categories as we can. And the grids have become much more accommodating on both the heavies and the Yield Grade 4s, and so they're letting us do that.
Miranda Reiman:
When you guys are thinking about pushing cattle to higher weights, are there any health or welfare concerns that you're also kind of weighing in the background there?
Pete Anderson:
Every day they stand there is a chance for something bad to happen. And we have seen over the last couple of decades so many great things happen in the cattle business in terms of performance and quality, but we haven't seen as many great things on the health side. So, yeah, there are some risks as we extend those feeding periods, and we still have got some things to learn about that.
Tom Fanning:
Yeah, I would say that there's nothing more disappointing than having that late-term mortality. A lot of times those are your highest-performing cattle, so that is definitely part of the model. I mean, you have to increase your potential for death loss by extending those days. And there's some genetic lines that seem to have higher increase of late-day mortalities. And then, of course, if you had health issues early on in that animal's life, those lungs that may have been damaged early on don't really support a 1,600-pound frame. So, certainly an issue.
Mark McCully:
And you guys bring up health, and I guess maybe dig into that a little more as we think about the improvements we've made and also maybe how does that tie, as you guys think about it to, you know, we've put really big appetites in these. We've selected for growth, but we've selected for, by doing so, we've selected for some big appetites, some big intakes. How do these things, are they related? How do we need to think about it? Maybe for the folks listening to this that are more on the seedstock side of things that are thinking about growth and quality and helping their commercial customers, how do you guys tackle that whole topic?
Pete Anderson:
Well, we get more of what we select for and we've selected for growth and quality and we've got those. And we have not put genetic selection pressure on health-related traits because really hard to do. And so we've not seen the same improvement from a genetic standpoint in those things, and you wouldn't expect that we would have. And I think you can see the same thing in other industries too, in the dairy industry, in the swine industry. I don't know as much about poultry. One of the things that I'm really excited about is that I think we are seeing now some better genetic tools for health-related traits, and we need some help there. And I think we're going to get some help from genetics as opposed to—most of the history was let's have better vaccines, let's have better antibiotics, let's find better management practices. And we haven't utilized genetics necessarily to improve the health of our cattle. I think we'll have some ability to do that now with some of the new tools that are available.
Tom Fanning:
As far as the feedyard side of that equation, one of the biggest things we can do to improve the health overall the whole feeding period is to be extremely consistent in everything we do in feed production, in feed delivery, in feed call. Because we can do a lot of things to screw up the health if we're inconsistent day-to-day in how we make the feed and how we deliver the feed and the quality of ingredients going into that feed. And that's one of the things that Pete's group helps us with on a daily, weekly, monthly basis is to evaluate our current ration ingredients, to evaluate how those are getting formulated and how the mix times and the delivery schedule and—cattle really want consistency. And that is super important. And we strive at every location to be on time, high quality and deliver exactly what we think the cattle need, not exactly what the cattle think they need. Sometimes those cattle can hurt themselves early on, especially with these high-quality, high-performing cattle.
Pete Anderson:
Yeah, Tom's exactly right. The consistency is critical. We're asking these cattle to be high-performance athletes and many of 'em are really capable of doing that. That puts the onus on us to do the same thing. So an organization like Tom's that does a great job of really being on top of the details and really getting that stuff right makes it easier to add a lot of value to those high-quality genetic cattle that come into a place like that.
Mark McCully:
This consistency topic is one I've been thinking about, you talking about consistency of management, but maybe at times I don't know we give enough discussion or maybe think enough about the consistency of genetics and how much better we could do as an industry if what the product you're getting into a feedyards are more consistent in terms of their genetic makeup, in terms of their weight, in terms of—I mean cattle that are closer in age, probably your vaccination program, might be a little more successful. I mean, it's one of the things I hear on the beef-on-dairy side. They love the consistency of those cattle and maybe ability to manage risks. So maybe it's also realizing we've got lots of different geographies we're running cows in this country, but maybe a continued goal for us is to drive the consistency of the product that you're first getting into those feedyards. Are we going in the right direction? Are we making some progress?
Pete Anderson:
One of the interesting things that I've seen in the industry over the last decade or so is what I call feeder-cattle consolidators or maybe compilers, where organizations will bring together a group of somewhat disparate cattle and put 'em together and then they'll take some of that, those differences out of 'em and send to Tom's organization a little more consistent product. Now that happens on those cattle we don't know much about. On the other hand, the cattle we do know something about—we know where they came from, we know what the genetic capability is, we know the age, and I think we can send those to Tom or a company like his, they can do a little sort like they do, and we can have pretty consistent groups. But we have to recognize there's a certain number of millions of cattle that are going to just wander out of the hills and we don't know much about 'em, and we have to feed those, too. And like Tom said earlier, everything has value. They don't all have the same value, but they all have value and we need to build systems to manage those cattle too.
Tom Fanning:
When I think about it, I think about the issues of, if you're that cow-calf operator, on my ranch, what decisions am I making on which females I'm going to keep and which females that I'm going to cull each year? And I have a good friend of mine who has a great Angus herd, and if a female does not breed back in the first cycle, she is immediately culled out of his herd. And basically every female he keeps has her mother was a first-cycle breeder. So what he has selected for is that in quality in his cow herd, but that also creates a very consistent, uniform calf crop by managing his bull time, exposure time and all of those things. So there's a lot of management issues that can go back to the cow-calf that will help at the feedyard side when they come through that stocker-feeder phase and are ready to be finished. So, that's all I would add to that.
Pete Anderson:
There's a demographic challenge here that we need to deal with in the cattle industry, too. A typical pen in a feedyard is going to maybe be 150 head of cattle. That takes about 400 cows to fill if you want to have just one sex group within the pen, 500 cows if it's heifers and they keep some. There just aren't that many cow herds that are that big. So we know that some meaningful fraction of the cattle we feed are going to get mingled, they're going to get sorted, we're going to have changes in ownership. And that's one of the challenges in Tom's line of work that they have to deal with. And that's not going away. Now, we love single-brand, big strings of cattle, but it's pretty hard to fill up with those. There just aren't enough of those for most people.
Miranda Reiman:
Sure. We've been talking a lot about what the cow-calf guys can do to help create value for you guys, but really taking that back one step further to the Angus breeders that are a lot of our listeners. I mean, we always say they're the genetic engineers. What should we be doing genetically to help you feed them to these higher levels to get more of what creates value? You mentioned weight, carcass quality and avoiding discounts. So what should we be doing when we're back making matings?
Tom Fanning :
Well, my answer will be pretty short and sweet. I'm definitely not the expert in that area and what those guys and ladies have done so far, I'm so thankful for. I always say thank God for the Angus cow because she has created wealth and brought hundreds and hundreds and hundreds of families out of poverty into success. And so I'm going to say keep doing what you're doing, keep focusing on the future and where we think the industry's going, and keep working on those tools that you've been doing to provide those high-quality bulls. And I'd just say continue to do more of what you've been doing over the last five years.
Pete Anderson:
When we do analysis of closeout records and look at hundreds and hundreds of thousands of cattle, there are two things that mean more than any other for profitability in the feedyard. One is stay alive, and two is get really big. Okay? The next two things that are also very important but not quite as much are be efficient and earn carcass premiums. And of course the relative proportion of those things to each other depends on feed price and price of cattle. And so they move around. So you need to have dynamic models to decide what direction you're going in these things. But if you send us cattle to stay alive and get big, can be efficient and earn carcass premiums, we can do the rest. So, now obviously we have to do that, you do that very differently in South Dakota than you do in New Mexico. You do it differently in Idaho than you do in Georgia. The part I don't know much about is what are the environmental and other constraints on the cow herd? And they've obviously they've got to work for where they are, but within what's possible for the cow owner, send us those kinds of cattle if you can.
Mark McCully:
You guys see a tremendous amount of closeouts from different programs. As you think specifically about feed efficiency for us to think about, what kind of variation do you see between the good ones and the bad ones? I guess maybe it's the good ones I'm most excited about, but what's the opportunity to get better there from a feed efficiency standpoint?
 
Pete Anderson:
I think it’s pretty substantial. I’ve measured the rate of progress in the cattle business at about 1-1/2 percent a year for basically my whole career. And 1-1/2 percent doesn’t sound like a whole lot, but that means you got to be 10% better 6 years from now if you compound that. We have not seen feed conversion numbers change that dramatically over the last 15 years. But when you do the arithmetic based on the calorie efficiency of cattle that are coming in heavier and going out way heavier, you can track that improvement in efficiency because we are utilizing the calories more efficiently. It doesn't show up in feed conversions much as it does in bigger out-weights and the product we are creating. But I think there is way more opportunity. We regularly see cattle that can gain 5 pounds a day and convert in the 5s. And like I said, there's thousands and thousands of those. There used to be hundreds. But there's room for more.
Tom Fanning:
I would say the range that I see can easily be 1-1/2 pounds of dry matter conversion between what I would say the top 20% and the bottom 20% in any of our feedyards. And if you're putting on 750 pounds of gain, that's 1,125 pounds of feed that that high-quality animal did not have to eat to achieve the same outcome, which at current feed prices would be $185 a head. So when I talk to customers about their efficiency and their cattle, it's not just that $150 a head grid premium that they received, it's also $180 less feed that they ate to receive that $150 a head grid premium. So it's well over $300 a head versus that bottom 20% that we see throughout the feeding periods. So it's a big deal. It is a very big deal, and it always excites me to see those really efficient, high-performing cattle that are also high-quality graders.
Miranda Reiman:
And that $300 a head, if you're compounding that across the number that that bull has sired, you can assign a little bit of that value back to maybe putting your hand up in the air one more time or...
Tom Fanning:
Exactly. And that female that you decided to keep, right?
Miranda Reiman:
Yeah.
Tom Fanning:
She's half the issue.
Pete Anderson:
Let me add another layer to this conversation because I've done the backward analysis using closeouts to say, well, what would these cattle have been worth if we knew exactly what the performance would be? And I see the same differences as Tom does, and even bigger when you look at bigger data. So if you look at the very extremes, it can be $7 or $800 difference, and the feeder cattle market does not have premiums and discounts that high. So the difference in price is one amount. The difference in value is much greater than that. So, Miranda, you said maybe you could raise your hand one more time. I would argue, if you've got those kinds of cattle you need to feed 'em, okay, instead of selling 'em. And if you're raising cattle with that kind of capability, you don't want to let somebody else get all that benefit. You want to keep some of that yourself, too. And if you've got those outstanding cattle, you need to find a way to at least participate in the feeding part of it and capture some of that value.
Mark McCully:
At Feeding Quality Forum, Pete, you also presented in kind of a bit of a challenge to the genetic suppliers as we think about bending the curve a little between fat and marbling, and as we talk about taking some of these cattle, these big weights, we're probably putting a little more fat on 'em than ideal. There's a cost to put it on, there's a cost to take it off. And maybe a little of your thought process there as you looked at some of that data and thought about what the opportunities were.
Pete Anderson:
Well, there's no problem about it. We're absolutely doing that. We're putting a lot of calories into carcass fat that aren't necessarily helping the palatability. And again, we get what we select for. We've selected for marbling over the last several decades, but we haven't put selection pressure on external fat thickness to moderate that. And I think it's time that we do that. And if you look at that external fat doesn''t assist in enhancing palatability, it just costs calories. And we're already the premium protein, we're already the most expensive one, much more expensive than pork and poultry because people love it because it tastes better and God's favorite creature got the extra gene for deliciousness, right, we can charge that premium. But sooner or later we're going to be held a little bit accountable for the calories we're using from a sustainability standpoint, from a feeding the world standpoint. Everything we can do to be more efficient will help.
And so I would challenge Angus breeders or breeders of any breed to continue selection pressure for more marbling, but do it also putting pressure on at least not increasing external fat and maybe decreasing it. And Esther Tarpoff from the Angus association was very gracious, sent me a bunch of data on the young bulls in the breed. There's enough variation there that I know that there's opportunity to select for cattle that are positive for marbling and either flat or negative for external fat. So I know that the genetic variation exists to make some progress in that area, and I hope we can do that.
Mark McCully:
As you guys think about the future of the cattle feeding industry, are there some structural changes you anticipate, some things that are going to change the kind of cattle we need to be building? Are there any big things on the horizon, new technologies or anything that you're excited about or you think might be game changers?
Tom Fanning:
I don't see any huge changes in the future, but what I see is that the premium cattle, I mean we in the United States create the best product in the world as far as a Choice and Prime product that can be exported to those premium markets. And just like we saw with CAB's numbers on what the growth was on their CAB Prime program, I mean the growth in that program is huge this last year when there's been headwinds in the economy on overall restaurant sales and all of those issues. So again, one of the things we may have learned from Covid is people learned that they can cook a steak at home and they prefer to cook a really good one. And so I think we need to focus on all of those things and maintain and continue to improve the overall quality of that carcass. And like Pete said, the next challenge is to produce that high-quality carcass with less external fat that requires less calories, less feed, less days.
Pete Anderson:
Tom mentioned the incidence of Prime cattle. One of the really interesting things that's happened, we talked earlier in the conversation about going from 50 to 80 or 90% Choice as a population, but we've gone from 1 or 1-1/2 percent Prime to 10 or 12 depending on which season and which plants you're looking at. When there's only one or two per thousand in a packing plant, we can't build a brand around that. And so in the early days, it was a happy accident if a Prime one showed up, but nobody could plan to market that. Now we know we're going to have consistent supply, virtually every plant, every week, and that's allowed the industry to build brands around Prime, which has really enhanced the value of the cattle. It's a really, really cool thing. When Mark asked the question about changes, structure, that sort of thing we see, I'll tell you one thing that I worry a little bit about, and I don't see it happening and I hope it doesn't. But, if you look at the way pork and poultry are branded, it's mostly on social factors and things that weren't done: antibiotic- free or cage-free or that sort of thing.
In the cattle business, in the beef business, virtually all of the branding is based on quality. And I love that and I think that's great. And as long as we can maintain that to be the driver of the brands, whether it's CAB or other brands, rather than taking away some technologies or limiting our ability to be efficient, I think that'll help us dramatically. A thing I worry about is if that were to change, if consumers or brands were to tell us something different, that would impair our efficiency and I think that would be negative for the industry.
Miranda Reiman:
And, ironically, would hurt that overall sustainability really in the long run.
Mark McCully:
I always said that the sustainability discussion, in terms of doing more with less, is a platform and a stage for more technology, not less technology. And it seems those discussions tend to sometimes with the consumer go different directions and we need to make sure that doesn't happen.
How about cattle ownership? It's one of the things I think about. A lot of investors have gotten into cattle feeding as a part of their diversified investment strategy with maybe a $20 to $30 return on their investment. There's a lot more capital tied up to own cattle today. Is any of that potentially going to change? Will we see more retained ownership or will it be kind of business as usual there?
Tom Fanning:
I have a lot of customers that are also investor customers and ROI is what drives that. Plus, there's some other incentives that go along with that, whether it's tax strategies or whatever their business plan is. But it's with leverage. With leverage, that narrow margin return improves your ROI on an annualized basis. So if you have a $250 to $300 equity investment and are returning a $50 to a $100 return, you annualize that, you're sitting here with a 25, 30, 35, 40% ROI annualized. That's why investors want to feed cattle. Nobody is interested in having a $2,000 equity investment with a $20 return. You might as well go have a CD at the bank, but there's no fun driving by the pen or the bank and looking at a CD in the window. There's a lot of satisfaction in driving down the alley and watching your investment grow and grow and grow and literally grow until they reach that endpoint and you get to see.
So there's a lot of good and a lot of great energy that comes with actually owning the physical product and not just being that, well, I own a stock, I own a CD, I own this investment and I have no interest in it whatsoever. But we love our cattle. We get passionate about our cattle, right? And that's why sometimes when they're mine, I ask one of my fellow feedyard managers, Hey, what would you do in this situation? Because I'm all passionate about my personal cattle.
Mark McCully:
You're too vested.
Tom Fanning (01:01:26):
But with our risk management tools available, there's no reason to go into this thing blind.
One of my favorite sayings for customers is luck is not a factor, hope is not a strategy, and fear is not an option. We should not go into this hoping that we have a good outcome at the end and we hope that the market is going to take care of us. That is a horrible business plan. Be better than that. Have risk management program work with a feedyard partner that's going to help you and guide you, and those are the relationships you need to make to further your business. Because as a farmer, as a rancher, we're usually tied up with just so much capital resources. Maybe we have enough cash that we could expand, but we don't have the land opportunity, we don't have the labor, we don't have the family members that are coming back into it. So we can expand our operation by expanding and vertically integrating and retaining ownership up through the next level.
And there's ways to take those ownership opportunities and take it from your cow-calf business and then look at it on the next phase as an investor, right, and have separate P&L's and evaluate each one of those to make sure that they're adding value to your overall operation. So, I'm really bullish on the opportunity of custom feedyards in the future because I think there's more people that want to have that story behind that steak that they're eating, and that story starts with that seedstock and that cow-calf operator and it maintains that supply chain all the way through to the plate at the restaurant at Morton's of Chicago
Mark McCully:
Or a good Certified Angus Beef licensee.
Tom Fanning:
Okay. You can edit that one.
Mark McCully (01:03:36):
No, no, no, no. I know they buy Certified Angus Beef from time to time.
Miranda Reiman:
So hope is not a business plan. I like that. Is there anything else that you'd like to add, Pete, before I go to our random question of the week, which is how we always end.
Pete Anderson:
Tom had a great summary there. I like that.
Miranda Reiman:
All right, very good. Well, your random question of the week. This week, I want to know either what kind of day you're having or what you are doing when you think I'm doing the job I was meant to do. So describe to me when you have those moments that you think, yep, this is what I was meant to do.
Pete Anderson:
So the single most satisfying part of what I do, we've been fortunate to bring some of the most outstanding young people in the business into our company. We've got tremendous talent and I one, get to find those people and hire 'em, and two, I get to mentor and coach and teach them. I just love doing that. So when I'm helping somebody get to where they want to go career-wise, reach their goals, that's when I feel like I'm doing something useful and that's where I like to be.
Miranda Reiman:
I like that.
Tom Fanning:
For mine, it would be when I'm on the phone with that customer and we're going over the grid results and their cattle feeding results and they're like, wow, that's amazing. I'm like, yeah, and you did that. That is amazing. They're excellent cattle and you keep improving them. And I mean, that's the highlight of my day is to being able to call that customer and go over the grid results and go over their feeding results and share that data back with them so they can start tweaking that next change they're going to make. That data-driven management is so exciting. And to see those continuing improvements, it just gets me pretty jacked up.
Miranda Reiman:
And probably way more fun than the times when they're shocked in a negative way. When you get a first-time customer.
Tom Fanning:
Taylor has to make those phone calls.
Miranda Reiman:
That's perfect. You know you've made it when you don't have to make those calls, right? Very good. Well, thank you guys for taking the time to visit with us today. I know morning in a feedyard is go-time, so thank you, Tom, for taking that time and, Pete, for stopping what you were doing to visit with us.
Mark McCully:
Yeah, you guys are both great leaders, great minds in our industry, and so we're thankful for that and thankful you'd come and share some of that with us here today. And I know it'll be for Angus breeders and all our listeners. The cattle feeding industry, I think, is one that a lot of folks, if they've not had exposure, there's lots of moving pieces and parts and things that maybe they never considered. So shedding some light on just a few of those here today has, I know, been super valuable and we appreciate you both doing that so well. So, thank you both.
Tom Fanning:
You're very welcome. Thank you for letting us be here.
Miranda Reiman:
If that conversation spurred questions for you, we have an opportunity to get them answered straight from the source. Dr. Pete Anderson will be presenting an Angus University webinar followed by a live Q&A on this topic in November. Just watch angus.org for more information on how to get registered. Or, for an opportunity to catch up live and in person, we are just a few weeks away from Angus Convention. Really looking forward to having a lot of conversations with breeders, so stop by our Angus Media booth, number 759 in the trade show, or catch us in the hallways as we're headed to cover the educational and informational sessions on the program. Until next time, this has been the Angus Conversation, an Angus Journal podcast.