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Front Gate: A Value-Added Checkoff

20:38PM Jul 29, 2008

The Cattlemen's Beef Board (CBB) has asked for suggestions to improve the checkoff program. Here's mine: A VAC: Value-Added Checkoff.

Like the value-added tax so popular in Europe. Similar to how soybean and pork checkoff programs work here. Like we talked about the first time around.

A VAC plan is fairer, easier to collect and to police than the current program. Now we collect $1 per head every time an animal trades, which might be three or four times.

The current system is not fair. If a dairy farmer sells a bull calf for $5, he is supposed to pay the checkoff $1. That's 20% of the value of the whole darn calf. If a purebred breeder sells a fine Angus bull for $10,000, he is supposed to pay the checkoff $1. So, 0.01%. If he sells a million dollars worth of such bulls his contribution to the checkoff is $100. At the same time, a 25,000 head capacity feedlot pays $25,000 on every turn of cattle.

The dairy farmer, who probably doesn't care if beef demand is good or not, was asked to pay 20% of his gross sale, while the purebred breeder, whose business depends on beef demand, pays next to nothing. The feeder, trying to squeeze $10 or $15 a head out of his high volume, kicks in as much as dozens of purebred breeders.

One way I've seen suggested to make the system fairer would be to base the checkoff on the weight of the animal. That's better, but basing off the value is best. Choose your own VAC level, but for purposes of clear discussion, let's say that we set the checkoff at 1% of sales value.

Brass tacks. In that case, a calf producer would owe $1 on a $100 calf. It would be collected only once, at harvest, then packers would pay it. Until harvest, I'd have buyers deduct the checkoff from the sale price—say $260 on a $26,000 load of calves—and hold it until the calf sells.

No longer must our recalcitrant friends in the livestock auction barns process the checkoff payment. They just pay the seller 99% and charge the buyer 99% of the sale price. That's pretty easy.

If I'm a feeder buying your calf for $800, I really just pay you 99% of $800, deducting your $8 checkoff. Then, when I sell the calf for $1200 as a fed steer, the packer deducts $12. But my actual bill is just on the value I've added, so $4. It doesn't matter how many times the animal sells.

When the fed steer finally sells for $1,200, the packer deducts the $12, and sends it to the CBB. The Beef Board then remits half of that to each state based on cow populations, perhaps adjusted a bit for cattle on feed in each state. That's pretty easy to collect.

Right now, there is—by rumor mind you, nothing I can prove—some "slippage." Where perhaps I buy a steer from you direct, deduct your dollar and then forget to send it in.

With the VAC, it's all handled at the packer. Easy to police. If you and a buyer strike a deal to cut out the checkoff, that's fine for you. But the buyer is still out the money when the calf sells. We would probably need to collect in the country on breeding cattle, but that's no different than now.

Why it works. There are many reasons I like the concept:

-No free rides except perhaps on deads and why should the buyer pay a checkoff on an animal that died?

-It will adjust to this business of fewer trades. As we get more programs that don't involve as many changes of ownership, the final sale price is all that matters.

-Collecting just once from an already monitored packer will make the CBB's job easier.

-It should adjust with inflation, at least as much as cattle prices do. Had we set a VAC back in 1986 that resulted in $1 per head based on the 40¢ fed cattle price of that day, it would have adjusted to be more than $2 per head today and we wouldn't be having this discussion.

-If the price of cattle goes down, the checkoff goes down. I'm not sure that's all good because the last thing you want to do in down times is reduce your marketing. But producers will pay less when they have less to spend.

-It is fairer because the value-added concept means those who profit more pay more. The dairy calf producer pays next to nothing because he doesn't get much. But the feedlot operator who makes the steer into beef does pay.

This plan would leave the cow-calf operator paying the biggest share, I suppose. That is how it should be. A cow-calf operator—with his finite set of resources and more fixed costs—is the one who benefits the most from increased beef demand. The yearling operator or feeder gets some benefit from higher prices and more cattle, but historically they bid most of the profits into what they pay the rancher.

And so there's the argument. Everyone in the beef business benefits from the demand we hope the checkoff generates. But those benefits don't accrue at a regular rate of $X per head or cwt. across sectors.

Forget the 1% if you want. Pick another number. It's just easy to illustrate. On cattle marketings of 30 million head, about $150 million would go to beef programs. That's not far from the inflation-adjusted value we started with in the ‘80s. But it's fairer. It's easier to collect and monitor. And it would roughly adjust with inflation. What's not to like?