Black, J. Roy

Hilker, James H.

Hogberg, Michael

Raper, Kellie Curry

English

Research Papers in Economics

Assessing Bottlenecks in Vertically Organized Beef Systems
Kellie Curry Raper, J. Roy Black, Michael Hogberg, and James H. Hilker
Historically, the U.S. beef industry is an industry of 
adversarial relationships between supply-chain lev-
els, in large part due to information asymmetries and 
the perception of one-sided opportunistic behavior. 
However, many of these adversaries have moved 
toward vertical organization through strategic alli-
ances and formal vertical arrangements in recent 
years (Ward and Estrada 1999). Vertical organiza-
tions in the beef industry have taken various forms 
including cooperatives, alliances, contracting, and 
combinations thereof. Such systems are often an 
attempt to control quality characteristics in the end 
product delivered to the consumer and require tight 
coordination at each level within the chain. Incen-
tives to change producer focus are built into the 
system to encourage marketing high-quality animals 
or animals that speciﬁ  cally meet the system’s prod-
uct goals (Anton 2002). Others have organized in 
efforts to reduce marketing risk. Regardless of the 
motivation for organizing, some of these vertical 
alignments have been quite successful (e.g. Certi-
ﬁ  ed Angus Beef), others have failed miserably (e.g. 
Future Beef), and still others are struggling to keep 
the components together. 
Though the costs and beneﬁ  ts of vertical or-
ganization in the beef industry have been widely 
discussed in the literature, there has been little 
empirical analysis of vertical relationships. Most 
studies that have addressed vertical relationships 
focused on issues of market power (e.g. Azzam 
1998; Ward et al. 1999). This study seeks to 
increase understanding of evolving vertical re-
lationships in the beef industry. This research 
surveys participants in vertically organized beef 
groups, including seedstock producers, cow/calf 
producers, stocker/backgrounders, and feedlots. 
Respondents were asked to rate their motives for 
joining an alliance or other vertical organization 
and to rate how well the alliance or vertical or-
ganization met their expectations with respect to 
those motives. 
According to den Ouden et al. (1996), vertical 
cooperation is deﬁ  ned as the relationship between 
individual ﬁ  rms or organizations in two or more 
adjacent stages of the production-marketing chan-
nel without full ownership or control by individual 
ﬁ  rms. Here, we deﬁ  ne vertically organized beef 
groups as groups where two or more adjacent 
stages of the beef production-marketing channel 
have a mutually deﬁ  ned ongoing relationship. It 
should be noted that our deﬁ  nition does allow a 
degree of ownership in that we allow those stages 
to be linked in a cooperative format. The sample 
frame was obtained via membership lists of verti-
cally organized beef systems. This was facilitated 
primarily through personal contact with system 
administrators and university extension personnel 
in the beef industry. 
Summary results here represent 30 respondents 
from 4 vertically organized beef groups. A total of 
215 mail surveys were sent out, with a response rate 
of 14%. Respondents are distributed through live-
market cattle-production stages as follows: 30% 
participate at the seedstock stage, 90% participate 
at the cow/calf production stage, 43% are stocker/
backgrounders, and 40% participate at the feedlot 
stage. Note that several respondents participate in 
multiple production stages, as is common in the 
beef industry. In particular, it is not at all uncom-
mon for cow/calf producers to also be in seedstock 
production or to background their own cattle. On 
average, respondents had been involved in a vertical 
beef system for 4 years.
In this paper we begin by deﬁ  ning categories 
of motives. A summary of respondents’ ratings of 
motives is followed by a summary of their ratings 
of how the alliance has met their expectations with 
respect to those motives. We then compare ratings 
across motive and performance with respect to 
expectations. We close with an impetus for further 
research. 
The authors are assistant professor, professor, research associate, 
and professor, respectively, Department of Agricultural 
Economics, Michigan State University, East Lansing.
  This research was supported by the Michigan Agricultural 
Experiment Station, the Livestock Marketing Information 
Center, and the Five State Beef Consortium.
  The authors thank Clem Ward, Oklahoma State University 
for his useful comments in survey design. We also thank Harlan 
Ritchie and Steve Rust, Michigan State University, Department 
of Animal Science, for their input and Amanda Bailiff for her 
research assistance.Journal of Food Distribution Research 36(1) 152   March 2005
Why Vertical Organization?
Motives for joining a vertically organized beef 
group can be classiﬁ  ed in ﬁ  ve basic categories: 
Price and Risk, Quality Enhancement, Cost Reduc-
tion, Information Sharing, and Business Culture. 
We recognize that the categories are not mutually 
exclusive; that is, a motive to increase quality may 
also be tied to a motive to increase price. Addi-
tionally, increasing access to information facilitates 
quality improvement. However, it is also useful to 
assess the rating of each motive separately. Price 
and Risk motives are those that either increase 
the price received by the participant or reduce 
the market risk for the participant. They include 
earning premiums, access to niche markets, pool-
ing calves for consistent lots, pooling calves for 
quantity, and reducing uncertainty and risk. Qual-
ity motives are deﬁ  ned here as source veriﬁ  cation, 
quality improvement, source of consistent qual-
ity, and source of higher quality. Production-cost 
motives include those activities which ultimately 
reduce the production cost of live cattle. Here, they 
include reducing duplication of animal health costs, 
reducing commission costs, reducing harvest age 
of cattle, and reducing feed cost per unit of beef 
produced. Information-sharing motives are those 
that increase the information ﬂ  ow between partici-
pants and the marketplace. They are deﬁ  ned here 
to include accessing carcass information, help 
with interpreting carcass information, and access 
to management expertise. Business-culture motives 
included in this study attempt to capture whether 
the participant was enticed to join because of 
similar business goals, similar business cultures, 
or because of a good match with alliance product 
or process speciﬁ  cations. 
Motivation Ratings
Respondents were asked to rate several motives for 
participating in a vertically organized beef group 
on a scale of 1 (very important) to 7 (not at all im-
portant). Results by category are discussed below. 
Overall results are presented in Table 1.
Price and Risk
Not surprisingly, earning price premiums and reduc-
ing risk were rated highly. Respondents consistently 
rated “Earn Premiums” high, with 89% of respon-
dents rating this motive either “Very Important” or 
“Important.” Respondents gave it an average rat-
ing of 1.54, making it the highest-ranked motive 
among those included in the study. Respondents also 
indicated that risk reduction was a signiﬁ  cant mo-
tive for participating in a vertically organized beef 
group. “Reduce Uncertainty/Risk” was rated “Very 
Important” or “Important” by 58% of respondents 
and received an average rating of 2.42. 
Quality Enhancement
“Quality improvement” as a motive for participation 
received the third-highest rating from respondents, 
with an average rating of 2.04 and 75% rating it as 
“Very Important” or “Important.” Producing cattle 
with more consistent quality and with higher quality 
are both aspects of quality improvement and both 
are rated as at least somewhat important (2.58 and 
2.89, respectively). 
Cost Reduction
In general, cost reduction was not ranked highly 
relative to other groups of motives for participating 
in a vertically organized beef system. None of the 
four cost-reduction motives received an average 
rating under 3. However, given the nature of most 
vertically organized beef systems, this is not surpris-
ing. For many such systems, the focus is on evolving 
toward a product-oriented or value-focused produc-
tion system rather than a commodity-oriented or 
cost-focused production system.
Information Sharing
Information plays an important role in economic 
markets. Respondents indicated that the most impor-
tant aspect of information with respect to vertically 
organized beef systems is access to performance 
information once animals are slaughtered. This 
motive received the second-highest rating among 
all motives in the study, with an average rating of 
1.81. Additionally, 81% of respondents rated it as 
“Very Important” or “Important.” Clearly, those 
involved in the beef industry at these production 
stages see the importance of accessing information 
about the quality of their end product. Interestingly, 
help with interpreting that performance information 
and access to management expertise were both rated 
substantially lower. Raper, Black, Hogberg, and Hilker Assessing Bottlenecks in Vertically Organized Beef Systems   153
Table 1. Beef System Participants’ Rating of Motives1 for Joining a Vertically Organized Beef System 
and Beef-System Performance2 With Respect to Those Motives.
Motives
M
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Earn premiums 1.54 89 3.44 33 -1.90
Access to specialty/niche markets for beef 3.14 41 3.05 38 0.09
Pooling calves for consistent lots 3.41 41 3.55 18 -0.14
Pooling calves for truckload lots 4.12 24 3.9 20 0.22
Reduce uncertainty/risk of marketing cattle 2.42 58 3.36 27 -0.94
Source veriﬁ  cation 3.50 33 2.71 43 0.79
Quality improvement 2.04 75 2.8 50 -0.76
Source of consistent quality cattle 2.58 74 2.73 47 -0.15
Source of higher quality cattle 2.89 63 2.8 40 0.09
Reduce duplicate animal health costs 3.47 42 3.07 43 0.40
Reduce commission costs 3.91 30 4.65 12 -0.74
Reduce maturity/harvest age of cattle 3.63 26 2.92 42 0.71
Reduce feed costs through increased daily gain 3.16 42 3.6 27 -0.44
Access to carcass/performance information 1.81 81 2.08 71 -0.27
Help with interpreting carcass/performance informa-
tion
2.67 63 2.92 46 -0.25
Access to expertise that helps my management 3.08 44 3.52 22 -0.44
Common desire to provide beef with the product at-
tributes that Alliance places value on
2.72 52 2.77 50 -0.05
Good match of pricing grid with your cattle 2.15 70 2.5 63 -0.35
Good match with Alliance Partner’s speciﬁ  cations 2.59 48 2.78 48 -0.19
Good match with Alliance Partner’s business culture 2.61 61 3.04 48 -0.43
Good match with Alliance Partner’s business/
marketing skills
2.68 56 2.7 48 -0.02
1Scale: 1= Very Important to 7=Not at all important. 2Scale: 1=Excellent to 7=Very PoorJournal of Food Distribution Research 36(1) 154   March 2005
Business Culture
The most important aspect of business culture for 
respondents appears to be a good match of the beef 
system’s pricing grid with the cattle that are already 
being produced. It received an average rating of 
2.15, with 70% of respondents rating it as “Very 
Important” or “Important.” Results indicate that, at 
least for this group of respondents, the least-impor-
tant aspect of business culture is a commonality of 
desire to provide speciﬁ  c product attributes. 
Perceptions of Alliance Performance
The second portion of the study attempts to capture 
participants’ perceptions of alliance performance. 
Respondents were asked to rate how well the alli-
ance had met their expectations with respect to their 
motives for joining. Results for this portion of the 
study are also given in Table 1. Table 1 also includes 
a measure of the difference between participants’ 
average rating of individual motives for joining beef 
systems and participants’ average rating of the beef 
system’s performance with respect to that motive. 
Price and Risk
While “Earn Premiums” was the highest rated 
motive for joining a vertically organized beef sys-
tem, respondents indicated that, collectively, their 
systems had only been average (3.44) in meeting 
their price-premium expectations. In fact, this 
category exhibited the highest difference between 
the average sample rating of the motive and the 
average sample rating of how well the beef group 
has met expectations with respect to that motive (-
1.90). Inquiries regarding expected per-head proﬁ  t 
increases and actual per-head proﬁ  t increases bear 
this out as well. Average expected proﬁ  t increase in 
the sample was $59 per head, while actual per-head 
proﬁ  t increase was only $30. (Though this number 
falls below producer expectations, it does represent 
a signiﬁ  cant increase in proﬁ  t.) Additionally, beef 
groups in the sample have fallen short of expecta-
tions in reducing the uncertainty and risk involved 
in marketing cattle. The average sample rating 
for undertainty/risk reduction as a motive is 2.42, 
while respondents rate performance with respect to 
uncertainty/risk reduction at only 3.36. 
Quality Enhancement
When respondents were asked to rate beef groups’ 
performance with respect to quality-related motives, 
performance ratings were very consistent across 
various aspects of quality motives. Performance 
for each of the four motives (Source veriﬁ  cation, 
Quality improvement, Source of consistent quality 
cattle, Source of higher quality cattle) received an 
average sample rating between 2.7 and 2.8. Addi-
tionally, the performance ratings are relatively con-
sistent with the level of importance placed on the 
quality motives as reasons for joining beef groups. 
Interestingly, though, the difference between the 
motive rating and the performance rating for 
“Source of consistent quality cattle” and “Source 
of higher quality cattle” are negligible, while the 
performance rating for “Quality Improvement” is 
0.76 less than the motive rating. 
Cost Reduction
For cost-reduction motives, the average sample rat-
ings are also relatively consistent with the level of 
importance given to motives as reasons for joining 
beef groups. That is, the various aspects of cost 
reduction do not appear to be strong motivating 
factors (3.16 to 3.91), nor does it receive high marks 
with respect to beef-group performance (2.92 to 
4.65). In fact, “Reduce commission costs” received 
the second-lowest rating for motives (3.91) and the 
lowest rating for performance among all motives 
(4.65). Again, the results for the cost-reduction 
categories may simply be an illustration that the 
focus for many vertically organized beef groups is 
adding value rather than reducing costs. 
Information Sharing
Results indicate that vertically organized beef 
groups in the sample have performed well, from 
participants’ perspectives, in providing access to 
carcass/performance information. In fact, “Access 
to carcass/performance information” received 
the highest average performance rating in the 
study (2.08). Recall that participants also rated it 
highly as a motive for joining beef systems (1.81). 
Performance with respect to “interpretation of 
carcass/performance information” and “access to 
management expertise” was rated lower (but still 
average or above); however, they are also rated as Raper, Black, Hogberg, and Hilker Assessing Bottlenecks in Vertically Organized Beef Systems   155
less-important motives than access to the informa-
tion itself.
Business Culture
Overall, the performance ratings of beef groups with 
respect to business culture are strikingly similar to 
the level of importance that sample participants 
place on these motives. The highest-rated indi-
vidual aspect of business culture is “Good match 
of pricing grid with your cattle” (2.5). In general, 
the results for the broad category of business cul-
ture is above average, suggesting that participants 
generally choose to participate in beef groups that 
have a culture similar to their own.
Summary
The greatest challenge to successful beef systems is 
vertically organizing the beef supply chain in a way 
that adds value to the ﬁ  nal product and that mutually 
satisﬁ  es the objectives of the diverse participants 
in the system. Results from this preliminary study 
suggest that the vertically organized beef systems 
included here met participants’ expectations with 
respect to information access, quality improvement, 
and business culture at nearly the same level of im-
portance that participants gave to those motives for 
joining the system. Additionally, participants gener-
ally did not enter beef groups with strong motives 
of lowering costs, nor did they rate beef groups’ 
performance strong in this area. Interestingly, the 
largest disparity in the study is between participants’ 
motives and participants’ perceptions of beef group 
performance with respect to price premiums, though 
the average increase in proﬁ  t per head reported by 
the respondents is certainly appreciable. Given 
that the study reports participants’ perceptions, it 
is important to recognize that the source of this 
disparity between motive and performance may 
stem from unrealistic proﬁ  t expectations or from 
poor performance on the part of the beef group. The 
study suggests that further research would include 
an examination of beef-system administrators’ 
perceptions as compared to those of beef-system 
participants.
References
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Azzam, A. 1998. “Captive Supplies, Market Con-
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Journal of Agricultural Economics 80:76–83.
Den Ouden, M., A. A. Dijkhuizen, R. B. M. Huirne, 
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Assessing Bottlenecks in Vertically Organized Beef Systems

Assessing Bottlenecks in Vertically Organized Beef Systems

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