Lamb industry value based pricing report for 2014
November 25, 2014
Submitted by the Roadmap Implementation Team Sub-Committee
Cody Hiemke, Dennis Stiffler, Rick Stott & Wes Patton
November 20, 2014
The Sheep Industry Roadmap identified value based pricing (VBP) as one of the critical things for the sheep industry to adopt. A subcommittee evaluated VBP and produced a white paper that can be read in its complete form at http://www.lambcheckoff.com. The following is a summary of that paper.
Value based lamb pricing is price discovery that provides market signals to produce a specific type of lamb. Value can be determined within terms of cutability and consistency attributes that are quantifiable on an individual carcass (weight, fat cover, grade, muscling, etc.) and/or might include production practice requirements (ABF, grass-fed/finished, age requirements, traceability, etc) that will increase efficiencies within the production system and/or increase the consumer demand/price. This value is captured from the consumer, then passed to the packer's customer to packer to feeder, from feeder to lamb producer and on to seedstock producer.
Consumers list high price, poor quality (e.g., flavor) and inconsistency as major deterrents to purchasing lamb.
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The majority of lambs are currently sold on a weight basis, not on a VBP system. Proper VBP incentives will be structured to focus on reducing these consumer deterrents.
The advantages of marketing lambs on a VBP system would include providing incentives for high quality lambs and lamb products, better meeting the consumer's expectations, reducing excess fat, and inconsistent quality and increasing the demand for American lamb. Premiums for "off-season" lambs can also improve year round supply of high quality products. Producers may need to change their production practices to take advantage of the premiums offered.
On the other hand, poor quality will be penalized at each stage of production from the producer to the consumer. Initially, there will be increased costs at each segment of the industry to establish VBP systems that will pay dividends and make the industry more sustainable.
For the supply of lambs to grow, good producers need to be consistently profitable in a stable market. They must have the incentive and confidence to invest in their production. The consumer has proven to be willing to pay a higher price for products, whether it's lamb, beef or any other product, when that product is consistent and is of high quality.
The lamb industry must change its course and it will require restructuring the marketing system. Weight, in and of its self, cannot continue to be the dominant market value driver. Value Base Marketing will enable the industry to grow and prosper by rewarding the individual quality attributes of the lamb carcass and its parts and provide a higher quality, consistent product to the consumer.
This committee is united in stressing the importance of increasing Value Based and Grid Pricing and encourages: 1) the feedback of data through the entire production chain, 2) all packers to strive to increase their grid-based pricing to over 80% driven by increased consumer demand, 3) Feeders and producers to use the best data available to produce the highest quality lamb, and 4) Commercial and Seedstock producers to respond to these lamb quality indicators.
The Implementation Committee is investigating how instrument grading can improve the consistency of grade determination which is essential for VBP. The Demand Creation and Product Characteristics teams are concentrating on measurable characteristics of lamb products that have value to the consumer. When identified, these characteristics can be incorporated into VBP grids to increase consumer demand for American Lamb.
–American Lamb Board