McDonald's sets the bar when it comes to quick-service restaurants, making it the biggest customer for U.S. beef producers. When the company announced it was testing Australian and New Zealand beef in some outlets, U.S. producers asked for a serious explanation.

When McDonald's announced it would be purchasing beef from Australia and New Zealand, U.S. beef producers were roiled. Though the foreign beef was directed to only 400 of the company's 13,000 domestic stores, U.S. ranchers and feeders took umbrage to the fact that McDonald's would purchase foreign beef when domestic prices were low and beef supply high.

A crowd of farmers and ranchers, nearly filling the arena at the Joplin Regional Stockyards in late July, focused their consternation about the situation on John Hayes, McDonald's senior director for U.S. food and packaging. He was there to offer the fast food chain's explanation for purchasing foreign beef.

According to Hayes, McDonald's is running the deliberative and long-term test with Aussie and Kiwi beef because it has seen a trend of decline in supply for the domestic lean trimmings market. Meanwhile there is a strong and increasing demand for lean ground, for which lean trimmings are a component.

For those not familiar with the inner workings of the meat industry, it may be helpful to explain that the predominant source for lean trimmings is from culled cows--cows that have served their productive calving life and been sent to slaughter. They're lean because they've been on grass throughout their lives rather than grain-fed diets like animals destined for choice meat cuts.

Chains like McDonald's buy lean ground beef from the non-fed-cattle market and mix it with fattier trimmings from the fed-cattle market. Their goal is a desirable lean ratio. McDonald's buys nearly a billion pounds of U.S. beef annually. That's about twice as much as the second largest purchaser of U.S. beef.

University of Missouri agricultural economist Ron Plain said that if you look across the board, there isn't a shortage in trimmings, but for chains like McDonald's, who mix fatty trimmings with lean trimmings to meet a certain fat to protein profile, the leanest trimmings are important.

"They've got to start at a very high percent lean trimming to get where they want with the final mix. We do see a real serious shortage for 90 percent lean trimmings," he said. "McDonald's is simply going to the international market to buy those high-lean trimmings.

Hayes says McDonald's first choice is to buy U.S. beef as well as other products. McDonald's, he said, needs a strong local agriculture because of the sheer volume it pushes through its chain. He uttered a barrage of mind-bending statistics. In most purchasing categories, McDonald's is the largest domestic user, including annual purchases of: 250 million pounds of pork; 156 million dozen eggs and 60 million gallons milk. These numbers have grown as the chain's stores have mushroomed to 13,000-plus in number.

Aside from the quick-service restaurant industry's increasing demand for lean trimmings, Hayes said that grocery stores are buying more of the product. He said the typical blend for lean to fat in the grocery used to be 75/25 hamburger. Now it's in the 90-percent lean range. The only way to get that lean is to add something else. And increasingly that's a cull-cow product. Thus, the reported dilemma of high demand and low supply of lean products.

On a side note, Plain said he has long contended that fat beef trimmings are an unparalleled success for U.S. agriculture when it comes to adding value. He said it's a product that could be rendered into tallow and sold for a few cents per pound, "but when mixed with imported lean trimmings, it sells at retail for a buck a pound."

Hayes said McDonald's went to as many sources as it could to verify it had the right outlook on supply trends, including the USDA and National Cattlemen's Beef Association (NCBA).

He added that additional pressure on the ground beef market is likely. "Ground beef is the only category in red meat that has never had a market decline. It is now close to 50 percent of the market," he said.

The amount of beef imported into the United States from a particular country is set up on a tariff rate quota (TRQ) system. For countries that import to the United States, the quota allows a predetermined amount of beef into the country before a punitive 26.5 percent tariff rate kicks in. If importing counties exceed their quota they can continue to send beef to the United States, but must pay the high tariff, which effectively prices them out of the market.

A recent position paper from the NCBA offers details on the mechanics of the quota system. According to the NCBA, "The 26.5 percent U.S. tariff has been effective in stopping additional imports in years when countries have filled their TRQ. Even with currencies of most exporting countries depreciating against the U.S. dollar in recent years, the tariff has resulted in product being placed in bonded storage until the next year's TRQ became effective. Rarely, if ever, has product continued to be imported subject to the 26.5 percent duty once a country has filled the TRQ."

Beef product remains in bonded storage until the TRQ for the next year becomes effective and is then released into the market, counting against that year's quota. But historically, exporting countries have rarely filled their beef TRQs so tariffs have had no effect.

Hayes says McDonald's won't ask for an increase in the quota. He also points out that all of the quota beef that does make it into U.S. markets would be used whether McDonald's bought any of it or not--snapped up by other quick-service restaurants and demand for lean in grocery outlets. Plain agrees. He said that the big picture is that McDonald's is going into a market of imported beef that is cheaper than domestic sources because of supply and demand. McDonald's, he said, may be improving its margins a little, but it will come at the sacrifice of margins for grocery chains and others who already buy the imported lean.

Finally, Hayes says that every McDonald burger has U.S. beef in it. The Aussie and Kiwi beef being used in the test market is used as lean blend.

He adds that because of the demand, McDonald's has paid 20 percent more for the lean trimmings over the past 5 years.

Hayes encouraged the producers gathered at Joplin to increase herd size, something that's not likely during periods of low prices. Asked if there was an opportunity for U.S. producers to tap into the lean beef demand, Hayes said he could see a three-tier cattle market in which fed cattle filled the top tier followed by grass-fed or some middle-tier market with the cull-cow market being the lower tier.

From an economic standpoint, it is unlikely that producers could direct valuable feeder-type animals into a middle-range price structure. Moreover, land used for grass-fed feeder cattle would possibly come at the expense of land used for cow/calf herds, affecting total national herd size.

Plain said that for some sort of domestic supply of grass-fed beef to grow toward the supply needed for McDonald's, it would have to dip toward parity with the cull-cow market. "The other option that would end the shortage for lean trimmings is $5 corn," said Plain. Last time we saw $5 corn, calf prices slid to 60 cents a pound, a sight, he said, that few cattlemen want to see again.

There were pointed questions from the crowd (including several producers mentioning that they have boycotted McDonald's since the announcement) but producers listened intently. One producer, near the end of the presentation, said that it seemed like the industry might have let this trend sneak up. And that rather than boycotting their best customer, producers might want to take a look at the market and see if there is a way to adjust to meet this niche demand.