By Lisa Baertlein and P.J. Huffstutter
(Reuters) - After nearly a decade of relying on weight-gain feed additives as a lifeline to survival, some of the 75,000 U.S. cattle feedyards that dot rural America in places such as Texas and the Great Plains, suddenly must do without the leading product Zilmax - nicknamed "Vitamin Z."
Merck & Co's announcement on Friday that it was suspending the sale of Zilmax in the United States and Canada surprised many cattle owners and feedlot operators, who say Zilmax and other beta-agonists have been a godsend for a struggling U.S. beef industry that saw overall domestic consumption fall more than 8 percent between 2002 and 2011.
"Sometimes it's the difference from breakeven, or even loss, and profit," said Jhones Sarturi, an assistant professor of beef cattle nutrition at Texas Tech University.
The feedyard business may seem simple to outsiders - roughly double the weight of young cattle to around 1,300 pounds with a few months of feeding, then send them to slaughter - but its economics have become brutal, and the number of feedlots has shrunk by one-fifth over the last decade.
Soaring feed costs in the wake of the worst U.S. drought since the Dust Bowl and fierce demand for light corn supplies by ethanol makers resulted in cattle ranchers thinning herds. That led to too few animals to fatten up and too many feedlot operators and packing houses scrambling to get them. Adding to the industry's woes, U.S. retailers are reluctant to raise prices in fear of alienating recession-weary U.S. consumers, who are willing to shift to less expensive proteins such as chicken and ground beef.
But with the help of Zilmax, and its rival livestock drug Optaflexx, made by Eli Lilly & Co's Elanco Animal Health Unit, many feedyards say they have found a way to reduce some of the economic pain. Mixed into feed in the weeks before slaughter, beta-agonists can add as much as 30 pounds of saleable meat to a carcass.
The Livestock Marketing Information Center in Denver calculated that feedlots in July, on average, lost about $82 per head of cattle sold to meat companies, the 27th straight month of losses. Industry calculations indicate the use of beta-agonists such as Zilmax and Optaflexx mitigated those losses an estimated $30 or $40 per head, said center Director Jim Robb.
Kansas-based Pratt Feeders sells cattle to the big U.S. meat companies: Tyson, Cargill, JBS USA and National Beef. Even so, Pratt closed one of its four feedlots in the past year due to the drought.
Things could have been worse, said Jerry Bohn, general manager at Pratt Feeders, which feeds Zilmax to some of its cattle and Optaflexx to others.
"It didn't heal us up - but it helped us," Bohn said of beta-agonists.
Tyler Karney, manager of Ordway Cattle Feeders in Colorado, said his confidence in the drug is unshaken by recent events: "Merck's decision to halt sales of Zilmax doesn't change my opinion of the product, or Merck."
But at least two of the nation's largest meat packers, who buy such cattle, are taking a more cautious stance.
Tyson Foods Inc, the biggest U.S. beef processor, said on August 7 it would no longer accept cattle fed with Zilmax, the leading brand of a drug type called beta-agonists.
Reuters on August 13 reported that JBS USA, prior to Tyson's announcement, played short video clips at an industry conference showing cattle fed beta-agonists that were reluctant to move and stepping tentatively as if on hot metal.
When Tyson said it would suspend purchases of Zilmax-fed animals, the company, which slaughters one in four of the nation's beef cattle, said it had observed similar behaviors in some animals delivered to its facilities. The company said it did not know what was causing the behavior, but animal welfare experts had told the company that Zilmax may be a cause.
In the days that followed, Merck said its own research had shown that Zilmax was not to blame for what was happening at Tyson's plants. Feedlot operators who spoke with Reuters said they had not seen the problems that have sparked the concern among packers.
On Friday, Merck said it needed time to implement what it called an "audit" of how Zilmax was being used in the field. The giant drug company said the suspension was temporary, and offered no explanation of why it was being imposed only in the United States and Canada, marketplaces that account for sales of $159 million. Merck does not disclose global sales of Zilmax.
Merck's decision spurred "lots of talk and lots of confusion," said Ken Winter, owner of Dodge City, Kansas-based Winter Feed Yard.
THE SAFETY QUANDARY
Despite scattered reports of some distressed cattle from animal welfare experts, JBS USA and Tyson, Merck said it was not aware of any problems beyond those observed and taken into account when Zilmax won U.S. Food and Drug Administration approval in 2006.
The product makes up a tiny fraction of Merck's $47.3 billion in global sales. U.S. and Canada sales of Zilmax account for less than 5 percent of the $3.4 billion reaped by Merck's animal health business last year.
While markets such as China and the European Union have banned imports of meats raised with beta-agonists, in the United States, more than 70 percent of U.S. beef cattle that go to slaughter do so after consuming a regimen of beta-agonist drugs, according to industry estimates.
The FDA has deemed beta-agonists safe both for farm animals and human health, and there has not been a suggestion by regulators or industry that food safety is in question.
But the beef industry has learned the hard way that concerns about how our food is produced can mushroom quickly.
Outrage erupted on Twitter and other social media sites last year after consumers found out that everything from U.S. school lunches to fast-food hamburgers used so called "lean finely textured beef," a low-fat product made from chunks of beef, including trimmings, and exposed to tiny bursts of ammonium hydroxide to kill E. coli and other dangerous contaminants. The resulting media storm over what critics dubbed "pink slime" nearly destroyed the product's maker, even though U.S. food safety regulators said it was safe.
Concerns over another backlash against beef may help explain why meat companies have spoken publicly about their beta-agonist concerns, livestock experts and consumer advocates said.
"Consumers have no idea that these drugs are being used and that they're being used to the extent that they are in meat production," said Caroline Smith DeWaal, food safety director at the Center for Science in the Public Interest, a Washington nonprofit that is vocal on food issues.
John Nalivka, an expert on livestock and president of Sterling Marketing Inc, said that if activists got onto the issue before industry, it could have been "'pink slime' all over again."
Meanwhile, cattle feeders are left to navigate the changing landscape without much direction from the companies deciding the fate of Zilmax and other beta-agonists.
Anne Burkholder, a Nebraska cattlewoman, expects to switch to Lilly's Optaflexx. She never had any issues with Zilmax and thinks it is a good product that will come back to market.
Still, she said, "My crystal ball is kind of fuzzy right now, just like everybody else."
Zilmax debuted in the United States in 2007. Users say it is pricier than Optaflexx, but packs on more muscle. They added that cattle must be weaned off Zilmax at least three days prior to slaughter, which narrows the time they have to find an optimal sale date.
Merck and Elanco say they help cattle feeders learn how to use their products in compliance with FDA rules. There are few hurdles to switching between brands, experts said.
Pratt Feeders' Bohn said Zilmax costs roughly $20 per head, while Optaflexx runs $8 to $10. He found that Zilmax adds about $15 to $30 in revenue per animal versus $10 to $12 for Optaflexx, because Zilmax puts more meat on the carcass.
Winter, who sells almost all of his cattle to Cargill, which has a plant across the street from his operation, said feeders can still win if Zilmax stays off the market.
Less Zilmax could mean slightly thinner cattle and a bit less beef on the market, which could fuel demand.
"If the product stays off the market, it should be positive for prices long term," Winter said. "That would be in our favor."
(Additional reporting by Tom Polansek, Theopolis Waters and Karl Plume in Chicago, Carey Gillam in Kansas City, Mo., Chuck Abbott in Washington and Ransdell Pierson in New York.; Editing by David Greising, Peter Henderson and Maureen Bavdek)