Increased market volatility means buyers covet proven value-extras even in a down market.
Cow-calf producers can be more than price takers.
That's true even as currently tight cattle numbers lift the price floor, while anemic beef demand squeezes the price ceiling.
“You're always subject to the whims of the marketplace, but there are things you can do to broaden your buyer base and make your calves worth more,” says Richard Stober, general manager of Superior Livestock Auction.
He's referring to what the Superior folks term “advantage programs” value options the market pays for, things like weaning and preconditioning, source and age verification, as well as compliance with natural beef program requirements.
“It seems like all the cattle selling in the top third of our sales are these value-added cattle,” he says.
The market is too volatile for it to be otherwise. So much equity has drained from the industry that cattle buyers and their lenders are looking for every opportunity to manage risk.
Many producers already manage cattle in ways that qualify them for various value-added programs, but Mark Harmon, Joplin Regional Stockyards marketing director, explains some don't take the final step to market those advantages. That usually means managing and marketing within programs that recognize the value.
For instance, unless you can verify the vaccination program applied to your calves, it has no value to buyers. For those who can verify it, buyers will pay more.
In Superior's 10 largest sales last year, VAC-34 calves (MLV respiratory, clostridial 7-way, plus Mannheimia, given 2-4 weeks prior to the sale) were worth about $2/cwt. more than calves not complying with a verified program.
In their sales, Stober says the value was even higher for SelectVAC-34 calves — same basic protocol but utilizing specific vaccines from their animal health partner, Pfizer Animal Health. Compared to the other VAC-34 calves in those sales, SelectVAC-34 calves brought an additional $1.97/cwt.
For contrast, Tim Dietrich, Kentucky Department of Agriculture beef marketing coordinator, explains calves selling in that state's Certified Preconditioned for Health program (CPH-45) average a $5-$8/cwt. premium. In addition to receiving pre-weaning and weaning vaccinations, these calves are weaned for at least 45 days before they are sold through special CPH-45 sales. Even with that state's extreme drought the past two years, Dietrich adds that producer participation remained stable.
Added value reduces risk
More than anything, buyers are paying to reduce risk, and not necessarily the risk producers usually think about. Stober and the Superior crew visited more than 200 feedlot managers last spring and asked them about their key concerns. It wasn't cattle health, the price of corn and other inputs. Their chief concern was labor — how tough it is to find and keep qualified help.
“When a producer installs these advantage programs, he's giving the buyer an opportunity to reduce labor,” Stober says.
It works the same for source and age verification. Buyers paid a $3.70/cwt. premium (basis 550 lbs.) for it in Superior's 10 largest sales last year. Even if Japan ultimately widens the age window of cattle it will accept, Stober believes exports there will still require an auditable trail. Likewise, source verification programs take the guesswork out of complying with rules for mandatory country of origin labeling, especially when it comes to commingling cattle.
Non-Hormone Treated Cattle (NHTC) also require an auditable trail. Stober says cattle qualifying for NHTC brought $2/cwt. (basis yearlings) more in Superior's 10 largest sales last year. “It has yet to be determined how broad that market is,” he explains.
Incidentally, the cattle in those sales eligible for mainstream all-natural programs fetched an additional 70¢/cwt. Stober says it remains low because so many cattle qualify and so many lose their eligibility before slaughter and because consumer demand has declined with the nation's recession.
Supply and demand are fundamental to value-added premiums. Derrell Peel, Oklahoma State University Extension livestock marketing specialist, explains if enough demand for a new attribute springs up, premiums are paid to entice producers to supply the demand. But a critical mass of supply must also accompany the demand.
That's why the jury is still out on how much of a market might develop for other value-extras such as testing for persistent infection with bovine viral diarrhea.
If and when demand is saturated, Peel explains, the premium declines or goes away. If enough of the system adopts the new attribute, then it becomes the new industry standard whereby the bar has been raised and those not achieving it are discounted.
That's why bull calves and horns are discounted in the marketplace, for example.
Assessing and exploiting value
“Why wouldn't you market them in way to retrieve the added value?” Harmon wonders.
Of course, there are those who have tried and been disappointed with the results. Cattle value is still the product of myriad variables, everything from season, to weekly buyer needs, to the futures market that day, to grass availability.
“Someone will say, ‘I did all of that and I didn't get paid for it,’” Stober says. “Keep doing it. The buyer of those calves this year will see the benefits and he'll bid for them again next year. There's a process and buyers have to discover the value of the deliverables. Adding value is about delivering on the promises made.”
Plus, Harmon cautions producers weaning and preconditioning calves to consider what they received, relative to what they would have gotten selling unweaned calves. That difference in revenue, minus the cost of adding the value, represents the net return or loss associated with managing and marketing for the value of weaning and preconditioning. Too many compare prices received to prices paid for similar weight cattle sold in the same area at the same time.
Harmon emphasizes the easiest calves to sell are the ones representing solid management practices. “If producers can get one round of shots in a calf and castrate the bulls, that's a good foundation. The end product is further enhanced for producers who can wean the calves, give two rounds of shots and turn them out to graze,” Harmon explains. “Being able to validate a health protocol, along with the possibility of age and source verification, makes calves worth even more.” He adds that using the latest, proven genetics is a must.
Likewise, Superior recently began a new advantage program — Superior Progressive Genetics — aimed at identifying and rewarding producers utilizing genetics proven to offer buyers value.
“Anyone using high-end genetics and installing these advantage programs is putting money in their pocket and growing their buyer base,” Stober says.