“We always see the upside potential in this business more than we do the downside risk,” says Nevil Speer, Western Kentucky University beef industry analyst.
Maybe that's why human nature often possesses us to expect calf prices to be higher at weaning time than any money offered previous to that.
“Are you making money? If you're comfortable with the price and putting net money in your pocket, do it,” Speer says, who believes this is a year to take a hard look at forward-contracting opportunities.
The inability to answer that basic question, relative to any price, might be why some producers are loathe to price their calves at all.
It's a question that bears more pondering as you plot the market fate of this spring's calves (see “Market Now Or Later?,” page 14), especially as individuals and the market itself seek to make sense out of bent fundamental value relationships driven by increasing input costs and volatility.
New outside influences
“The old concept of doing business in an environment where cattle markets operated in somewhat of a bubble are gone,” Speer says. “The business is now influenced by ethanol, oil, fund buying, the credit crisis, plunging consumer sentiment, global political pressures, etc. All these markets and forces are intertwined.
“Just about the time you think you've got something figured out, some aspect changes, setting up a whole new scenario of contingencies. There's lots of ambiguity and complexity, so producers need to dedicate themselves to being objective about their business and the environment they're operating within, and they need to remain well informed to make good decisions.”
That's why knowing production costs and then marketing cattle rather than simply selling them is so critical. Marketing is all about working in advance to make cattle in demand by as many bidders as possible. Selling is about expecting buyers to be interested enough in your calves to bid, then wondering why they don't.
“The name of the game will be marketing and planning ahead. I see more attention paid to it and more planning than even what we saw five years ago, but I think we'll have to do even more,” says Tim Petry, North Dakota State University livestock marketing specialist.
“There was a $10-$20 range in prices last fall for 550- to 600-lb. calves coming from within 40 miles of each other, the same class and quality,” Petry says. “Those ranges could be even wider this fall. So, the question becomes, how can you sell at the top of that range?”
The answer is different than chasing a premium, which has never been economically advisable and could be downright lethal as input costs escalate. Instead, it involves understanding what the market is demanding, how your product fits those demands and how it might receive more demand.
“Just waiting until sale time and loading them up, you can't expect a ‘premium.’ It's about working with the market where you intend to sell, and deciding at the time the calves are born how you're going to market them,” Petry says.
Where's the money?
Ask which cattle are bringing the most money and why. Identify the gaps that exist between what you offer and what the market most covets. Next, determine if the bridge can be gapped, and if so, whether closing the distance is worth any additional risk.
To truly market rather than sell, Speer explains, “You have to critically and realistically evaluate what you're offering compared to what the market wants. That requires as much information and knowledge as you can get, so you're basing decisions on facts rather than supposition and gut feelings. Most critically, it requires objectivity.”
Given the increasing complexity and interdependence of commodity markets, Speer emphasizes that making correct marketing decisions requires more lead time. “If I've got calves to market in October, I've got to start following the markets and evaluating their relationships today,” he says.
There are plenty of opportunities to differentiate the product and reach for the top of the ranges Petry mentions, be it reputation, performance history, seasonal timing, a certified vaccination program, adding more pounds, (especially when price slides between calves and feeders are narrow), and so on. That's true whether you're considering an auction sale, video market, direct trade, forward contract or retained ownership.
No matter what value-added colors we paint cattle with, though, they remain a commodity product in a commodity business. As such, getting ahead means either cutting production costs or figuring out how to get paid more for the same basic commodity.
“It looks to me like it's easier to get another $50-$100 net return from marketing than it is through cutting costs,” Petry says.