The U.S. beef industry has more than 800,000 cowherds, but less than 300 feedlots market two-thirds of all fed cattle. Even small feedlots have pen sizes larger than most U.S. cowherds.
This demographic situation clearly illustrates the essential role that auction markets play in the U.S. beef industry.
First, they efficiently assemble and present for sale animals from thousands of sellers to relatively few buyers.
Second, they facilitate price discovery. Ultimately, it's the buyers and sellers of calves that “discover” a price they agree to, but auction markets help make it happen.
While the auction markets' assembly function has changed little over time, price discovery — and particularly the information needed to truly determine value — has changed quite a bit.
Feedlots still want healthy, fast-gaining and efficient cattle. Grid markets, however, reward carcass characteristics over and above feedlot performance, and there may be premiums or simply requirements for specific breeds or health programs.
Meanwhile, producers have added value to their herds' calves through superior genetics, improved health programs and preconditioning management. Yet, they must communicate these unseen traits to buyers, while constantly asking what else feedlots are willing to pay for.
Thus, information is essential to accurately discover a price reflecting the cattle's true value. This needed information must flow quickly and accurately in both directions, though. And today, dramatically more information is of interest to both buyers and sellers.
Auction markets are developing ways to improve information flow. Some information is passed en masse while other information is individualized.
For example, a special sale may require that all calves be of certain genetics (by breed or breeder), or have a similar health program (preconditioned, VAC-45). The amount of information on the individual lot or animal may vary from one seller to the next, but the basic requirements of the sale are met.
More detailed information is available in source-verified feeder cattle sales in which the sellers' names and full genetic, health and nutritional information of the cattle move with the cattle. In some cases, this information is documented at the herd level. In others, individual animal data (birth date, weight, treatments) are included. Electronic identification and data management have made this level of detail feasible.
Several innovative auction market programs are emerging throughout the country. One example, which combines the assembly function with source-verified information, is the Iowa Missouri Beef Improvement Organization (IMBIO). IMBIO, developed by the Bloomfield Auction Market, Bloomfield, IA, has completed its seventh year.
Calves receive a standardized vaccination program, administered by an approved veterinarian prior to sale day, and a numbered IMBIO tag. Calves are the offspring of sires with expected progeny differences (EPDs) in the upper 60% of their breed for growth and carcass traits.
On sale day, calves are sorted into uniform truckload lots by sex, color, frame and muscling. Buyers don't know the individual seller but do know the health and genetic standards. More importantly, the calf can be traced to the farm of origin through a phone number on the back of the tag, should additional information be needed.
But Does It Pay?
Additional information and assurances are fine, but who will pay? Research in 2000 indicates that food retailers, processors and the hotel, restaurant and institutional trade will pay more for beef that results in a branded, customized product. That premium is expected to grow over the next five years.
In some but not all cases, the processor or retailer is willing to pay for the additional cost of certain food safety measures in order to reduce their liability. Thus, demand for information is forming near the consumer.
Already, feedlots are paying more for calves with information. Four years of Bloomfield data indicates that buyers paid an average of $1.84/cwt. more than the premium for large group size for calves in the IMBIO program. A 550-lb. IMBIO steer in a group of 90 was worth $22/head more than the same calf sold in a group of 10 outside the program. Other source-verified programs are reporting similar results.
Factors To Consider
Cyclically strong calf prices will give producers an opportunity to better position their herds before the next downturn in the market. In addition to producing superior cattle, sellers must effectively convey the true value of their cattle to buyers. Likewise, buyers will expect more information from sellers as downstream markets place higher demands and/or value on process-verified systems.
What should cow/calf producers do to function with auction markets in this changing industry?
Work with your auction market to identify the traits and information that buyers are demanding, and what special programs are available to capture the added value.
Second, identify any added requirements and determine if you can recover these costs.
Third, does the program move your operation ahead, or does it seem out of step with industry trends?
And finally, some programs may require producer action as early as when the calf is born. So start planning now.
John Lawrence, PhD, is an Extension livestock economist and director of the Iowa Beef Center at Iowa State University in Ames.