Buyers of any product will always pay as little as possible. That's just common sense. But, feedlots are proving they will consistently pay more for the extra value that comes through reduced downside potential.
“Buyers are looking for these lower risk cattle because they're confident they will consistently perform without added health costs,” says Ken Jordan, executive vice president of cattle operations of eMerge Interactive. He refers specifically to cattle flowing through his firm's CattleInfoNet Premium Auction Sales.
All told, buyers are giving $8-$14/cwt. more (basis 500 lbs.) for CattleInfoNet's premium calves. These calves are electronically identified, weaned and preconditioned for at least 45 days, then commingled and sorted into uniform load lots with no more than a 75-lb. weight spread.
Jordan points to a recent Texas A&M University (TAMU) study that found health program, uniformity and lot size contributed to a gross slide-adjusted premium of about $100/head for steers and heifers. That's compared to cattle selling in 10 other traditional auction sales during the same time period.
“Buyers are willing to pay more for these kind of cattle because they're getting the value out of them,” says Jordan. “They know they can get back what they pay — and more — in return.”
Health Is The Driver
The math is simple, says Jordan. Feeder calf and cattle buyers adjust their bids based on risk. Nothing adds to risk like cattle that get sick even one time.
The last full year of TAMU Ranch-to-Rail data show that cattle needing treatment even once in the feedlot returned $120/head less than cattle never needing treatment. That makes healthy calves worth $23/cwt. more heading into the feedlot.
Certainly, the same holds true in the stocker pasture. Folks like Kevin Stauffer of Holton, KS, prove that taking care of health on the front end pays them on both ends.
Stauffer is a cow/calf producer who retains ownership in his calves through backgrounding. He then markets them through a health-verified, LMA-VACC sale at the Holton Livestock Exchange.
“In five years, I remember one head we had to treat one time,” explains Stauffer. “Vaccinating and weaning the calves here at home has paid for itself and then some just because we haven't had to pull anything, and nothing went off feed. As far as the sale goes, I know it has made us some, too.”
Admittedly, the premiums consignors receive for health decline as cattle weight and age increase. But, Stauffer says any extra he gets at sale time is gravy because he's already collected his premium in added performance at home with less health and labor cost.
A recent Kansas State University (KSU) study of 7,600 head sold in four, health-verified sales at the Holton market over the last two years found that buyers paid an average premium of $24.90/head compared to cattle selling in the regular sales. The premium sale cattle had a similar spread in weight (284-917 lbs.) and condition (BCS 3.7, compared to 3.5, respectively).
Plus, lot sizes were similar — 4.5 head in the regular sales versus 5.5 in the premium sales. So, even without the benefit of large lot sizes, health commands a premium.
Regarding lot-size economics, a recent study from the Iowa Beef Center indicates an 8-10¢ premium/cwt. for each additional head added to a lot of cattle, at least up to a point.
For instance, say that a 5-weight steer alone will bring $1/cwt. Put him with 50 others in one lot, and each should be worth $1.04-$1.05/cwt. (the 8-10¢ premium times the 50 head added).
“I feel you should see a $15 per head premium over the cost of doing the work,” says Dan Harris, manager and co-owner of Holton Livestock Exchange. “I believe we'll see that premium increase as more buyers come and try the calves, take them home and have such little trouble with them.”
Jody Holthaus, the Jackson County Extension agent who helped organize the Holton sale concept, says that even though buyers prefer larger lot sizes, “they can put together lot loads and know they have all been managed the same.” Periodic buyer surveys verify their satisfaction.
In fact, Harris says the success of the special sales is boosting the price of similarly managed cattle in his regular sales.
Credibility Is Everything
Both the CattleInfoNet and Holton sales include veterinarians and third-party process verification or signed affidavits and certification, including vaccine lot and serial numbers and purchase receipts. These enhance buyer confidence.
In the Holton sales, veterinarians must be present for at least one round of vaccinations. They also verify such practices as effective castration and proper injections.
“The veterinarian certification really put teeth in our program,” says Harris, “But, it's also been the biggest challenge with producers. When producers think of including a veterinarian, they start to see dollar signs.”
But once they go through the process and see the returns relative to the cost, Harris says they bring calves again the following year.
“We've always based our business on repeat customers,” explains Harris. “The same principle applies to producers. You have to keep your customer happy. This program helps them build the reputation of their cattle.”
What's more, rather than a market where the premium declines as supply increases, Jordan expects the health and process verification premium to keep growing as the beef industry continues to move toward branded beef systems.
New Meaning For Old Basics
Dale Blasi, a KSU beef Extension specialist, points out that the industry's move toward specification beef underscores rather than supplants traditional value basics. For instance, while different cattle types have flowed in and out of favor over the years, the price spread between genetic types is growing.
In 1993, a KSU study compared the value difference at auction between 10 different breed types, all else being equal. The spread was $12.98/cwt. By 1997 when Oklahoma State University (OSU) compared the same breed types in a separate study, the gap was $20.83/cwt.
Blasi says a safe bet for buying genetics that feeders demand is English/Continental crossbreds. With half of fed cattle trading outside cash today, that's what many coordinated systems describe as the perfect beast.
In fact, of the 36 consumer-based systems listed in this year's “2001 Alliance Yellow Pages” (August BEEF) 13 specifically required that mix. Another 12 require at least 50% English or 50% Continental.
Blasi says buyers also monitor other value factors like condition and fill. Shrink them out, tank them up, push them too hard or too slow before trading time, and he says you can count on discounts.
Delay castration and dehorning until after weaning, and that can add up to a $10/cwt. hickey. That's based on KSU research indicating calves castrated after weaning suffer decreased performance of 0.35 lbs./day for 96 days, adding up to discounts of $3-$7/cwt. on the purchase side. And, a 1997 OSU study of 31,000 head pegged the cost of late dehorning at $3.30/cwt. on steers, $1.94/cwt. on heifers.
Jordan cautions that producers adding value to their cattle must work with a program that can retrieve the benefits of that effort for them. That means finding a credible way to document the cattle and then presenting them with enough similar kinds of cattle that buyers can put together loads.
“It's easy for people to tell producers they can make them more money, but it's important to participate in a marketing model that can accomplish that,” he says.
Jordan suggests producers look at programs backed by solid research. If you or the system you're selling in can't verify the value attributes of the cattle and make potential buyers believe it, buyers will assume the worst and bid accordingly.