Take the money and run. Sell your calves at the first and best opportunity and let someone else worry about the risk. With calf and yearling prices climbing to unprecedented levels, it's a no-brainer, right? Of course it is.
“This has to be one of the most confusing times we've ever seen in this business, especially for the cow-calf producer intent on finding a market niche,” says John Paterson, Montana State University Extension beef cattle specialist, Bozeman.
“Yet, it's one of the easiest times to give marketing advice,” he says. “Pay attention to your fundamentals — and just do it.”
Does this mean ranchers should shift away from participating in any of the beef production and marketing alliances that have popped up over the past decade?
Paterson looks at the question through the eyes of a rancher.
“If I'm a 55- or 60-year-old rancher carrying serious or even significant debt — or facing severe drought — I'm going to sell my calves and never look back,” Paterson says. “I don't think I'd carry that risk into the winter. I'd take the money and run.”
But for the producer who might have a long-term vision, or who is looking to grow or build a herd — and can find a forward-thinking banker — the advantages of an alliance may be in order.
“It really depends on the kind of alliance you're talking about and on your short- and long-term goals,” Paterson says. “It's hard to pigeon-hole the alliances. There's an alliance for just about any beef producer in the country.” (See the “BEEF Alliance Yellow Pages” that follow in this section.)
More Than A Market
As one of the architects of the Montana Beef Network (MBN), Paterson says that, so far this year, 4,200 head of MBN calves have sold into one of the larger alliances for about a $10/head premium over cash cattle. The calves were processed through beef quality assurance (BQA) protocol and source-verified using individual radio-frequency ID tags applied at branding.
“Ten bucks is a decent premium for this market,” Paterson says. “It sure pays for the time and expenses needed to get the calves into and through the program.”
But, Paterson hopes MBN producers realize they're also better positioning themselves for that point in the cattle cycle when cattle buyers are a little tougher to find.
Unlike today's situation, the cattle cycle likely will spin around to where production and marketing alliances will look a lot more attractive to rank and file cattlemen, says Lee Meyer, University of Kentucky ag economist.
“I'll admit we haven't come as far with beef alliances as I thought we would have by now,” he says. “But, the concepts of sharing quality and performance information throughout the supply chain will continue to provide more incentives and rewards as we go along.”
Among the most positive outcomes of alliances is the general awareness of beef quality and its place in the food chain, he adds.
“That awareness tends to put producers into more of an ‘enterprise’ mindset than a production mindset,” Meyer explains. “That's something you can't put a price tag on.”
Speaking of price tags, Meyer says the progressive producers who first bought into the alliance concept probably didn't get paid enough for their innovation. This may have slowed the evolution of value-based marketing programs and production alliances.
“A few years from now, these will be mainstream concepts, especially as we move toward more individual ID and third-party process verification systems,” Meyer adds. “That's when we'll begin seeing the real payoff to the industry as a whole.”
Back in Montana, Paterson says getting producers to develop BQA and source-verification habits wasn't as easy as he thought it would be, but they are seeing the payoff. The key, he adds, is that buyers and sellers have more information about the cattle traded.
“When it comes to source verification, ranchers don't seem to be as concerned about what the government is asking of them; they're more concerned about what the end-user wants,” he says. “Certainly, source verification and alliances go hand in hand.”
Some type of integration with feeders or even processors is a fundamental part of most alliances. Many alliances and marketing programs have functions that keep participants in the loop as prices rise. Many also share in the risk as prices fall.
“There's no question that, as we see more volatility in the markets, alliances will become more attractive,” Paterson says. “Depending on the program, a rancher putting cattle into an alliance will eventually see better price protection than riding the cash markets.”
Preparing For The Dark Side
Ron Torell, University of Nevada Cooperative Extension livestock specialist in Elko, concurs.
“Oh yeah, we're presently experiencing one of the best cattle markets of all time. Marketing cattle in this type of environment is easy. If history repeats itself, however, more difficult times are down the road,” Torell says.
As a beef producer himself, he encourages ranchers to look at alliances as more than niche markets.
And, alliances are more than a marketing agreement or a set of carcass specifications, adds Twig Marston, Kansas State University Extension beef specialist.
“They are more than a breed or a product identity. They are a partnership where people and companies work together and fairly share in the final product,” he explains.
Alliances may be vertical in nature and encompass different facets of the beef industry, or they may be horizontal and be a group of businesses within a particular segment of the industry.
“Together, their main goals are to share information, improve production efficiency, and/or better place their product within a tough marketing arena,” Marston says. “Most of the vertical alliances are based on the concept of value-based marketing where anyone who donates to the total value of an animal is fairly rewarded monetarily for their efforts.”
Pricing grids are a key alliance component. Producers willing to invest the time in management and production of animals that fit a grid of choice will likely do well in an alliance situation, says Tom Anton, University of Florida Extension economist in Ona.
There can be added risk with grids.
“The returns for cattle that grade well in the grid are high, but the losses for poorly grading cattle are as high or higher,” Anton says.
Short term, alliances aren't always a good buffer against volatility, adds Jim Robb, Lakewood, CO. He's director of the Livestock Marketing Information Center.
“For that reason, this is a difficult point in the cattle cycle not to take the money and run,” he says. “But, for the long pull, if you're trying to receive a premium for the quality and quantity of your cattle, a move towards an alliance may be in order.”