You’ll almost always hear two predictions at any cattlemen’s meeting. The first is that prices will move dramatically higher as supplies tighten. The second is that the value differences in cattle are growing and will be accurately reflected in the prices we receive.
The first prediction will be a reality, as supplies will tighten resulting in higher prices. Skyrocketing corn prices and drought have simply postponed the timing, but not altered it. Amazingly, with recent placement numbers into feedyards, and with the increase in cull numbers, liquidation of dairy cows etc., the decline in beef supplies has been postponed for the short term.
The good news is that pulling cattle ahead doesn’t alter the dynamics of tightening supplies, it just delays it. But it will actually serve to make the hole even deeper when we get there. We had expected to experience the decline in supplies several years ago, but it now appears it’s at least another marketing year away.
Regarding the second prediction that price spreads will continue to expand and more accurately reflect value differences, that movement has been slow, but steady. A recent article generated by Certified Angus Beef® reported the results from about 63,000 head of yearling cattle placed on feed and marketed at roughly the same time. One half of the cattle were characterized as high grading, high growth; the other half as low grade, low growth.
A Closer Look: Cattle That Grow & Grade Are Money In The Bank
These cattle didn’t represent the extremes in the population. In fact, the data indicates they were fairly well concentrated around the mean of the industry. Amazingly, there was nearly a $160/head difference in the value of these cattle leaving the feedyard, with $80 of that actually making it to the profit-and-loss line. The high group made more than $44/head, and the low group lost nearly $36/head.
The difference in the $160 revenue and $80 profit number can primarily be accounted for in two ways:
- The additional feed required for the higher growth cattle. They were more feed-efficient, but were on feed longer as well.
- The increased procurement costs for the higher-quality cattle.
Using past studies, it would appear that producers are probably getting $6-$7/cwt., or about 2/3 of the realized value difference. What’s striking about this data and all the similar data sets I’ve seen is that there is such a dramatic profit difference between the groups.
If the marketing system was allocating value differences, the profits or losses for the two groups should be roughly identical, but they aren’t. The good cattle continue to subsidize the poorer cattle in our system. In part, this subsidization effect is explained by excess capacity, as supplies are tight and there’s a lot of competition for numbers regardless of quality. But the price spreads will widen when numbers begin to expand or when excess capacity is eliminated. The removal of feeding and packing capacity is another accelerating trend.
However, the primary reason that the system continues to not reflect value differences accurately is a failure of information and knowledge transfer. As any feeder will tell you, they can’t even accurately divide cattle into simple outcome groups like mentioned when they are purchased. Producers must not only be able to document accurately what they have, but they must be able to transfer that information effectively to buyers.
There are those who are creating “reputation” cattle, but most marketing channels remain opposed to the concept of increasing price variation. This is because, while it furthers the industry as a whole as well as individuals producing better cattle, it also increases risk and makes their job more difficult.
The impending decline in supplies will be a negative factor in increasing price spreads, but this trend is also irreversible and unstoppable. Currently, cattle that combine better genetics and better management continue to move away from the marketing systems that benefit from and operate primarily on a commodity-based system. Eventually, these outlets will have to adjust if they hope to play a role in marketing higher-valued cattle.
The industry also is in the very infancy of being able to document, guarantee and transfer the information necessary to make accurate value judgments. Today, there are still lots of surprises and a lot of factors that affect results. Ultimately, however – whether via DNA, process and genetic verification, or other means of information exchange and technologies – the industry is becoming more adept at being able to describe and document value. That will accelerate the shift away from commodity marketing.