The industry has been at an interesting crossroads for quite some time. Every segment of our industry understands the significant role that genetics can play in affecting the bottom line. The value of “better” genetics is increasing on almost a daily basis, but few segments have been able to capture the value of those genetics.
Even the seedstock industry, which has literally spent hundreds of millions of dollars collecting data and quantifying the genetic differences, often finds value differences more closely associated with reputation, volume, promotion and presentation. If the seedstock industry has struggled in pricing its product based on true value, it significantly raises the difficulty level for the other production sectors.
Part of the problem is that there are a tremendous number of management practices – nutrition, vaccinations, handling, weather, etc. – that affect the expression of genetics. However, the primary stumbling block has simply been the inability of the system to consistently reward producers, regardless of their production segment, for superior quality.
While every buyer in the cattle production system – seedstock, cow-calf, stocker, feeder, packer, wholesaler and retailer – will always try to buy their inputs as cheaply as possible, they’re also more than willing to invest in genetics that will increase the bottom line. Yet, talk to anyone who is involved in the marketing of cattle and they will tell you we are still primarily a commodity system where the differentiation of prices from the high to low for any given segment is less than is justified.
Ironically, it’s been the marketers themselves who have often encouraged this lack of differentiation. By definition, seedstock suppliers will produce more average bulls than superior bulls, so their focus, rightly so, will always be on raising the average and on reducing the price spread between the lower 10% and the average.
Cow-calf producers have the benefits of EPDs, pedigrees and data to help them differentiate their options, but they purchase genetics largely based upon the average price and what the competitive market makes them pay for those better genetics. It is not a pricing system based on what those genetics will actually return.
Meanwhile, feeders, packers and upstream participants understand the value of superior genetics and management, but the current system has given them very little hard data. Thus, they rely almost exclusively on previous experience to establish value. The fact that this is so variable and unpredictable, leads them to be reluctant to pay much over average prices for any cattle; besides, they aren’t paying much below average prices for inferior genetics, so they must use the better cattle to subsidize the poorer cattle. Add in the fact that, without the documentation to prove the genetic value of cattle, any time they pay much above average price, they find themselves elevating their total procurement costs.
The auction and video markets have a similar struggle. Buyers want the cattle that represent better genetics and management, but they have difficulty identifying those cattle in the system; meanwhile, the sellers are frustrated that they’re not sufficiently rewarded for producing a superior product.
There have been a multitude of attempts to try to fix the problems created by a commodity system; everything from grids, to branded programs, to age and source verification, have created ways to recognize and capture value. It isn’t an understatement to say these programs have forever changed the industry and helped to issue in the value-based marketing revolution.
Yet, while these programs have grown demand and increased the amount of dollars available to purchase cattle and beef, they haven’t been able to knock down the barriers that keep the industry’s pricing systems based on commodity averages rather than true value.
The industry is rapidly evolving toward genetic and management verification and quantification as a means of addressing this problem. The other solution has been to build supply chains that actively control these factors to improve not only the quality but consistency of the product being produced. There are currently no less than 10 major entities putting together systems that will help create, characterize and capture additional value. As these systems come on line, the number of cattle moving through commodity systems will continue to shrink, and commodity prices will continue to fall relative to the other systems as more and more of the higher valued cattle are moved through these alternative channels.
As it’s often been said, higher prices have a tendency to mask any problems, but I believe it can be argued that our marketing system is undergoing a more significant transformation than at any time in the past. Just look at the consternation these changes to our commodity pricing system has created in the past.
Expect the battle lines to be drawn even more dramatically going forward. This could prove to be highly divisive, because for every producer who has not received the true value of the genetics and management he has put into his cattle, there is one producer who has been subsidized as a result.
Hopefully, these differences will not be focused on distractions like GIPSA, mandatory country of origin labeling, and the like, and instead will address the real issues of price discovery, price transparency, market access and growing demand. Record prices will only mitigate the radical changes occurring in our market system for a little while.