The jury is a long way from a verdict, but recent debate among Texas cattle feeders could dramatically shift the way fed cattle are marketed in the U.S. At the very least, their discussion could provide a springboard toward a value-based pricing system that rewards rather than discounts cattle for hitting specific targets over the long haul.
"We call it consolidated marketing which provides us with unity in marketing and feeder independence at the same time. It would help us get more negotiation and value-based," says Richard McDonald, president and chief executive officer of the Texas Cattle Feeders Association (TCFA).
Obviously, the notion and practice of value-based pricing - be it formulas or grids - is more dog-eared than a calving book at weaning time. But the reality of a system that allows for base price negotiation is, so far, more elusive than an IRS auditor with a smile.
"The basic question we have with grids is whether or not they can be improved," says McDonald. "The key is the base price you start with." And that's the rub. According to Clem Ward, professor and Extension economist for Oklahoma State University, the risk of pricing systems that begin with a base tied to packing plant averages or reported cattle prices is that hitting value targets can prove to be a disincentive over time. If the base is tied to the price of Choice grade cattle, as an example, the laws of supply and demand will drive the price down as supply increases.
With that in mind, lots of feeders have been reluctant to move away from cash markets even though they realize their power of negotiation continues to shrink with the size of the marketing window each week. But a system that would allow daily or weekly base price negotiation might change all of that. Last fall, TCFA asked its member yards how many cattle they would pledge to such a system if one could be developed. So far, 1.5 million head have been committed, and McDonald says most of those represent cattle currently trading in the cash.
Texas Controls 25% Of Fed Cattle Keep in mind, year in and year out Texas yards feed and market better than a quarter of all the fed cattle in the nation (Table 1). Even a million head ear-marked for a new consolidated system would rival the volume currently flowing through coordinated production and marketing systems.
Those numbers would also fuel significant increases in cattle trading away from cash markets. According to USDA, the percentage of packer-fed, contracted, formula and grid cattle (additional movement) was 18% in 1994. By 1997, that number had grown to 25%; and 33% in 1998.
Of course, as more cattle are pulled from the cash market, Ward points out reported prices can deteriorate, depending on how mandatory price reporting plays out. With that in mind, he favors base values tied to wholesale beef or futures prices.
When it comes to getting a feel for the power of numbers, Ward explains, "Rather than look at the percentage of the industry total, you have to look at the percentage of the daily packer kill these (Texas) cattle would represent."
In round numbers, he says 1 million head would represent about 4,000 head per day, or about one day's kill each week for a packer. In those terms, Ward says, "That's a significant number and you would get a lot of attention."
Moreover, Texas feeders have proved their ability to fight for bargaining chips that are now industry standard. Things like a 4% pencil shrink and seven-day delivery. Then again, this is the third time in a decade Texas feeders have tested the waters for consolidated marketing. While it died on the vine previously, proponents say this time is different.
"The general consensus is that the industry is going through a transition, and we're all searching for a better way," says McDonald. "We have a responsibility to be a catalyst for that change."
If current evolution will include negotiated base prices and consolidated marketing, Ward believes the key will be figuring out what it can add to the current system. "I believe if you go into something like this it can't be power (feeder) versus power (packer). It must be a situation where you figure out what you can do to help the packer be more efficient," he explains.
"Bottom line, we're looking for ways to improve marketing for our member yards, but we think an improved marketing system needs to be beneficial to both feeders and packers," says McDonald. More important, he explains any new system must help everyone on the production side of the fence to consistently build what consumers demand.