Price premiums are signals of what markets value. In the beef production business, like other industries, consistent price premiums become incentives to provide the market with animals treated in a particular manner or having a desired set of traits.
In recent years, there's been much discussion about whether preconditioning, for example, adds to the price or value of calves. Extensive university research in the mid-to-late 1990s indicated vaccination programs resulted in ranchers receiving higher average prices than those received by sellers of unvaccinated calves.
Colorado researchers reported premiums as high as $3.89/cwt. for vaccinated calves. An Oklahoma State University study conducted in late 2000 though, found price premiums were received for preconditioned calves weren't enough to cover its added costs.
While many factors influence cattle prices, those influences are often interactive. We hear today from many ranchers that there's no longer a premium market for vaccinated calves — yet most still vaccinate.
Recent University of California research is shedding light on this price conundrum faced by today's cattle rancher found important changes in the calf market since those earlier analyses and, as a result, very different signals for ranchers.
The market majority
“We focused our attention on whether or not price premiums were still received for value-added calves at weaning time,” says Steve Blank, University of California-Davis (UCD) Extension economist. “In the process, we discovered the market has changed in an important way.”
First, none of the value-added programs received a consistent price premium when using only simple average price data that can be observed by ranchers when watching the market. Each program has premiums and discounts in different years, thus no pattern exists.
“It appears the market isn't really paying attention to the value-added characteristic when setting prices,” Blank adds. “But, clearly there's much more to the story.”
Buyers were expressing a preference for preconditioned calves during the 1990s, but few sellers, at first, were aware of this change in demand. Thus, few ranchers were supplying preconditioned animals to the market.
In the case of vaccination and preconditioning, the cattle industry as a whole responded to the market. Early on, the share of calves sold as preconditioned was less than 10%, says Larry Forero, livestock advisor, Shasta/Trinity County Cooperative Extension, University of California (UC). By 2001, that share included a significant amount of calves sold.
“Preconditioned cattle have represented a majority of the market since 2001,” Forero says. “The catalyst is the dynamics of competition — sellers responding to the market.”
Clearly, that message got out to ranchers. Starting in 2001, they were supplying the market with mostly preconditioned calves, says Glenn Nader, UC livestock advisor for Sutter/Yuba/Butte counties. “In other words,” he says, “the market niche became the market norm.”
Now, say the California research collaborators, the higher supply of preconditioned calves has led to the price premium seen earlier being competed away in most years.
“In a competitive market, sellers must supply a product with the characteristics demanded by buyers, or risk selling at a discount, or in a worse case, not being able to sell at all,” Blank says.
The end result is early adopters of value-adding programs may benefit by receiving a price premium. That premium will gradually disappear, however, as more sellers join the market, increasing the supply of product with the desired attribute.
Preserving the niche
Livestock auction operators usually try to standardize the products being offered for sale whenever a buyer preference becomes transparent. In such a case, if cattle sale operators know buyers want only preconditioned calves, showcasing preconditioned cattle might be a way to attract more buyers to the sale.
“Our study did find two characteristics that consistently received a price premium over the data period,” Nader adds. “First, increasing the length of time since weaning boosted average prices.”
For every 30 days in the length of time since weaning, the average price increased about 1.3¢/lb. Cattle producers have responded to the market and are delivering more calves weaned for a longer period. As a result, they're receiving a price premium over the average price received for freshly weaned calves.
Second, calves meeting the requirements of “natural” beef programs received a premium in each of the five years that sales of natural cattle were made in the video auctions. The amount of the price premiums was influenced by other factors such as breed and sale location.
During the UCD research period, the share of sales that were “natural” was zero (0.00%) in 1997-98 — steadily increasing to only 13% by 2003.
“Thus,” Blanks says, “natural beef is still very much a niche.”
The future is here
The future amount of natural beef premiums, if any, will depend upon the competitive response within the cattle market.
“If buyers continue to expand their demand for natural beef, price premiums may exist,” Blank says. “However, as ranchers respond and provide increased supplies of natural beef to the market, the natural niche may become the norm and producers could see premiums competed away.”
The same can be said for premiums granted the weaning niche if it grows to become a larger share of the market.
The irony of the natural niche, Blank notes, is that in the early 1990s beef buyers were moving toward more standard use of preconditioning programs involving more “value-adding” use of medications.
Now buyers are beginning to reflect consumers' preferences for more cattle that are free of rancher interventions. “Natural beef” free of hormones and antibiotics could be considered a move back to the simpler production practices of the past.
“Thus, in a sense,” Blank says, “the cattle industry's future may involve discovering ways to go back to old production methods and finding a way to make them pay.”
Cattle markets are dynamic, so ranchers need to carefully watch price trends to see what characteristics are valued.
“If the premium isn't consistent across years, it may be a false signal that mixes the market effects of more than one pricing factor,” Blank says. “Knowing what is truly being valued by the market can save ranchers time and money.”