Discovering the value of fed cattle today is an exercise of mind over matter. If you don't mind thousands of cattle trading each week for virtually the same price - even though their actual value differences represent hundreds of dollars - then it just doesn't matter.
"It's always mystified me why all cattle in the U.S. feedlots, regardless of quality, are worth the same price live," says Ben Thorlakson, president of Thorlakson Feedyard at Airdrie, Alberta and Cattle Land Feedyard in Strathmore. "It must be discouraging for those cattlemen who spend their whole lives trying to develop better genetics."
Indeed. The U.S. marketing system has evolved to entire show lists trading for the same price in a single marketing window so short each week that sellers miss out if they aren't near the phone. In fact, there are times when negotiation revolves more around which pens of cattle the packer will take at the price offered, than the price itself.
Feeders don't like it. "When you get to the point in the week you have to market cattle, you're not worried about price, you're worried about when the market happens," says Perry Owens, manager of Kan Sun Beef Inc. at Leoti, KS.
Some packers don't like it, either. "The packers would rather bid and buy cattle five days every week because the packer is selling beef every day of the week. It's a better hedge," says Tim Schiefelbein, manager of value-based procurement for Monfort.
Selling By Sealed Bid All of this is a mystery to Thorlakson because the system works much differently in Canada. "All cattle are not created equal. Unless a person is selling on a carcass basis, which is the best way to sell, there has to be an opportunity to move values up and down," says Thorlakson.
In a nutshell, better than half of the fed cattle in Canada are sold through a sealed bid system, according to Can-Fax market analyst Anne Dunford. It works like this:
Feedlots tell packers which cattle are on the show list. If interested, buyers place a sealed bid, via phone, by a time designated by the feeder. Bids are placed on a live or carcass basis. The seller can accept the bid or pass.
Besides giving feeders more control of when they market and packers a better sense of when they're buying, the system uncovers a range of value differences between pens because folks aren't standing around waiting to see who's bidding what. Across the industry, from Tuesday morning to Thursday night, Thorlakson says 1,000-2,000 head are traded every hour on some type of bid system.
"At least on this basis, we are trading cattle with different weight, quality, days on feed and history at different prices ... having a $5 range in prices on a day to day basis is no surprise," says Dunford. What's more, seeing a similar range between pens is commonplace (Table 1).
Of course, U.S. feeders used to enjoy pen by pen bidding. "When every pen had a different price, we probably had more range over the course of a day. That should have given packers an opportunity to match the bid to the pen of cattle, which should have improved price discovery," says Clem Ward, professor and Extension economist at Oklahoma State University. "When we sell at the same price, we still have some price to base the next transaction on, but it's not as good from a price discovery standpoint of matching the price with the quality," Ward adds.
Moreover, a system like this could improve other mechanisms ultimately dependent on live prices - tools like formulas and grids. For that matter, a sealed bid, live or hanging, could represent the negotiated grid base price many say is necessary for grids to take another step.
Would It Work Here? Today, if a packer bids its top early in the week, few feedyard managers would take it because weekly opening and closing bids have been a few dollars apart for so long.
It is possible, though. Owens of Kan Sun Beef says, "It would be fascinating to do something like this ... If I had a sealed bid, and I thought I was getting good, honest bids, and we were getting fair value, I probably wouldn't market as many grid cattle because I think this would have the potential for packers to bid up more on the cattle."
Schiefelbein believes packers would be open to any workable system that allows them to trade cattle more than one day each week. "If cattle are worth X and they sell in the meat for Y, there are a number of ways to determine the margin in between," he says.
In fact, going full circle to the days of selling pens of cattle for different money rather than entire lists for the same dollar could be downright revolutionary. Owens says, "I think it could have some merit if it was mutually agreed upon by packers and feeders, where you force the industry into it. Over the long haul, it could be one of the best things to happen to this industry."