Here Comes Price Differentiation!

When numbers are tight, as they are today, and excess capacity is chasing a small supply, price differentiation will tend to narrow. And, we’ve always seen price differentiation increase in times of ample supply. This dynamic hasn’t changed, but the economics are changing the value differences between cattle based on genetics and management in a major way.

For example, a 10% change in feed efficiency was never insignificant, but it’s a whole different game when corn has gone from $2.80/bu. to $7. A few additional pounds of carcass weight at $1.80/lb. vs. $1.20 is easy to calculate, as is every other variable from death loss to trucking. The impact is far greater as is the risk and the potential rewards.

It makes buying on the average increasingly difficult. But, more importantly, it means that if one can document or can characterize value with some degree of certainty, then the value for such animals goes up nearly equally.

These dynamics mean that price spreads, which already are growing, will widen even more if supplies increase. Buying on the average made sense when the variation around the mean on a price basis was small; the focus was on production efficiencies, but with that variation around the mean growing almost exponentially, with both input prices and market prices increasing, assigning value becomes an even more critical component.

We’re fast approaching the time when price spreads on any given day will be larger than yearling price swings based on averages. The implications have already been felt in the bull market, and to a lesser degree in the bred female market, and then the cow-calf market.

The fed market isn’t seeing the price variation grow as much as we are seeing alternative marketing windows. And, the Choice/Select spread appears to be the one value determiner that isn’t increasing; we may not see that change until supplies change.

But, the trend appears to be irreversible as the economic drivers are real and increasing. Price spreads based on quality are increasing in magnitude.