Western cattle ranchers have long suspected their calf prices are discounted compared to those of cattlemen closer to the Midwest and High Plains. However, it's been difficult in the past to determine how much price effect — everything else being equal — could be attributed to transportation costs.
With recent University of California research focusing on price differences in calf markets across locations, it's now possible to estimate average transport-based price discounts received by ranchers. These calculations take on added magnitude as energy prices continue to climb to record-high levels.
“We understand our distance to the major feeding regions and slaughter facilities affects our prices,” says Max Olvera, manager of Cattlemen's Livestock Market, Galt, CA. “What we once thought was a $4-$6/cwt. feeder calf market discount based on transportation costs now looks more like something in the range of $7-$8/cwt.”
He says some of the transportation discounts are mitigated by California's seasonal supplies that place an emphasis on fall-calving herds.
“Our volume feeder calf runs come in May, June and July,” he says. “That helps bring in repeat buyers from the Midwest who need to keep their feedlots full year-round.”
Olvera says that while many California calves are fed as far away as Nebraska, Kansas and Iowa, a healthy feeder market still exists in the Pacific Northwest. He also says if it weren't for market opportunities offered by Harris Feeding Company at Coalinga, CA, many far Western ranchers would be at an even greater price disadvantage.
Cattle market basics
Basic economics say supply and demand factors that determine the price of an agricultural commodity must be adjusted across locations.
“The process of arbitrage reduces cattle supplies in the low-price market and increases supplies in the high-price market, pushing prices in the two locations closer together,” says Steve Blank, Extension economist in the Agricultural and Resource Economics Department, University of California (UC), Davis. “In the highly efficient American cattle market, few arbitrage opportunities appear because market participants react quickly when those opportunities do appear.”
The issue involved in explaining cattle prices over different locations involves the structure of the American beef industry and its location, Blank explains.
“In general, the cattle and meat industries developed to minimize total transport costs,” he says. “The economics of transporting inputs make it most cost-effective to ship the most valuable input on a per-pound basis to the location of the least valuable, or most bulky, input.”
That means calves should be shipped to the location of the feed grains. Therefore, the facilities that combine the inputs — feedlots — are mostly located near the source of feeds. The output of feedlots — fed cattle — are the primary input for meat processing operations, so those facilities are usually located near feedlots to reduce the costs of shipping live animals.
“These economic facts mean the real value of a calf to a buyer is the price paid adjusted for transport costs,” adds Larry Forero, UC livestock advisor for Shasta/Trinity Cooperative Extension. “At any point in time, a buyer can offer a higher price to ranchers located closer to the feedlot.”
Therefore, as witnessed by Olvera, because of their location, ranchers in California are generally the most disadvantaged and receive discounted prices in the current cattle market structure.
Discounts across regions
Blank, Forero and Glenn Nader, UC livestock advisor for Sutter/Yuba/Butte Extension, conducted a study with recent sales data to see whether the dynamic cattle market price discounts on 500- to 625-lb. feeder steers in Western states matched what was predicted by economic theory (see sidebar on page 68).
“Indeed, we found Western markets consistently received a price discount over recent years,” Nader says.
As an example, the price effect for marketing Region 10, which covers northwestern California, shows the average discount of $5.39/cwt., relative to the average price received for sales in Region 4 (Montana, Wyoming and Colorado). Region 4 was used as the base because that region had the most sales during the entire study period.
“Therefore, to get the total discount compared to the Midwest, the average premium of $1.27/cwt. received in Region 6 must be added, giving a total discount for Region 10 compared to the Midwest (Region 6) of -$6.66,” Nader explains. “The same process must be used to get the total discounts for all other regions.”
The California research also indicates how much the average price received was affected by the presence of a particular management attribute.
“For example, our analysis showed every 30 days since weaning raised average prices about 1.3¢/lb.,” Blank says. “Also, calves that met the requirements of a ‘natural’ beef program received a premium averaging $1.60/cwt.”
There are differences across locations indicating differences in supply and demand characteristics in each market region. These differences show up in each region's response to the effects of the underlying “cattle cycle” on price trends.
“The location price discounts were evaluated by year to see if they changed over time,” Forero explains. “There were indeed differences in the average amounts from one year to the next. That implies transportation costs are not the only source of the discounts observed between the Midwest and other regions.”
The source of discounts
Price differences across years also reflect differences in relative supply and demand in each location across years.
“However, the fact remains the discounts are usually higher for regions farther from the Midwest,” Blank adds. “This supports the fact transportation costs are a major source of the price differences observed.”
In the future, the existence of location discounts and their amount will continue to depend upon cattle market structure.
“As long as most feedlots and meat processing facilities are located in the Midwest and High Plains, calves raised in California will be sold at a price discount,” Blank observes.
While corn and other feed grains (excluding soybean meal) are produced in California, there's currently not enough of those feed grains to meet the needs of California feeders if they were to buy more of the region's calves. And, the relative profitability of other crops California farmers can produce on their land makes it unlikely feed grain production will expand.
This leaves ranchers in California and other Western locations with few ways to raise their average price received other than value-adding practices, such as increasing the time between weaning and the sale of a calf, or by using natural production methods.
Olvera can attest to the advantages of providing value-added or what he calls “reputation” cattle. He says, whether it's on the video or through the ring, he gets a lot of repeat buyers looking for calves that have undergone a vaccination program.
“Plus, it helps that we can sort the cattle into groups depending on what the rancher has done and try to make them worth more to the feeder,” Olvera says. “This is especially critical when marketing smaller lots of cattle.”
These factors can result in higher average market prices, Nader acknowledges. However, whether the costs associated with those factors are lower than the price benefits is a matter each rancher must determine individually.
“Either way, to ensure profitability, the Western rancher has to meet or exceed the increasing transportation discounts they are faced with,” Nader concludes.