Now what am I supposed to do?
Cattle prices are at historic levels because the national cattle inventory is the lowest it’s been since World War II. This is due to severe drought in the big cattle states, competition from corn for ethanol (which has reduced availability of hay and pastureland) and rising exports. Packers are short on cattle, causing the closure of some plants, and those remaining are pricing finished cattle nearly 20 percent higher than the spring of last year. The U.S. Department of Agriculture’s April Livestock, Dairy and Poultry Outlook reported feedlot profits of $200 per head. This has pushed up the price paid for feeders.
A research project evaluating factors affecting the price of cattle in New York found that prices for feeders are 20 percent higher this spring compared to last year. With higher prices nationwide, Harlan Hughes, professor emeritus, North Dakota State University, projects that cow-calf producers will have the opportunity to see a return of $246 per cow this fall. The production sector is responding to good returns by slowly expanding their herds, which will put fewer heifers into the slaughter mix, further raising feeder calf prices in the short term. All of this is good for the cow-calf producer selling feeder calves, but has serious consequences for other segments of the industry.
The question has to be raised about consumer demand. Through February 2014, the retail price of beef had risen 5 percent, and while pork and poultry prices have also increased, they’re still cheaper than beef. Fortunately, this has not dampened demand. CattleFax has projected that consumer demand will remain steady or slightly increase in 2014, suggesting that beef buyers will continue to put beef in their grocery carts.
I’ve had several conversations with cattle buyers about the high price of feeder cattle. A stocker operator who grass-finishes is wondering if he can pay the high price for feeders and still supply grass-finished beef to his customer base. Will they be willing to pay the extra price for beef if he factors in the price of feeder cattle?
A cooperative that acts as a conduit to markets in New York City is getting pushback from its members, who believe they can receive similar prices in the commodity market. The cooperative is not sure it can pay the premium necessary to meet the demands of membership and pass this premium on to the New York City markets.
Finally, a cattle feeder that adds value to fed cattle by selling retail is also struggling with the price of feeder cattle and passing that price increase on to its customers. While this feeder/retailer guarantees local, consistently tender and flavorful beef, will these attributes be valued by the consumer?
What’s a beef seller to do?
First, for sellers comparing to the commodity market, they need to be sure they understand the specifications of the market. Not all feeder cattle bring the same price. Breed, weight, condition and management are all factored into the final price.
Take, for example, a set of steers that sold on April 12 at Finger Lakes Livestock Exchange in Canandaigua, New York (Table 1). The weight range was 29 pounds, yet the spread in receipts per head was over $365. Lot 1 was discounted compared to all lots, for a reason not captured by the price recorder. There was something that the buyers didn’t like about these cattle. Compared to Lots 3 and 4, Lot 2 was discounted for being red. Lot 3 was discounted for carrying lighter muscle than Lot 4. Lot 3 received a premium compared to Lots 1 and 2 for being preconditioned.
three-year study in New York.
The same is true for finished cattle. At the April 23 sale in Canandaigua, Choice steers ranged from $1.39 to $1.55 per pound, while Select cattle were $1.18 to $1.34 per pound. On a 1,200-pound Choice steer, the difference in receipts is nearly $200. If that same 1,200-pound steer was Select, the spread would be even greater. The point is that when hearing that cattle brought $2 per pound at the sale, it has to be understood that while prices have increased 20 percent from last year, there is still a large range in the value of cattle. Do your cattle meet the qualifications to get the highest price?
The second consideration in market selection is that a farm should be operating from a business plan that describes the goal of the operation. Matt LeRoux is an agriculture marketing specialist with Cornell Cooperative Extension. He says, “The business plan gives guidance on market channel selection.”
Brent Gloy wrote “A Guide to Understanding the Value Chain” (http://bit.ly/R42CNj) when he was an assistant professor at Cornell (he is now at Purdue University). In it, he advises: “Ask yourself: What chain are you most suited to participate in? How can you deliver the most value to that chain? What relationships are necessary to successfully compete in your chosen value chain? What key factors can destabilize or adversely affect the value chain?” Every market has product specifications, just like the ones described above for the commodity market.
Production methods and cost of production must produce a profit for a given market. If that’s not the case, the enterprise either needs to produce at a lower cost or choose a market with higher receipts. If the higher cost of production cannot be passed on to the consumer, then it’s necessary to re-evaluate the goals.
Re-evaluation of the business plan could lead to lower marketing costs, such as selling quarters and halves, or increasing prices may be an option due to the relationship built with buyers and the quality of the product.
The good news is that there has been plenty of press about the increasing price of beef, and to date the demand has not declined. In the commodity market, communication with the buyer is somewhat more difficult. If you use direct marketing channels, communication with your buyers gives you the unique opportunity to explain to them why your price has increased and why your product still has value.
Quality – Twenty percent of beef purchased in grocery stores does not provide an acceptable eating experience. This is mostly the result of genetic variability in cattle, not production practices.
What are you doing to improve consistency? Do you go to the processor and look at each carcass? How much fat do they contain? What size is the rib eye? Is the beef tender? How do you substantiate quality claims?
One processor samples every carcass and will not sell it unless it meets their standards for flavor and tenderness.
Value – Your customer must see additional value in your product or they will buy it cheaper at large retail outlets. What are the intangible benefits to purchasing your beef? Some examples include farm experience, supporting local, production system (natural, grass-finished, organic), personal relationships, delivery, and providing expertise in choosing the right cuts and preparing the beef.
Reputation – Brian Henehan, retired Cornell senior extension associate, writes in “Reputation as Your Brand” (http://bit.ly/1mhx7Jh), “Your reputation is an integral part of the ‘story’ that you tell to customers or consumers. Some segments of consumers are very interested in how you produce a product or the values you adhere to in conducting business. Some examples include: the ethical treatment of animals, utilizing environmentally sound practices, or how employees are treated. Highlighting your reputation or the standards you set for conducting business can be a productive marketing strategy.”
Do your customers know your standards of trade relative to the quality of your product? If surveyed, how would your customers rate your reputation? The American Soybean Association provides the following advice: “Always stay transparent and follow this model: Act responsibly. Admit mistakes. Engage stakeholders. Build trust.”
What not to do
If profitability requires denigrating other beef producers who operate differently than you do, what does this say about your reputation? All beef is grass-based, even for grain-finished beef – 70 to 75 percent of the diet over the entire production cycle is composed of pasture and forage.
With few exceptions, all beef producers raise their beef humanely; it wouldn’t make economic sense to do otherwise. Large confinement operations are regulated to a much greater extent than small operations, so environmental impact between production systems is similar. Finally, there is no research documenting that any one production system is superior in producing beef that is beneficial to human health.
For direct marketers, these principles have not changed. Communication with the consumer has always been the driving force in differentiating your product. However, in the current market, where all food is expensive and the consumer has many protein choices, communication is more important than ever if you’re going to participate in this channel and continue to be profitable.
For additional information on communicating with consumers and telling your story, visithttp://www.beef.org/mastersofbeefadvocacy.aspx.