Premier Beef Management and Marketing of the Beef Cow Herd

Veterinarians routinely influence animal health- and production efficiency-decisions that impact profitability on farms and ranches. Increasingly, veterinarians are also influencing their beef producing clients’ marketing decisions. Marketing strategies can impact the management of a cattle herd, including the genetic, health, pharmacologic, and nutrition tools used. Conversely, management skills and interests also influence the optimum marketing strategy for a particular farm or ranch manager. In order to offer the best health and production advice to your clients you must have an understanding of how management and marketing interact to impact profitability.

Marketing and Profitability

Although two papers that report the descriptive differences in higher-net income versus lower-net income beef farms emphasize the need to reduce costs in order to increase the likelihood of receiving a positive net income from a beef cow/calf enterprise, reducing production costs is not the only factor influencing farm profitability.[i]^,[ii] When veterinarians discuss low-cost production with clients, the denominator used to divide cost is extremely important. Some producers are very low cost on a per cow or per acre basis, or even on a per pound of calf produced; however, on a per dollar value of calf produced, these farms may not be the lowest cost operations. In addition, producers must give special attention to not reducing quality when reducing costs, especially if the producer’s market price is a function of measurable quality.

In a survey conducted by the National Animal Health Monitoring System (NAHMS) Cow/Calf Health and Productivity Audit (CHAPA) of 35 farms who completed a Standardized Performance Analysis (SPA), management practices for farms that had positive versus negative net returns were analyzed and summarized.[iii] The NAHMS study showed that positive-return operations paid more attention to price when buying or selling their animals. Positive-return producers were more likely to use price as the most important factor for determining when to sell their calves than negative-return operations (31% vs. 5%).3 In addition, two other NAHMS summaries of marketing practices of 2,713 producers from 23 major beef-producing states, point out that only a small proportion of operations use any forward pricing of calves and instead have to manage daily price fluctuations through auction markets and private treaty sales.[iv]^,[v]

Even though the price beef producers receive for their cattle is determined by market fluctuations that cannot be controlled by the individual producer, some marketing strategies have the potential to decrease price risk or to establish price based on expected performance. Therefore, in addition to decreasing cost per unit of production, another possibility to increase the likelihood of receiving a positive net income is to increase the dollar value (price received) of calves produced per cost of production (Figure 1). For many herds, these two goals are not completely antagonistic. Because of the inefficiency described by Featherstone et. al.,2 and the lack of attention to price received described by NAHMS,3 many producers can simultaneously decrease cost of production and increase price received. The optimum return for a farm, which is determined by subtracting the cost of production from the price received, is a dynamic interaction between these two variables and will differ from one farm to another based on each individual farm’s opportunities to reduce cost and/or market a higher-value product.

Selling weaned cattle through auction markets is by far the most popular method with 85% of producers marketing 68% of the weaned calves in this manner.⁵ The discrepancy might suggest that smaller operations tend to use auctions as the primary marketing method, while larger operations used a variety of methods including private contracts, video, or forward contracts. The use of auction marketing makes a farm’s entire income from weaned calves and opportunity for profitability dependant on market conditions on a single day. Producers may want to diversify their marketing strategies to ensure a more stable and predictable market price. The second most popular method of marketing cattle is through private treaty with 10% of producers using this method to sell 18% of the cattle.5 Forward pricing was used by 1.5% of operations as a means to market calves in 1996.5 When producers forward priced their calves, on average, they did so with only 53.8% of the calf crop. The most common method used to forward price calves is the cash method, whereby the buyer and seller come to an agreement on a fair price for a transaction that will occur at some point in the future.5 Futures contracts and options are other methods of forward pricing that can be used successfully.

Marketing choices that your clients make influence not only their economic position, but also the production choices they should make. Management decisions will be dictated heavily by how and when animals are marketed. The best advice for a producer who markets cattle on a per-pound basis at weaning may be different than a producer that markets cattle through a grid at slaughter or a producer that sells calves at weaning in a branded-product alliance.

Selling weaned calves through live auction markets is the most prevalent marketing for several reasons. For many producers, previous experience and the lack of any required negotiating make this selling method very comfortable. In addition, discrimination is minimal in that almost all cattle delivered are sold. And, auction markets provide local support and infrastructure.

However, selling through auction markets has weaknesses. Generally, there is little opportunity for information feedback to the cow/calf producer about the health, growth performance, and carcass quality of the calves once they leave the sale ring. This method also allows little opportunity for information about the health and performance to date of the calves, and the performance of previous calves from the same herd to be transferred to the buyers for use in their bidding strategy. Because of the limited information exchange, the opportunity for value-based marketing is very minimal. In addition, because no negotiation takes place, many factors outside of the producer’s control and input impact the sale price received: daily price fluctuations, number of buyers present, time of day the cattle sale, amount of shrink the cattle suffer, quality and health of other calves in the sale, etc.

Video auction markets attempt to capture the benefits of live auctions and also decrease some of the risks. Many areas of the country have local support and infrastructure for video marketing and comfort is increasing with experience. By attracting a larger number of buyers than could attend many live auctions, the risk of few bidders is decreased. Since cattle are sold directly from the farm of origin, the amount of shink figured into the bid is negotiated at the time of sale. As with live auction markets, there is little opportunity for information feedback and value-based marketing; however, like live auction markets, exceptions do occur.

Forward cash contracts are often as simple as a broker or market agent agreeing to place a floor-price under a producer’s cattle for an upcoming sale. A forward contract decreases some of the risk associated with daily price fluctuations and may allow a producer to lock in a price above or near breakeven. Negotiation is required and having information concerning previous performance of cattle from the herd is helpful in the negotiation process. Some discrimination may take place, in that the contract-price may only apply to cattle that meet certain specifications. The contract or commitment is not necessarily repeatable with subsequent groups of cattle from the same farm. Some producers may consider this lack of commitment to be an advantage, while others consider it a disadvantage. Because of the negotiation involved in establishing a forward cash contract, opportunities for information exchange and value-based marketing exist.

Beef producers face price and production risk over time and within a marketing year. Price risk can occur for a number of reasons. For agricultural commodities, price risk may occur due to drought, near record production, an increase in demand, decreased international production, etc. One method of reducing risk is through the use of the commodity futures exchange markets. Arbitrage is the process whereby a commodity is simultaneously bought and sold in two separate markets to take advantage of price discrepancy between the two markets. A commodity futures exchanges acts as a market place for persons interested in arbitrage. Much like the use of insurance, agricultural producers can use the commodity futures markets to hedge the potential costs of commodity price volatility. The factors driving arbitrage are the differences and perception of differences of the equilibrium price determined by supply and demand at various locations. The primary objective of hedging is not to make money on the futures market transaction, rather, it is to minimize price risk.

The commodity futures markets provide a means to transfer risk between persons holding the physical commodity (hedgers) and other hedgers or persons speculating in the market. The theory of risk establishes that the hedgers may forgo some profit potential in exchange for less risk and speculators will have access to increased profit potential from assuming this risk.

By knowing cost of production, beef producers can determine at what price to consider forward pricing a portion of sale cattle. The costs of hedging are straightforward; however, these expenses can become substantial over time. Commissions are paid to a broker for administrative costs, futures exchange operation, and futures exchange regulation. These costs may range from $5 to $35 per order. An order is either a buy or sell order. Therefore, to enter and exit the market the total costs can range from $10 to $70.

Margin money refers to earnest money placed in a brokerage account to cover potential losses. The initial margin is needed to start trading. Typically, a futures position will require the initial margin of between 3% to10% of the actual value of the contract being traded (e.g., a 50,000-lbs. feeder calf contract may require an initial margin of $1200/contract). The maintenance margin is used to step up the initial margin account. For example, suppose the maintenance margin on the feeder calf contract is $1000/contract. Therefore, whenever the initial margin account drops to $1000 because of “paper” losses in the futures market, the account must be added to so that the balance in the account is at least $1000. There is no maximum number of times a margin call can occur.

Margin monies are only paid on futures contracts and not options contracts. The options market also differs from the futures market in that with an option, a producer has unlimited profit potential but can lose, at most, the cost of the option premium plus brokerage fees. Alternatively, holding a futures position allows for the opportunity for both unlimited profit and unlimited loss.

For the options market, the arbitrage activities are carried out through the exchange of paper promissary notes that provide the opportunity to sell or buy a specific futures contract at an agreed upon price at a later date. This promissary note gives the individual the right but not the obligation to buy or sell the futures contract. Therefore, if the market moves so that it is in the producer’s best interest to exercise the option, he/she will do so because that right was obtained by purchasing the option. However, if it would be more beneficial to not exercise the right to buy or sell a futures contract at the price in the promissary note, an option does not require the producer to do so. The producer’s only loss in such a situation is the cost of the option and related brokerage fees.

A put option gives the individual the right but not the obligation to sell at a later date. A call option gives the individual the right but not the obligation to buy at a later date. The price at which the futures market can be entered at a later date is referred to as the strike price. A put option is said to be in the money if the strike price is above the underlying futures price. A put option is said to be at the money if the strike price is equal to the underlying futures price. A put option is said to out of the money if the strike price is below the underlying futures price. At any given time, the range of strike prices quoted will cover values in the money, at the money, and out of the money. Thus, a hedger or speculator has the choice of purchasing an option at any of these three levels. Typically, options in the money will cost the most, followed by options at the money, and options out of the money will be the cheapest. As with futures contracts, it is imperative that a producer knows his/her cost of production when using options to hedge cattle.

As cattle producers approach the time to make a decision on whether to keep or sell their weaned calves they should be aware of the options, advantages and disadvantages of retained ownership. For example, every time a calf is sold there are commissions, trucking charges, and some health costs associated with the transaction. If one producer owns the calf from birth to the slaughter plant, the marketing costs of at least one transaction are saved.

Cattle producers may choose total retained ownership, ownership shared with a feedlot, or retained ownership for only a limited period of time, with the producer taking the cattle to a predetermined weight before selling. Many feedlots will share ownership of cattle with the producer, as well as assist in financing and risk management.

Producers that choose to retain ownership of calves past weaning and sell them at a predetermined age or weight prior to placement in a feedyard generally do so to take advantage of two strategies. The two ways producers add value from short-term retained ownership is to add weight at a cost of gain that is advantageous when the calves are sold at a heavier weight, and to take advantage of seasonal price variations based on supply and demand. During periods when supplies are high or demand is low, prices paid per pound will decrease. Conversely, if calves can be sold when supplies are low, prices will be higher. Historically, lower prices are paid during periods of time when many producers are weaning calves or when a large number of stocker calves are available for placement into feedlots. By considering historic trends, veterinary consultants can predict periods when calves will be sold for a higher price. In general, historic highs for calf prices are in April, however some recent years have had February highs. Historic lows occur in October through November.

The most common way to learn how cattle perform in the feedlot and as carcasses is to own them to slaughter or have an arrangement to retrieve the data. To capture information that can improve production efficiency, as well as to manage the variable financial performance of marketing fed cattle, producers have to make a long-term commitment to retained ownership. If they retain ownership, they should keep records on which calves did well and what factors of the production system they believe contributed to that performance (i.e. feed efficiency, carcass yield, carcass quality grade). This provides performance information on bulls and possibly, culling information on cows. Working with a custom feedlot also provides access to information on nutrition, health and marketing that can be transferred to the cow herd for future production and marketing advantages.

Retained ownership isn't for everybody. With a small herd size or wide variance in weaning weights, for example, it is may be difficult to feed animals efficiently. In addition, if ownership of calves is retained through feeding and slaughter, the amount of negotiating and interpersonal communication required increases. Many cow/calf producers do not have established relationships with the people in the feeding and slaughter industries with whom they will be negotiating and interacting. Distance, lack of previous experience, and lack of established relationships makes retained ownership through feeding and slaughter uncomfortable for some ranchers.

Retained ownership can significantly affect cash flow. If calves are not sold at weaning as usual but are sold the following spring, the ability to meet loan payments or other farm or family commitments may be significantly altered. The producer’s lender may want to be part of a decision to retain ownership. Producers considering retained ownership must consider first year cash flow and income tax implications for their operation. Additional inputs might also be required to successfully retain ownership of calves. Financing packages offered by feedyards that free up part of the value of the calf and finance the feed could greatly ease cash flow constraints. Feeding calves one year and not the next will complicate income tax management. This is only a problem for a producer using cash accounting who switches from a retained ownership program to selling both calves and fed cattle in the same tax year. In a diversified farming operation in which cattle sales are only part of total income, selling two calf crops in one year may not cause a problem because sale of grain may be shifted. However, if cattle sales are a major part of total revenue, tax considerations are significant. Pre- or post-paid feed bills may provide some relief for an uneven income stream. Retaining ownership of calves beyond weaning is a value-added manufacturing process that provides cow owners opportunities for additional profit. It turns lower-value calves and feedstuffs into higher value animals. The accelerating trend toward value-based marketing also provides an opportunity for cow owners to more fully capture their investment in genetics. It increases the size of the operation while adding diversification and improving marketing flexibility.

Retained ownership provides opportunities to producers that selling the calves at weaning does not. One of the greatest, and commonly overlooked opportunities, is the direct information feedback to the genetic decision-maker to improve future animals and meat products. Cow/calf producers may obtain the performance of their cattle from the cattle feeder without retained ownership in isolated situations and be able to use that information to adjust the breeding program. However, the signals are clearer if there is a direct economic link between cost of production, the price received at slaughter and the person controlling the genetic makeup of the cattle. Thus, in any retained ownership program, captured information is a tremendous benefit.

While it is difficult to attract a packer buyer to the farm for a small pen of cattle, the producer can increase market access and competitive bids by feeding the cattle in a custom feedyard that is visited by several buyers. It is also easier to hedge fed cattle than feeder cattle because packers commonly offer cash forward contracts on fed cattle, but cash contracts are less common on feeder cattle. While feeder cattle futures and options do exist, the live cattle futures and option market are typically easier to use because they have higher liquidity and orders are filled quickly.

Feeding cattle in a custom feedyard allows the cow/calf producer to benefit from the feedyard’s use of specialists and state-of-the-art facilities and equipment. Many feedyards have consulting nutritionists, veterinarians, marketing and risk management specialists, and other professionals whose sole objective is profitable cattle feeding. For cow/calf producers gathering and using information to improve their herd, feedyards that have scales in the working chutes and can record individual weights when the cattle are worked (arrival, re-implant and sometimes prior to sale) are able to capture individual performance information. Producers can work with many packers and the National Cattlemen's Beef Association to gather individual carcass information.

Some states have banking regulations that make transferring collateral outside of the state difficult. Producers and lenders should both be aware of the banking laws in the state where feeding takes place to better understand the laws of financing the feeding stages. Understanding the laws of litigation in the other state may also prove useful should the feedyard experience the financial difficulty of bankruptcy.

When cattle are sold in the commodity auction market, there is a tendency to underprice superior animals because it is difficult to predict/confirm superiority in carcass traits or even in feedlot performance as a calf or a backgrounded feeder. There is little opportunity to capture premiums when selling superior cattle at weaning in this market. For producers who own their cattle through the feeding phase, the calves’ production (ADG, Feed:Gain, carcass yield), whether good or poor will directly affect income. For producers of superior calves, owning them through slaughter gives the greatest opportunity to be rewarded for those superior traits.

Beef carcass marketing is moving towards prices based on quality of an individual carcass; so, producers who own their cattle to that stage have the opportunity of getting a superior price on qualifying animals. Of course, a lower price is received for inferior animals. Getting an average price for beef that's been mixed with that produced by many other farms, is no incentive or assistance in setting goals for improvement. A small but growing percentage of fed cattle are marketed on a carcass price grid (Figures 2 and 3 are examples of such grids). With such a system, the buyer determines what he/she wants (quality grade, yield grade, cut size, etc.) and gives price incentives for carcasses that meet those specifications. There are also heavy discounts on cattle that do not meet the specification (i.e. carcasses the buyer can’t use). In figure 2, the buyer supplies meat to several steak restaurants and mail-order steak outlets. The price incentive is for prime and high choice cattle with only moderate discounts for yield grade 3 and 4 cattle. In contrast, the grid in figure 3 represents a buyer who supplies lean beef cuts to a specialty grocery store brand and a mail-order meat supplier who specializes in people who are worried about fat/cholesterol. This grid has discounts for prime and choice carcasses and heavy discounts for yield grade 3 and higher.

If producers know how their cattle will perform on a carcass basis, they can sell them on an appropriate price grid and receive a price advantage over selling them live or on a carcass basis without a grid. The obvious danger is when producers do not know how their cattle will perform on a carcass basis and they sell them on a grid where they suffer substantial discounts and therefore receive a price disadvantage over selling them on a live basis.

Although none of the currently available marketing strategies place beef producers in complete control of price received, they do offer a variety of price-risk-management options that can increase the likelihood of economic success. In order to choose the marketing method offering the greatest potential return, producers must know their cost of production and the desirability of the product they produce for those who want to purchase their product. Desirability of product includes health costs, feed efficiency, and rate of gain in the feedlot, as well as carcass yield, carcass yield grade, and carcass quality grade. If the product is undesirable, a marketing method with no discrimination, and little information feedback offers the best opportunity to receive an average price for a below-average product. If the product excels at either feedlot performance or carcass performance, or both, a marketing strategy that captures that information and links it to the calf-producer offers the greatest opportunity to negotiate a greater than average price for better than average cattle. If genetic selection to improve either feedlot or carcass performance is desired, a marketing strategy that captures that information is necessary.

[1] In-depth information is available at http://www.ssu.missouri.edu/faculty/vernpierce/default.htm

[i] McGrann JM, Wikse SE: Standardized performance analysis: Opportunities for beef cow/calf veterinarians. Comp. on Cont. Ed. for the Pract. Vet. 18:S199-S206, 1996.

[ii] Featherstone AM, Langemeier MR, Ismet M. A nonparametric analysis of efficiency for a sample of Kansas beef cow farms. J Agric and Appl Econ 29:175-184, 1997.

[iii] Management practices associated with profitable cow-calf herds. USDA-APHIS-VS Information sheet http://www.aphis.usda.gov/vs/ceah/cahm/Beef_Cow-Calf/chapa/chapecon.htm, 1996.

[iv] Part 1: Reference of 1997 Beef Cow-Calf Management Practices. USDA-APHIS-VS. Washington D.C., June 1997.

[v] Marketing practices in beef cow-calf operations. USDA-APHIS-VS Information sheet, , http://www.aphis.usda.gov/vs/ceah/cahm/Beef_Cow-Calf/bf97markt.htm 1997.

Low cost herds	=	¯ cost of production ($) / calf value ($)
High return herds	=	calf value ($) / cost of production ($)

	Yield Grade
Quality Grade	1	2	3	4	5
Prime	$ 114.24	$ 112.24	$ 110.24	$ 96.24	$ 91.24
High Choice	$ 110.24	$ 108.24	$ 106.24	$ 92.24	$ 87.24
Low Choice	$ 108.24	$ 106.24	$ 104.24	$ 90.24	$ 85.24
Select	$ 97.74	$ 95.74	$ 93.74	$ 79.74	$ 74.74
Standard	$ 77.74	$ 75.74	$ 73.74	$ 59.74	$ 54.74

	Yield Grade
Quality Grade	1	2	3	4	5
Prime	$ 67.74	$ 63.74	$ 60.24	$ 59.24	$ 54.24
High Choice	$73.74	$ 67.74	$ 63.24	$ 61.24	$ 57.24
Low Choice	$94.24	$ 92.24	$ 82.24	$ 75.74	$ 61.24
Select	$118.24	$ 116.24	$ 90.74	$ 79.74	$ 66.74
Standard	$114.24	$ 111.24	$ 87.74	$ 75.74	$ 61.74