Cattle Digital Sales Platforms Bring Price Transparency
See Through Markets
As cattle markets twist and turn, it can be hard to know where prices are headed and how to best value this year's calf crop. From black swan events to rising inflation, it seems the markets are in a one-step-forward and three-steps-backward pattern that is unusually tough to navigate.
While legislators and lobbyists debate cattle-market price transparency and argue reforms, it's the local side of the business where most producers are concerned. To those producers, Curt Lacy says it's time to stop talking about selling cattle and start talking about marketing them. It's a totally different mindset.
"A market mindset means a seller knows what buyers are looking for in terms of types of cattle," he says. "A buyer may be stressing anything from breed to genetics to management practices. As a seller, we need to know what those buyers want, but we also want to have a clear idea of the costs associated with meeting those particular market requirements. A marketer knows where that profit line is and can decide what is, or isn't, worth the extra management time and expense. He factors in commissions and transaction fees, insurance. A marketer looks at the whole picture."
Lacy keeps an eye on cattle markets even though his role today is less focused on that segment of the industry as Mississippi State University's regional Extension coordinator for the Delta region, out of Stoneville, Mississippi. He held the role of livestock economist at the University of Georgia previously and has watched the cattle market evolve over the years, especially with the addition of digital or video cattle sales platforms across the country.
While he says these outlets aren't for everyone, given minimum head or lot sizes, they do help when it comes to price discovery.
"If you're a producer, the first thing you need to know is what buyers want and when they want it," he says. "Look at timing. Consider when supplies to the market are lower. You may benefit by having head to sell at certain times of the year, especially when they are uniform and preconditioned."
Lacy doesn't discount the value of the local sales barn, though. He says these businesses have their own advantages, depending on the type of seller you are.
"One of the advantages of the local sales barn is that in many cases, they are going to have weekly sales. So, you can take your cattle and sell them, and get a check every week. For some producers, that is important. When we look at other platforms, we may be limited to selling monthly or even seasonally. That, in turn, means it takes longer to get paid. That's a factor to consider for the average producer."
MORE THAN A COMMODITY
With so many value-added marketing programs available to producers today, Lacy says it's important to know how buyers are defining each category and whether some type of verification is required.
"Some programs require a lot of extra effort, and some just fall into what I'd call good husbandry. A lot of producers already meet some of the bars these programs set, but the challenge comes in keeping good records and, in some cases, verifying. It's really just another part of that marketing decision. The best price isn't always the most profit."
Lacy emphasizes that cattle marketing is a personal decision with no right or wrong approach. But, he adds that in today's economy, it's important to recognize that consumers are not just interested in whatever is the cheapest food product.
"A growing part of the value a cattle producer adds today is in the form of information about how that animal was raised," he explains. "Consumers want to know things like whether animals have been treated humanely and what management practices were used. They want to know what goes into getting that animal to the plate. And, if a producer wants the higher price, he or she needs to recognize they are marketing that information as well as that animal."
THE VALUE OF A NICHE
University of Nebraska livestock marketing analyst Elliott Dennis recently compared sources of price information, looking at futures prices for feeders, available through the Chicago Mercantile Exchange (CME), along with video auction prices. Taken together, the two can give sellers a good gauge of overall markets and their direction.
"The prices we see on the CME represent global demand for feeder cattle," he explains. "We can convert this to a local price by making an adjustment for the basis, which is just the local cash price minus the futures price. This approach relies on historical patterns for basis, and it varies year to year."
Dennis says one advantage of these futures prices is that they are available many months in advance of when production will be sold on the cash market. The CME also offers daily price signals.
On the video market side, a producer is looking at prices on production contracts between buyers and sellers, where the two sides have agreed on a price for a given set of characteristics, delivered a certain month at a certain place. Here, the cash price is known prior to delivery rather than determined at delivery -- such as when a producer takes calves to the sale barn and finds out what they are "worth" that day.
One of the biggest values for video markets is that they approximate what value-added labels are really worth in terms of price.
"It's important to understand, however, that the price is a composite of a lot of things," Dennis adds. "Buyers buy on reputation of the seller, on what cattle have been fed, on how cattle were raised, even on transportation and shrink. It all goes into actual price a buyer is willing to pay. The value-added element is in addition to that, and today, what we see in these video sales with regards to value-added is our strongest signal that tells us what people are really willing to pay."
VIDEO AUCTION ADVANTAGES
Video auctions bring together the largest number of potential buyers of all other market methods and provide flexible delivery schedules. They are considered by many to be the best way to find out if your cattle fit any of the growing number of value-added programs.
Superior Livestock's Joe Lichtie, veteran marketer and vice president of the video sales company, says their top value-added programs revolve around health protocols.
"It's almost a requirement today that producers have some sort of health protocol in place for their herds," he says. "It's become rare to offer cattle to buyers without having that health program in place."
Superior Livestock Vaccination Programs, of which there are seven, begin with VAC 24, where calves are vaccinated on cows at 2 to 4 months of age. This requires one dose of a 7-, 8- or 9-way clostridial; one dose of a viral 5-way; and one dose of a Mannheimia haemolytica and/or Pasteurella multocida vaccine. Internal and external parasite control is recommended. From this level, there are additional vaccine and management requirements, in some cases including weaning 45 to 60 days prior to delivery.
Lichtie says they are also seeing more buyer interest in cattle that are Non-Hormone Treated Cattle (NHTC), and all of the Natural Beef programs, of which there are three: Verified Natural Beef, Certified Natural Plus and Owner Certified Natural. A growing area for sales are the GAP 1 and GAP 4 cattle, which Lichtie says go into the Whole Foods system through Amazon. GAP stands for "Global Animal Partnership," where a five-step animal-welfare rating program is used to certify an operation.
Lastly, Lichtie says genetics continue to be a big driver of sales, which he notes has moved the industry a long way in terms of more Prime and Choice carcasses.
"Right now, about 30% of the cattle we sell are program cattle of some type," he says. "If we had more, we could sell them. These programs all go back to the consumer. It's the consumer driving this demand, and I don't see that changing."
While the value-added niche is growing, at the end of the day, Lichtie says the biggest driver of price is always going to be competition at an auction between buyers.
"If you have one offer, that's all you have. But, if you have three, four or five offers, then those entities are competing. That is price discovery at its best," he says, noting that Superior sold 1.5 million head in 2021 through its video auction platforms.
PRICE OUTLOOK TOOLS FOR CATTLE PRODUCERS
Every cattle market analyst has his or her own way of looking at where prices are headed. Personal experience and intuition play a role, but there are some key sources on which many rely.
-- USDA WASDE REPORTS. Each month, agricultural analysts, whether on the crops side or the livestock side, look forward to the latest data from the USDA in the form of its monthly "World Agricultural Supply and Demand Estimates" (WASDE) report. This is a comprehensive forecast of supply and demand for major crops and livestock.
-- LOCAL AUCTION SALES. The Agricultural Marketing Service reports prices on feeder cattle sales from local auctions. These reports are broken down by state.
-- DROUGHT REPORTS. A key factor in analyzing where cattle numbers are headed is to consider the weather in a region. Drought can lead to liquidation in a region, forcing prices lower in those local markets. Look to the National Drought Mitigation Center for weekly updates.
-- WEATHER AND THE MARKETS. Maybe it's not a drought but a derecho event or a blizzard affecting your local markets. For a look at the big picture with current market commentary, you can rely on DTN analysts.
-- FUTURES AND OPTIONS MARKETS. The Chicago Mercantile Exchange (CME) is where buyers and traders hedge price risks globally. On the livestock side, CME includes live cattle, feeder cattle and lean hogs. Live cattle are physically delivered contracts; feeder cattle are cash-settled contracts. CME offers reports and news on its website helping spot trends.
-- NEW REPORTS. Last year, the USDA announced two new reports, the "National Daily Direct Formula Base Cattle" report and the "National Weekly Cattle Net Price Distribution" report. They are a response by the USDA to an executive order titled "Promoting Competition in the American Economy," which directed the USDA to enhance price discovery, increase transparency and improve the functioning of cattle and other livestock markets.
-- DIGITAL PLATFORMS. Some video auction sites only offer seasonal data, others report weekly. For a full list of feeder cattle internet and video reports and platforms, go to this USDA page with links.
For More Information:
-- Superior Livestock: https://www.superiorlivestock.com/…
-- University of Nebraska's "What Are Video Auctions and CME Futures Telling Us ...": https://beef.unl.edu/…
-- University of Georgia's "Profitable Cattle Marketing for the Cow-Calf Producer": https://extension.uga.edu/…
-- Follow Vicki on Twitter @myersPF
(c) Copyright 2022 DTN, LLC. All rights reserved.