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There is no single pricing method that is optimal for all cattle, according to Dr. Ted C. Schroeder of Kansas State University's Department of Agricultural Economics. He said pricing fed cattle on a value-based quality and yield grade grid provides the best opportunity for cattle producers to receive the premiums associated with high quality cattle. He also offers some warnings. To take full advantage of grid marketing, cattle producers need to have considerable knowledge regarding the quality attributes of their cattle, Schroeder explained. He also noted that while packers pay premiums, grid discounts for cattle not desired by a particular packer are often very substantial. Value-based marketing refers to pricing on an individual basis. Cattle are traditionally sold in groups based on averages. Schroeder found, during his research using 202 pens of cattle, the highest level of return was with dressed beef. The lowest return was with live cattle. Grid-based marketing was in between, but closer to the dressed beef return than to live cattle. "It's interesting because some of the conclusions are constant, but what I've found is, as you dig deeper you find a lot more really happening with individual carcass value," he said. Grid-pricing is based on individual animal performance. The most critical factors influencing profitability include quality grade, yield grade and dressing percent; the price spread between Choice and Select; the particular packer or alliance premium and discount price grid; production and feeding cost differences and most importantly, knowledge about the price and quality distribution of the cattle being sold. "I've looked further...with some grids and some cattle, it looks like dressed pricing offers, on average, similar to slightly higher opportunities ... as I look at cattle on the individual carcass level basis," Schroeder said. "We took about 11,000 head of cattle and got individual carcass level grid prices..." and, "what they would have sold for dressed and live. What I found...if you took those cattle and...sold the whole bunch dressed...the packer would have paid...an average of $30 too much for some of those cattle or up to $30 too little for others. If you retarget, reshuffle and sort those cattle and send them to the optimal location, send some dressed and some to the grids, you get substantial revenue enhancements...," he said. These findings reaffirm his initial beliefs that cattle feeders and producers have to know their cattle and what they are capable of. Schroeder thinks that grid marketing will expand. "I think we're going to continue to see more expansion because we've got too many incentives in the industry to get away from the average-based pricing system," he said. In February, Schroeder said three major packers have indicated they are all willing to bid on a base price. He said this is a foreign concept for at least two of these packers. "It is evident to me the packers are serious,"Schroeder said. "They do want to have incentives to go into a value based pricing system, not just to throw out a formula and say 'Here, do it or leave it.' I think a lot of the packers really desire to have a longer term marketing agreement...on a value based system. Volume drives packer efficiency, but more and more the packers are finding there is value with having a contractual relationship on the selling side." Packers are seeing the need for relationships with food service institutes which have very stringent specifications. They also want relationships with export opportunities that also have very specific needs, Schroeder said. There is just more information being demanded by the buyer...," Schroeder said. "It may even have to do with the way it was produced." He sees this as consistent with what is happening throughout the food chain. "I see it as a growth area, one which will continue to expand," he said. He could not predict the percentage of cattle which would ultimately pass through the system, but he predicts it will be larger than it is today. Schroeder thinks there are opportunities today to improve income by selling cattle on a grid basis, but better management is needed to do so. He said managing the simple things will improve the opportunities. He uses a computer simulation to show producers how much value they can add by managing single attributes in a typical pen of cattle. "I take a pen of cattle that was actually sold on a grid and it had nine percent heavy weights," he said. "The first thing you do is move the heavy weights away and you increase the value of the pen...by about $1500. It had a few Yield Grade 4's and 5's. If you remove those, you add another $600 to $700. Finally, I go up to the quality grade and change." The pen also contained a few Selects and Standards. "If you managed those a little better, it very quickly gets up to $5000 for that pen, just one pen, in terms of value in managing some attributes," Schroeder said. "Some of them are very easy to manage." There are huge value opportunities in individual carcass based management whether it be sorting, selling at different times, or even selling some on a live basis and others on a targeted grid, Schroeder said. He thinks this opportunity is going to increase because of the amount of money being left on the table. "I know there are costs associated with managing and collecting all the information, but to me the returns are really there," he said. |
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