Small details, big premiums

Small details, big premiumsRaising value-added calves requires understanding the marketplace and selecting programs that can make a ranch more profitable.

Value-added programs are not for every producer and every situation. For some cattlemen, the extra management simply will not pay. Others consider it an opportunity worth taking.

Research by Kansas State University evaluated the genetic, management and marketing characteristics of more than 30,000 lots of calves sold on the Superior Livestock Auction video auction market from 2004 to 2010.

The study evaluated claims regarding traditional breed and health programs as well as modern market-based programs, including natural eligibility, non-hormone-treated calf eligibility and age-and-source verification.

Similar research has examined the influence of lot size, weight, frame score, flesh score, weight variation and breed on calf sale prices. The project explored these traits in addition to the new value-added landscape.

Calves were sold by video auction from June to September on a forward contract arrangement for fall delivery, and separate models were analyzed in each year for both steer and heifer calves. Premiums and discounts referenced in this article are typically for steer calves and considered statistically significant at the 95 percent confidence interval.

Results show small details in management and marketing can influence the premiums calves receive at sale time.

Additionally, the report discusses the increasingly integrated nature of value-added management across breeding, health and nutrition programs, as vertical coordination has become more common in the industry.

Background

Small details, big premiumsA value-added calf requires a greater investment in resources and leaves the ranch with greater profit opportunity for later sectors. A calculated investment in the management and marketing characteristics buyers want creates additional demand and calves receive a higher sale price.

As value-added programs such as preconditioning became more prevalent, researchers realized understanding the price differences associated with integrated management programs required detail that was often missing in traditional auction markets.

Preconditioning was often used as a generic  term. It encompassed a variety of vaccination and weaning requirements, and buyers sometimes challenged the validity of the management claims.

Video auction markets present one opportunity to address these challenges. However, there are notable structural differences between video and traditional auction markets.

Video auction markets

SLA sale volumes have exceeded 2 million head annually since 2001, and cattle are represented on SLA through a video and written lot description. A market representative videotapes and photographs the cattle in their natural surroundings and works with the seller to prepare a consignment contract describing the cattle and outlining the sale terms and conditions. 

A video auction catalog is made available on the Internet prior to the auction.  Buyers and sellers can be present at the auction site on sale day, or they can view the auction on satellite television. Video of the cattle is shown while a live auctioneer calls for auction-site and telephone bids.

Video auctions signal cattle market conditions on a much larger scale than traditional auctions by representing national buyers and sellers in one setting.

Video auctions provide buyers specialized benefits the convenience and reduced health risk of preassembled truckload lots of cattle; farm-fresh calves not exposed to the stress of local auction markets; cattle representing a variety of U.S. locations, climate conditions and management programs; and detailed information concerning breeding, nutrition and health programs.

Sellers also benefit from utilizing video auction markets reduced transportation and shrink, exposure to buyers with a variety of purchase preferences, marketing tools and advice offered through the video market representatives, risk management through forward contracting, and the avoidance of weather-related and other unknown marketing issues.

Based on these observations, estimates from video auction data should be considered distinct from price signals discovered in local auction markets.

Research considerations

Video auction market premiums exist for truckload-sized groups of calves with advanced herd-management traits. Smaller cow-calf producers might not realize value-added benefits to the same degree as producers in these markets.

Regardless of size, producers can still gain valuable information from the research.

The size and detail in the SLA database provides cow-calf producers with a robust model for quantifying auction market incentives based on lot characteristics.

Detailed pricing models were used in the research to navigate the layered management standards of marketing programs in the cow-calf sector. Average sale prices based on individual lot characteristics cannot account for the isolated effect of one management practice. 

A pricing model accounts for all value-added characteristics in the marketplace, separates the individual price effects of these management programs and minimizes the occurrence of misleading or incorrect price differences.

Health programs

Small details, big premiumsWeaning and vaccination programs represent some of the largest revenue-enhancing management practices available to cow-calf producers selling calves on the SLA video market. These programs can also be among the more complex management systems in the value-added landscape.

Producers can choose from five different certified health programs through SLA. There is also the option of using a non-certified health program consisting of any combination of vaccination and weaning strategies.

Complete details on the SLA health and marketing programs can be found on the auction market's website, www.superiorlivestock.com.

In general, VAC 24 and VAC 34 programs only require one round of respiratory vaccinations and do not require weaning. Producers using the VAC 34 program can also offer an additional respiratory vaccination booster prior to delivery and certify the calves as VAC 34+.

Weaned calf programs are designated by SLA as VAC 45 and VAC Precon. These programs include two rounds of respiratory vaccinations in addition to weaning periods of 45 and 60 days, respectively. The VAC Precon program is reserved for calves from multiple ranches.

Non-certified health claims can take on a variety of shapes and forms. For simplicity, the research focused on lot descriptions including one respiratory vaccination, two or more respiratory vaccinations, and weaning.

Non-weaned calves vaccinated against respiratory diseases can earn up to an additional $1.49 to $3.70 per hundredweight on SLA video markets.

Cow-calf producers willing to invest resources into a weaning and vaccination program can receive up to $6 to $10.72 per hundredweight in sale premiums (see table). If a producer chooses to use a non-certified health program, weaning can add an additional $2.71 to $5.10 per hundredweight.

Chart B highlights the health program premium structure for 2010 SLA steer calves.

Premiums for weaning and respiratory vaccinations are highly dependent on health program requirements and can fluctuate considerably from year to year. Also, the premiums for non-certified health programs are often less consistent compared to more stringent certified health programs.

Marketing programs

Small details, big premiumsImplant programs have taken on a new focus in recent years with an increasing number of producers marketing non-implanted calves as natural and NHTC candidates.

Certified Natural Cattle were added to SLA video market lot descriptions in 2004 and NHTC-market-eligible calves were added in 2008. Premiums in these programs have been sporadic during the last seven years, while program participation is increasing.

Natural-eligible steers and heifers received premiums in 2004, 2006 and 2008. The premiums were similar for each gender and ranged from 49 cents to $1.17 per hundredweight. Steers eligible for an NHTC market earned premiums of $2.70 and $1.77 per hundredweight in 2008 and 2010, respectively. Similarly, heifers received an additional $1.97 per hundredweight in 2008.

Premiums for NHTC were not significant in 2009. The result is not entirely unexpected since natural and NHTC production represent a relatively small proportion of the beef produced and exported in the United States.

The fluctuating premiums for natural and NHTC calves suggest that demand for these programs is generated from a relatively small number of buyers. Until these markets generate stronger and more consistent price signals, cow-calf producers on the SLA video market should not depend on these premiums.

Compared to non-implanted calves, the price determinants for implanted calves and sale lots with some implanted calves or calves with unknown implant history are generally weak over the seven years analyzed.

Statistically significant discounts for lots with unknown or mixed implant protocols appeared in four model years for steers and three years for heifers. The discounts ranged from 60 cents to $1.64 per hundredweight for steers and 53 cents to $1.26 per hundredweight for heifers.

As more attention has been given to the Beef Quality Assurance and carcass quality, it is likely buyers are paying closer attention to the effect of previous management on later sectors and are discounting calves with unknown or mixed implant history.

It is important to note that implanted calves are not penalized in the marketplace.

Cow-calf producers who can benefit from the efficiency gains of implants at the ranch do not receive price discounts at sale time and can capture an additional 25 to 40 pounds of gain through implanting.

Age-and-source verification has been featured in SLA lot descriptions since 2005 and has consistently generated premiums for steers and heifers throughout that time (see chart C).

The premiums were similar for steers and heifers throughout the analysis. The advantage for ASV calves started with 92 cents per hundredweight premiums in 2005 and has been between $1.50 and $2.01 per hundredweight since that time.

These premiums have continued to hold reaching a high in 2008 as participation in ASV has grown to include nearly 50 percent of all calves sold in 2010.

Genetic and breeding programs

Breed influence has continued to have a considerable impact on feeder-calf prices.

The relative price differences among each breed remained mostly unchanged from 2004 to 2010, and breed premiums are referenced in the study relative to Brahman-influenced calves.

Premiums for Angus and black and black-white faced calves were consistently among the highest premiums, ranging from $4.27 to $7.73 per hundredweight, while Continental-influenced calves generated the smallest premium relative to Brahman calves, with an additional $2.87 to $4.79 per hundredweight.

Premiums between Angus and black and black-white faced heifers were statistically different from each other for five of the seven years and different three of the seven years for steers.

The price difference points to the importance buyers place on Angus genetics relative to generic black-hide color claims in the marketplace and also points to the added value Angus heifers have from a buyer perspective, potentially as herd replacement heifers.

Implications

The majority of U.S. cow-calf producers sell calves at auction market, and the price signals delivered through the SLA video market provide cattlemen with a snapshot of those management practices likely to add value to their calf crop, even if they market calves at a local market.

The cost and feasibility of these management practices need to be examined at the individual ranch level. Some management practices offer more opportunities for profit than others, and cow-calf producers need to prioritize calf-management decisions based on ease of adoption and profitability.

In general, buyers are more discriminating in seller management and marketing claims. Subtle genetic, management and marketing trait details can have a statistically significant influence on calf prices. 

The study shows verified health claims and specific genetic program details result in higher calf sale prices compared to commodity calves (see chart A).

Producers who describe their calves as "weaned, non-implanted, black-hided calves with all their shots" could be missing chances for additional revenue compared to calves listed as "Certified VAC 45, Natural-market eligible, NHTC-market eligible, Angus-influenced calves."

Premiums for natural-market eligible cattle are relatively small, but creating a point of differentiation between these and non-implanted calves is often as simple as documenting and verifying ranch management practices.

The price differences that exist for these management adjustments can be small and unpredictable at times, but many of these management decisions can be implemented with incremental adjustments.

Large changes in management are often necessary to move premiums to the $5 to $7 per hundredweight level. However, even a small change in management or marketing can improve calf revenue $1 to $2 per hundredweight and have a substantial influence on per-head net profit. 

Lance Zimmerman earned his master's degree in agricultural economics at Kansas State University in December 2010. He is currently an analyst at CattleFax, in Cenntennial, Colo. More details about this research, including references, can be found in his published thesis, "Factors Influencing the Price of Value-Added Calves at Superior Livestock Auction," at http://krex.k-state.edu.

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