Justin Sexten is vice president of strategy for Performance Livestock Analytics.
There is much discussion around the possibility of lifting the veil on alternative marketing agreements (AMAs) between beef packers and producers. A recent bill passed the House Ag committee outlines the creation of a contract library to provide a public listing of terms and details in order to provide greater market transparency.
My interest here is not to wade into politics or even cast a vote on the need of such legislation, rather challenge us to consider what we would do with the information. Stepping back from the beef industry for some perspective, consider the swine packer marketing summary initiated in 2003 as a preview of what such a library may offer.
Looking through the swine library you find hundreds of pages outlining the variety of methods finished hog prices are determined. Sections devoted to laying out base contract specifications such as terms for payment, delivery and default, listings of multiple reference reports used to obtain base prices and numerous factors influencing carcass premiums and discounts.
Using the context above, can you think of 3-5 carcass or production factors used in finished hog pricing one might find in the contract library?
Checking your “experience” in swine pricing here are some of the major factors listed in the summary documents: carcass weight, percent lean, iodine value (indicator of fat firmness), and backfat to loin eye area are all listed with acceptable ranges and respective premium and discounts. Additional factors include load uniformity, delivery month, futures basis, pork quality assurance compliance, and presence of blemishes (scars, bruising ect).
Why all this discussion of swine pricing? My guess is even with limited knowledge of the swine industry but a base knowledge in protein production most readers found success in naming at least 3 factors above. The specific premium and discounts related to these factors are likely unknown to most. But even if you didn’t guess the factors successfully, the direction of change resulting in a greater premium or discount is likely not hard to determine even for a swine industry outsider.
Back to the topic at hand, beef industry pricing transparency. The idea behind the AMA library is to provide the contract specifics for everyone to see. Let’s consider the same exercise as above but use a more familiar protein, beef.
We would anticipate carcass weight, dressing percent, quality grade, and yield grade to make up the bulk of the premium and discount specifications. Add premiums for natural and NHTC and discounts for hardbones, dark cutters, dairy type, and stags and we have likely covered most of the specifications we will likely see published in the proposed library.
Recognizing the real point of interest is the specific details around the base price and the scaling of premiums and discounts for packer contracts. That said, the general magnitude and direction of the pricing details can be referenced on the USDA premium and discount schedule currently available. This exercise isn’t designed to suggest such transparency wouldn’t have value, rather to suggest the opportunity to implement market driven management changes isn’t limited by the knowledge of what the market wants.
Using the public data available today one would conclude the market rewards a feeder who delivers a high-quality carcass, that avoids a carcass weight over 1050 lbs, and yield grade less than 4. Significant premiums available for the natural and NHTC cattle and major discounts for hard bones and dark cutters. Select grading cattle are not finding many friends in the current market either.
For those stocker and cow-calf operations further removed from these direct market signals from packers there are many management decisions affecting premiums and discounts that start and stop at your gates.
Set aside the big ticket items like sire selection, natural or NHTC management, and health serves as a well documented factor impacting grade and growth potential controllable at every address a calf resides.
The combination of feeding the cow adequately before calving, the calf nursing within 12 hours of birth, vaccination at branding and the 30 days before and after weaning add up to grade potential for the feeder. Healthy calves are more valuable to growyards easing cowboy labor needs and start growing day one, rather than week three after getting lined out.
Consider a more significant management change, calving date as another factor. Consider how much optionality is built into a fall-born calf compared to spring. Fall calving cow herds have marketing optionality built in, with favorable seasonal trends at weaning, yearling and cull cow marketing stages. Spring calving herds suffer from the seasonal impact of 70% of cows calving during the first half of the year, with calves and cull cows all marketed at similar times generally at market lows.
These examples range from simple to implement to requiring a wholesale production change and admittedly ignore costs differences. Operations can control costs or at least choose which costs to incur. Broad market trends are impossible to control at the operational level. Making plans to take advantage of as many long-term market trends makes sense where operationally possible.
Back to the question at hand, do we lack knowledge of what the market prefers? Or do the costs to fulfill what the market prefers exceed our willingness to change?
