By Scott Brown
Markets function best when consumers can communicate to producers about what they want and expect from a product. Producers then generate a product that is most satisfying to consumers, and consumers respond with repeat purchases.
The complexity of the product’s production chain can often cause challenges when it comes to transmitting consumer desires backward through the chain until they reach all producers responsible for the final product. The cattle and beef industry is an interesting example of this phenomenon.
Since 2007, the volume of Prime beef reported in USDA’s weekly load data has increased by nearly a factor of four. Let that sink in for just a minute. Total U.S. beef production was slightly lower in 2017 than 2007, but Prime beef production was nearly four times higher. Over the same period, branded loads increased 12%, Choice was up just over 2%, Select declined by 46%, and ungraded load volume fell by 20%.
The willingness of consumers to pay up for better beef continues to show up in the statistics. Retailers know that selling quality beef is good business. But how does that information get passed back in a way that informs and financially rewards cattle producers all along the chain to produce the quality of beef that consumers want?
Quality drives price
Producers at any stage of the cattle industry are only interested in changing production patterns if it makes financial sense to do so.
Packers were willing to pay more for fed cattle that produced better beef, because they realized they would receive higher values for selling that beef. Slaughter cattle premium and discount data shows that Prime-Choice premiums (averaging nearly $16 per cwt from 2015 to 2017) and Select-Choice discounts (averaging nearly $10 per cwt) have remained steady in recent years, even as a larger supply of cattle grading Prime (and a smaller supply of cattle grading Select) would signify a narrowing of these spreads if not for growing demand for higher-quality beef.
Produce for a premium
Getting fed-cattle premiums appropriately passed back to calf producers has taken a little longer to occur, but it is happening.
Think of the growing number of added-value certification programs available for qualifying calves, which are not solely based on beef quality. In addition to quality grading, feedyards understand the financial benefit of calves from a producer with a reputation for providing better cost-of-gain measures, healthier calves, all-natural certification or other qualities that lead to higher feedyard profitability. And they are willing to pay more for calves that possess them. Current genetic tests are making identification of higher-quality calves much easier than just a few years ago.
The chart shows data from one feeder cattle auction in southwest Missouri for the first week of November over the last 15 years. It shows feeder steer prices have been growing, as signals from further up the supply chain are factored back into calf values. Do you see a similar phenomenon at the market where you go to sell your calves?
Though consumers are notoriously changeable, they rightly hold the power to influence markets as they vote with their dollars. Though it has taken some time in getting there, cattle markets from the calf to the packer are increasingly being influenced by premiums and discounts that can be traced through each stage of production.
Choosing what (if any) of these premiums that you want to earn or discounts that you want to avoid should be an important component to the financial planning of your operation.
Brown is a livestock economist with the University of Missouri. He grew up on a diversified farm in northwest Missouri.