HUNTIN' DAYLIGHT -- REPUTATION MATTERS WITH ADDED VALUE, TOO

by: Wes Ishmael

You can buy a Chevrolet pickup—or whatever your favorite breed happens to be—lots of different places. If you continue going back to the same source, it's likely because of the dependability of the product, how well you're treated and your perceived value of the transaction. All of those things that contribute to a dealer's reputation.

The dealer's failure with any of the above—erosion of reputation—is also the likely basis for hunting a new supplier.

It's no different with cattle, of course. Buyers have plenty of choices when it comes to finding bulls of a particular breed composition any given year, or calves of particular breed type, weight, condition and whatnot on any given day.

Repeat buyers for either are typically those satisfied with the dependability of the product, how they're treated by the supplier and their perceived value of the transaction.

When it comes to added-value management and production, though, it's sometimes easy to forget that the same rules apply.

Consider the management and marketing of preconditioned calves. Even if calves pose less risk to buyers, there's no guarantee they will bring higher prices than their non-preconditioned peers.

Valuing Preconditioning Reputation

Determining the net benefit of preconditioning calves typically revolves around determining the cost associated with specific programs and the likelihood of receiving a price premium at a given weight level.

For instance, producers pondering the advantage of selling VAC 34 calves consider the costs associated with gathering calves an extra time and administering what constitutes an extra round of vaccinations.

Those thinking of weaned and preconditioned calves consider the cost relative to the expected increase in sale weight.

In both instances, the only shot at a price premium usually means marketing the calves via a system or sale that recognizes the particular preconditioning program and how its verified, then can attract enough buyers who also recognize the value difference.

Based on research from Iowa State University (ISU), reputation of both the program and the seller can also influence the ultimate price of preconditioned calves. It's the only study I'm aware of that makes such an attempt.

The ISU study—Factors Affecting Preconditioned Calf Price Premiums: Does Potential Buyer Competition and Seller Reputation Matter?—was completed last year by Lee Schulz, an ISU agricultural economist, Kevin Dhuyvetter, a technical consultant at Elanco Animal Health and Beth Doran, a beef program specialist with ISU Extension and Outreach.

“After accounting for cattle, lot, sale, and market characteristics, roughly 79 percent of the lots sold (preconditioned) brought statistically similar prices, but 21 percent received prices that were statistically different (18 percent higher and 3 percent lower) from the base seller in our model, indicating a seller reputation likely exists for some producers,” explain the study authors. “The implication is that while most research has concluded that premiums exist for preconditioning calves, this will not necessarily be true for all producers.”

In other words, there may not be any price premium for some producers who incur the cost of preconditioning.

“Related to seller reputation, it might be that ‘sale' or ‘program' reputation matters, as Gold-tag certified calves (described below) receiving two rounds of vaccinations and weaned for 45 days did not bring a premium over the more commonly known Green-tag program,” researchers say.

Individual seller identity was used as a proxy for reputation.

Preconditioned sales were those meeting the standards of what's known as the Iowa Green-tag program or the newer Iowa Gold-tag program.

Calves in the Green-tag program must be weaned for at least 30 days, owned by the seller at least 60 days, bunk-broke, dehorned, castrated, dewormed and receive specific vaccinations. It's the same for those in the Gold-tag program, with the additional requirements of a second round of vaccinations. The Iowa Veterinary Medical Association issues tags and preconditioning certificates to veterinarians, who issue them to clients. Producers and their veterinarians sign the certificates.

The premium for preconditioned calves compared to the average of all auctions ranged from $1.71 to $7.44/cwt. for steers and $6.03 to $11.76/cwt. for heifers over the 6-year period. As calf weight increases, the premium declines.

“The premiums (difference between preconditioned and non-preconditioned sales) are greater for lighter weight calves sold earlier in the market year,” researchers explain. “This result is not surprising as heavier calves sold later in the market year are somewhat ‘preconditioned' even if they are not certified as preconditioned.”

Preconditioning premiums mostly increased from year to year.

“Given the increased focus on adding value and having quality and process assurance-based programs, preconditioning programs will likely continue to be important in the beef industry,” researchers say. “Furthermore, with cattle and beef prices at record levels, improved health and performance of calves is critically important for both buyers and sellers of feeder calves. Thus, it is important to understand the value of marketing preconditioned calves, especially under evolving market and sale conditions.”

Data for the ISU study were collected From December 2008 to February 2014. Data were collected on individual lots of calves sold through one preconditioned sale and 11 regular auction sales occurring the week of and the week following the preconditioned sale.

Researchers note that previous industry studies examining the determinants of feeder calf transaction prices generally find that sale-lot calf characteristics (e.g., weight, lot size, sex, frame, muscling), market characteristics (e.g., futures prices, transportation costs), and seasonality explain much of the variability in transaction prices within a particular market.

Overall findings by ISU researchers for the relative value of such characteristics were similar between preconditioned and non-preconditioned sales; also similar to previous industry studies.

For instance, in the non-preconditioned sales, medium-large-framed calves brought a premium of $5.09/cwt. compared to medium-framed calves ($5.10 for preconditioned). Calves with a muscle score of 1-2 brought $7.02 less than those that were muscle score 1 ($3.85 discount for preconditioned).

Increased lot size boosts sale price but at a decreasing rate. The optimal lot size for calves sold in non-preconditioned auctions in the study was 130 head; 24 head for the preconditioned sales.

Valuing Feedlot Competition

Another novelty to the ISU study is the incorporation of feedlot capacity utilization.

“Despite claims about the importance of excess capacity in the feedlot sector on feeder calf prices, the price impact of feedlot capacity utilization has not been well established,” researchers explain. “This is the first study to create a model of feeder calf price determinants that incorporates feedlot capacity utilization, which can account for variation in competition and the leverage position of the feedlot versus cow-calf producer.”

As large feedlot capacity (1,000 head plus) utilization increases, the study indicates that prices decrease and then increase. Increasing capacity utilization from 50.7 percent to 58.3 percent resulted in a price decrease of slightly more than $3/cwt. Prices in the model increased more than $17/cwt. when capacity utilization increased from 58.3 percent to 81.3 percent.

“Higher prices when utilization is low are consistent with the expectations that large feedlots likely bid more aggressively to procure cattle to offset fixed operation costs,” researchers explain. “However, the higher prices at high capacity utilization is less intuitive but likely reflects periods when expected profitability is high; feedlots continue to bid higher prices as increased profitability sends the economic incentive to have more cattle to sell.”

As for capacity utilization of small feedlots (1-999 head), prices in the ISU model were lowest when utilization levels were lowest.

“Lower prices when small feedlot capacity utilization is low is consistent with buyers being farmer-feeders that may stay out of the market at times, lowering overall demand,” researchers say.







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