C.A.B.: Beef producers should 'step back'
January 27, 2010
by Bryan Salvage
WOOSTER, OHIO — Beef producers try to manage cattle and resources based on market incentives, which is especially challenging when signals change faster than they can make adjustments. Sometimes it helps to step back and check the flow, according to Certified Angus Beef LLC (C.A.B.).
In 2002, Iowa State University (I.S.U.) helped producers to do that when it published, “Assessing the Cost of Beef Quality.” The study showed the strategy generally pays, depending on the U.S.D.A. Choice and Select beef price.
Regarding feedlot profitability, marbling ended up being a key driver, even more important than carcass weight when the Choice/Select spread was at the 1996-99 average of $8 per hundredweight (cwt.) or higher. The study concluded, “The current trend to rewarding higher quality-grading cattle will have the added benefit of reduced cow cost.”
During the last decade, much has changed. To determine cost/value relationships, C.A.B. sponsored a “revisit” 2009 white paper, with I.S.U. economist John Lawrence anchoring the research team.
Several changes were noted in the resulting paper since 1999: “Value-based marketing is commonplace, the national beef cowherd has shifted toward more Angus influence and carcass weights have increased. Most notably, however, cattle and grain prices have increased.”
Iowa feed cattle and corn prices for 1996-99 averaged $64.13/cwt. and $2.49/bushel (bu.), respectively, compared to $88.87 and $3.04 for 2005-2008. The I.S.U. team looked at the relative importance of cattle performance and carcass characteristics on feedlot profitability, given the new price levels.
Grid marketing’s rise was noted in the 2002 paper, which ranked traits affecting profit. Building on that with data from the Tri-County Steer Carcass Futurity (T.C.S.C.F.) on individual gain, efficiency and carcass measurements, the “revisit” shows quality is at least as important with higher costs. No other driver of feedlot profitability was more important than marbling at Choice/Select spreads of $6/cwt. or more.
The nearly 15,000 fall-placed T.C.S.C.F. calves were fairly uniform, thanks to the network of feedlots using similar management and marketing protocols, Mr. Lawrence said.
The 2009 paper charted all the correlations between traits. Hot carcass weight is highly and positively correlated with rib-eye area (R.E.A.), daily gain (A.D.G.) and placement weight. “Faster growing cattle have larger carcasses, which have larger rib eyes,” he explained. “Also, the faster they grow, the less feed it takes to put on that gain.”
That shows up in the strong, inverse correlation between A.D.G. and feed efficiency. “We calculated total revenue for each animal based on its carcass data, the base price and a representative grid,” Mr. Lawrence said.
Input and output prices were standardized over time to find profit differences mainly due to performance, efficiency and carcass traits. As much as 78% of the variability in net return, and marbling topped the list of individual traits, accounting for 42%, the I.S.U. model explains.
A sensitivity analysis looked at how that changes when the Choice/Select spread, base carcass price and feed prices change. The spread baseline of $8 was examined at $4, $12 and $16. Feed prices were adjusted up and down by 20% and the base carcass price was evaluated up and down $10/cwt.
“Not surprisingly, the economic importance of marbling is directly related to the Choice/Select spread,” Mr. Lawrence said. “Even at $4/cwt., it is the second-most important variable, just slightly lower than placement weight.”