Considerations for Improving Profitability in the Beef Cattle Business: Evolving to a Value Based Marketing System for Feeder Cattle?

by Gordon Jones, WKU Animal Science Professor (Retired)

During the last two decades, programs have been developed and utilized to provide cow/calf operations the opportunity to gain premiums for “superior” quality calves. The majority of these programs have related to health protocols and management practices. The most notable of these programs in KY has been the CPH 45 approach. CPH 45 is based on specific health and management criteria. This protocol has resulted in calves that are less prone to sickness, exhibit better performance in the feedlot, and yield higher quality carcasses than calves that have not been on a premium program. There are many programs in various parts of the US that are quite similar to CPH 45.

According to industry experts, programs such as CPH 45 were gaining traction prior to 2014. However, auction market personnel and cattle buyers are now quick to point out that the industry has taken a huge backslide in health and management practices because of the unprecedented high cattle prices during 2014 and 2015. Instead of weaning calves and pre-conditioning them with two rounds of respiratory vaccines, many producers were simply selling calves “straight off the cows” in order to reap the benefits of the high cattle prices.

Perhaps reflecting on the swine industry of the early 1990’s could provide a glimpse of the future direction of the cattle industry. Pork packers began to advise producers of the changes that were needed in the swine industry to provide more desirable products for consumers and to eliminate wastes for the packers. The large integrated swine operations took notice and began to produce market hogs that were packer acceptable. However, many small swine producers continued to “do business as usual”. Packers established merit buying systems with discounts MUCH greater than the premiums. It became evident that if producers wished to stay economically viable in the swine industry, their pigs had to meet packer expectations. As this system progressed, some producers were getting financially robbed because of the huge packer discounts. When the packers were able to acquire enough pigs to meet their expectations, many producers simply had no viable market for their pigs—packers simply refused to buy the pigs that did not conform to their specifications.

Now, could a similar scenario occur in the cattle industry? This scenario may not occur to the extent that it occurred in the swine industry because the cattle industry is by necessity more segmented. Only a small portion of cow/calf operators ever have direct communication with the packer that will eventually harvest their calves. As discussed in previous articles, the beef industry has three distinctly specialized production segments. Cow/calf producers have tremendous capital outlay in land resources and usually concentrate efforts toward producing calves up to or shortly past weaning. Stocker operators take advantage of the ruminant’s ability to convert forages or by-product feedstuffs into cheap gains. The stockering segment is necessary because this segment plays the role of leveling the supply of cattle throughout the year. The feedlot segment concentrates on finishing cattle or feeding cattle to allow deposition of marbling to produce high quality beef carcasses.

There is a viable portion of the stockering segment, particularly in the southeastern US, that concentrates efforts on taking substandard calves and “straightening them out” to become acceptable mainstream calves. These substandard calves are usually purchased at prices that are well below industry average prices for their respective weights. The calves are designated as substandard for multiple reasons such as small lot sizes, bulls that have not been castrated, calves with eye lesions or horns, mixed colors, and a myriad of other characteristics that can be identified to make calves appear different than mainstream calves.

Even though the cattle industry may not get to the point that there will be NO market for inferior cattle, there is little doubt that the price difference between industry preferred feeder cattle and those deemed substandard will become increasingly greater as years go by. So, now is the time for producers to plan management, health and genetics programs that will make calves attractive to buyers that are willing to pay premiums for cattle that meet their specifications. My article next month will address specific strategies to garner premiums and avoid discounts.