Economics and Marketing: Marketing Alternatives for Feeder Cattle

This is a fact sheet from the Economics and Marketing section of the Alberta Feedlot Management Guide, Second Edition published September 2000. The 1200 page guide is available for purchase on CD-ROM.

Introduction

There are many marketing alternatives for a cattle feeder. These alternatives become more viable when producers understand the potential value of their cattle, how feeder cattle prices are established and the implications of the conditions of sale. Whether a producer is selling his own cattle, paying someone to do it or is looking into the future, there is a market niche for every class of cattle produced.

Factors Affecting Price

At any time of year, calf and feeder cattle prices vary for the different sexes, weight, types, frame sizes and conditions of livestock. Each class of livestock will have a different price range as it relates to the current demand for that class.

Producers should understand the potential value of their cattle in the marketplace. A major factor is the sex of the livestock. Steers generally are worth more than heifers and heifers worth more than bulls. Each sex can be further defined by weight. Given a normal relationship between feed costs and fed cattle prices, cattle weighting 500-600 lb. are worth more per unit of weight than those in the next weight range of 600-700 lb. When the relationship between feed costs and fed cattle prices is in its normal range and cattle in a lower weight range do not bring a premium price, it could be because of one or several factors. These factors include:

Supply and demand
The feeder cattle market is determined by supply and demand. The demand for feeder cattle is determined primarily by the buyers' projection of the slaughter market and the cost of producing that slaughter animal (i.e., the cost of gain). Supply will also influence price. A shortage of feeder cattle of a certain type will create a price increase.

Frame size
Feeder cattle prices vary according to the frame size within a given weight range. Large and medium framed cattle are in more demand because of the weight potential of the finished product. Smaller framed cattle may be discounted. However, this relationship may be reversed if feed costs were to escalate sharply.

Breed and colour
Specific breeds and cross breeds usually have specific colours. Buyers often use breed and color to be more discriminating in what they buy. Premiums or discounts for breed and colour are due to perceived differences in performance on feed and differences in carcass characteristics.

Carcass value
The bottom line on feeding cattle is the value of the finished carcass. Buyers look for grade, dressing percentage and marbling potential when purchasing feeders. They determine this by breed and frame size.

Condition
Condition refers to the amount of flesh that the animal is carrying. An animal described as ‘green’ will carry little flesh for its weight and frame size. On the other end of the scale, an animal that is described as ‘heavy’ or ‘fleshy’ would be carrying too much flesh for its weight and frame size and is usually discounted. Condition may also refer to the amount of gut fill or tag that an animal is carrying. Cattle that are full of feed or carrying mud or manure may be discounted.

Lot size
Cattle in packages of ten or more usually bring a premium over those in small or single lots.

Unhealthy or stressed appearance
Cattle that have any indication of being sick, such as having runny eyes, will be discounted regardless of their weight or type. Stale or stressed cattle are discounted even when supply is short and markets are active, regardless of weight or type.

Off type cattle
Cattle with horns, bulls and stags (improperly castrated) are discounted because feedlot performance and grading may be affected. Bulls are discounted because of the loss in gain after castration. While lighter weight animals can be castrated, animals with staggy appearances, often due to improper castration, pose unique problems for the buyer. Cattle with horns may be discounted because of the recovery time after dehorning or because horns are dangerous to the feedlot operator and to other cattle.

Weaning, preimmunization, preconditioning and backgrounding
Buyer preference varies on weaned, pre-immunized, and preconditioned animals. Some buyers prefer to purchase calves that are adapted to feed and in better condition than calves that have just been weaned. By contrast, other buyers will look for calves fresh off their mothers with little or no conditioning. These buyers are willing to accept the risk of calves that have not been conditioned because they know exactly what they are buying. Producers should be sure that a buyer will pay a premium for preimmunized or preconditioned calved before incurring the additional costs.

Preimmunized calves are certified as such by veterinarians. These calves have received vaccines at least three weeks before sale day, but are not weaned. A preimmunized calf is less likely to get sick.

Preconditioned calves are both weaned and vaccinated. Because they are weaned for a minimum of, say 45 days, they are older and heavier at sale time.

Backgrounded cattle are cattle that have usually been fed on a high roughage ration. They are classed as feeders and may be sold at a variety of weights. There is a definite health advantage in purchasing backgrounded cattle. Prices are determined by the sex, weight, breed, frame size and condition.

Weaning, preimmunization, preconditioning and backgrounding are tools that can be used to enhance marketing power, but sellers must be aware of their costs and what the market is willing to pay as a premium.

Know the Cattle

If producers know their cattle, they will be able to provide an accurate description according to the factors listed above. When the different classes of cattle are identified, it becomes easier to sort them according to their potential value.

In the average herd, there are often a variety of classes of cattle. If the owner sorts cattle into groups according to sex, breed, frame size, weight, condition or potential, it provides a powerful marketing advantage. This grouping of cattle allows buyers in any type of sale to choose uniform lots. The larger the lot, the greater the premium. Steers and heifers should be grouped, and if the numbers allow, the steer and heifer groups could be broken into sub groups of similar weight or frame or color. Potential breeding stock could be sold as such. In the case where calves are light, small framed or need more growth, backgrounding is a consideration. Sorting and tailoring cattle to the market can be a profitable marketing manoeuver.

Know the Market

To fully understand the feeder market is to know not only what it is doing, but why. Why are certain cattle desirable at certain points within the cattle cycle and what is the general trend? The more a producer exposes himself to the market and concentrates on the study of it, the more confident the marketing decisions become.

There is a market niche for every type of livestock produced and finding that niche can be very productive.

Understand the Conditions of Sale

Conditions of sale are any cost, direct or indirect, that improves or reduces the net return when marketing livestock. Examples of these conditions are shrinkage, commission, freight, feed and yardage, brand inspection fees, or pricing practices.

Shrinkage
The condition of sale that affects the bottom line the most is shrinkage. As cattle are handled, transported, sorted, stood or weighed they will lose a percentage of their body weight. This is referred to as shrinkage. A reduction in body weight generates a reduction in return. Some cattle may be subject to a "pencil" (calculated) shrink to account for gut fill or excessive fleshiness for their weight range.

Commission
This is also a condition of sale that directly decreases net returns. It is a direct cost for each animal sold. The cost of commission per pound increases as the sale weight of the animal decreases. To determine this cost, divide the commission by the sale weight. For example, a $16.00 commission on a 600 lb feeder will cost the owner $0.026 per lb. The same commission on a 400 lb calf will cost the owner $0.04 per lb. Commission can vary between markets and can be negotiable.

Freight
This is also a condition of sale and it is negotiated in two ways: FOB (free on board) the farm or FOB the point sale. When cattle are purchased FOB the farm, the buyer pays the freight. When cattle are purchased FOB the point of sale, the owner of the livestock is responsible for the freight. When the cattle are sold FOB the farm, freight is still a direct cost. This is because, though it is not paid up front, it is built into the purchase price of the cattle. To calculate the cost of freight per pound, divide the freight cost into the total sale weight of the livestock.

Feed and yardage
These charges may apply when cattle are fed on long journeys or overnight. Also, some markets charge for sorting.

Brand inspection fees
All licensed livestock dealers deduct brand inspection fees.

Pricing practices
These differ for the various types of sales. Cattle may be purchased by the head, by the pound or by the pound subject to a sliding scale. When cattle are bid by the head, it is important for the owner to know or closely estimate the weight and the market potential of those cattle. Owners should have predetermined the value of the cattle before the sale.

When cattle are sold by the pound, the point and time of sale are important factors. After all, the producer will want to be paid for as many pounds as possible. When cattle are sold with a sliding scale, it means that the price will be adjusted according to the net weight of the cattle. For example, if a producer sells a steer for $90.00 per cwt on a sliding scale of $0.05 at a shrunk weight of 600 lb, he will be paid $90.00 per cwt if that steer weighs 600 lb after shrink. If that steer were to weigh 575 lb shrunk, the producer would be paid $91.25 per cwt [$90.00 + ($0.05 x 25 lb)]. If the same steer were to weight 625 lb shrunk, the producer would be paid $88.75 per cwt [$90.00 - ($0.05 x 25 lb)]. The sliding scale adjusts the price by $0.05 for every pound the animal weighs below or above the agreed sale weight. It is a fair way for both the buyer and seller. It is advantageous to know the weight of the cattle before sale time.

Marketing Alternatives

There are many marketing alternatives available to livestock producers today. These alternatives can be adjusted or adapted to each individual producer’s needs. Five general marketing alternatives are discussed here:

• Direct sales;
• Commission sales;
• Direct sales with commission;
• Forward contracting;
• Satellite, video or internet auction.

In the farm gate sale, the livestock owner accepts bids for cattle as they stand on the farm. There is no commission cost to the producer in holding a farm gate sale and weight loss on the animals due to stress is limited. The net return from a farm gate sale may be higher than other forms of marketing because there are no freight costs, commission or shrinkage.

The owner of the cattle must be prepared to commit the time needed for market research, sorting and weighing the cattle, inviting buyers and conducting the sale. He should know the value of that type and weight of cattle in the marketplace.

The producer predetermines the conditions of sale, such as:

• where and when the cattle will be weighed;
• who is responsible for freight;
• if a pencil shrink should be applied;
• if a sliding scale would be necessary and;
• how the buyers will bid on the cattle.

To use the auction market sale method to its fullest potential, make arrangements before trucking from home to minimize stress in roundup, loading and trucking by having facilities and transportation ready. If selling the cattle under your own name, let the market know of your planned delivery well in advance so that your cattle can be advertised. You may have to "book" your cattle with your selected auction market before delivery.

Direct sales with commission
There are sales which combine the basics of a direct sale with that of a commission sale. One of these is a ranch sale. In the ranch sale, cattle are gathered and brought to one central location. This could be a set of corrals on the range or a nearby feedlot. As the cattle arrive they are sorted into load lots of same sex, size or type and are weighed, usually with a pencil shrink to be applied. The calculated weight is recorded as the sale weight. The cattle are then provided with feed, water and bedding. The next day the cattle are sold in their pens by an auctioneer. The owner of the cattle is paid according to the number of pounds owned in each pen.

This type of sale is also used at community pasture sales when cattle are sold in owner lots. In either situation, the commission may be less than that experienced when using an auction market, and the shrinkage is minimized. Livestock buyers are usually on hand for ranch sales.

Electronic Auction Another direct sale type using commission marketing is the electronic auction. It sells cattle by computer. With this system a producer may receive bids on his stock without the cattle ever leaving the farm.

To use the electronic auction, ask an electronic auction market representative to visit the farm and describe the cattle for the sale. The representative will take pictures or video your cattle, record the sex, weight, frame size, condition, immunization, and feeding program. At this time, the representative will determine with the producer where the cattle will be weighed, how much pencil shrink is applicable and if the producer wishes to place a reserve bid. The cattle are placed on a list that contains a complete description of the livestock for the buyers to review. Shortly before the sale the buyers can scan a summary to remind themselves of the lots that they are interested in. When the sale starts, prices fall by a set amount from a starting point every few seconds until someone bids. As bids occur, the price then ascends in regular increments and buyers have a limited time within which to bid. If the high bid is not to the satisfaction of the producer, the cattle owner can "pass" the cattle on that sale, and arrangements can be made for those cattle to be offered for sale again at a later date.

The electronic auction uses a sliding scale on all feeder cattle sales to adjust the price to the actual weight from the estimated weight. To qualify for the electronic auction, producers should have load lots of the same sex and similar size, preferably 50 to 80 head (truckloads), depending on the weight. Buyers are sometimes allowed to cut back a small percentage of the cattle on loading if they do not appear as described on the computer sale. A commission is charged on all cattle described and sold.

Forward contracting
Forward contracting of cattle to a specified weight range by a predetermined date is another marketing alternative. A forward contract allows a producer to lock in a price for his cattle ahead of time. With a forward contract, the livestock producer may sell his calves as feeders and/or cattle feeders sell as fed cattle. There may be a commission involved and the weight is subject to a sliding scale. Penalties may apply to producers not fulfilling the specifics of the contract. To successfully fill a forward contract, the producer should know the current weight of his cattle and correctly estimate their average daily gain to the date of sale. Use a breakeven analysis to decide whether to sell feeders on the current cash market or to forward contract. A forward contract is only an advantage when a producer can lock in a price above the cost of producing that animal to that weight. When forward contracting, producers must be aware of how the contract is enforced. There is an obligation for each party of a contract to perform to the satisfaction of the other parties.

Satellite video auction
The satellite video auction combines the auction system with a way of letting the buyer look at the cattle in their natural environment.

Cattle for sale are videotaped by a company representative on the farm, ranch, or feedlot. Together, the owner and representative determine the number of head for offer, sex, age, the base weight and weight variance, frame size and amount of finish on the cattle. They also make a report of the livestock’s medical history and feeding program.

The terms of delivery will include the time frame in which the cattle will be delivered, the location of the point of sale and the weighing conditions, such as pencil shrink. A sliding scale will apply over and under the base weight and, on mixed loads, heifers are usually priced below the steers. Buyers are usually responsible for the freight.

After the cattle are consigned by signed contract, the videotape is edited and, on the day of the sale, buyers bid in person (if video is shown in an auction) or by phone (if shown on television). Prior to the sale, buyers are screened, issued a bidding number and provided a catalogue or pre-view of each lot of cattle.

After price has been established, the seller has the option to "no sale" the cattle. By doing so, he may forfeit a small fee. Buyers of sold cattle must submit a per head fee until payment is made in full. The seller is given a per head prepayment until the day of delivery. On the day of delivery, the cattle are weighted and a cheque is issued to the producer.

Selling cattle via a satellite allows producers excellent exposure to a wide variety of buyers before the cattle leave the farm. The "no sale" provision allows flexibility for the owner of the cattle. Buyers gain access to load lots of cattle that are accurately described and visible to them through video.

Timing Feeder Cattle Sales

Feeder cattle prices will be affected by supply and demand. These prices may also be influenced by the general economic situation, the supply of feedstuffs, weather and livestock futures and forecasts. Livestock returns may fluctuate according to the timing of the sale.

A study of the livestock market and the general trend of that market is the first step in determining when to use marketing alternatives such as special sales. Examples are one breed sales, preimmunized sales, preconditioned sales, video sales or sales direct to another province or country. As an alternative, cattle could be backgrounded to light feeders, heavy feeders or finished to slaughter weight. Livestock may be kept on light feed, grassed and sold as yearlings. Quality heifers could be sold as light weight breeding stock or sold later as bred heifers. When considering any of these alternatives, attention should be paid to the costs of production and realistic expected return. Break-even analysis programs are available to help with these decisions.

Prompt Payment Clause

Cattle should be sold to or through a licensed livestock dealer or licensed livestock dealer’s agent. The seller of the livestock should receive actual payment in lawful money of Canada within two days of the transaction. Accompanying this payment should be a bill of sale which states: the number and kind of animals, the purchase price, the settlement weight and other details of the purchase.

When cattle are consigned to or through a licensed livestock dealer or dealer's agent, a copy of the official scale ticket and the following information should accompany payment within two days: the number and kind of animals, the correct weight, the price, deduction and commissions, the advance payment if any, the gross proceeds and the net proceeds.

Producers have 60 days to register a complaint if the livestock buyer did not pay within two days or the information
accompanying payment was incomplete.

Complaints can be registered with:

Regulatory Services
Alberta Agriculture and Food
317, O.S. Longman Building
6909 - 116 Street
Edmonton, Alberta T6H 4P2
Phone: 780-422-7249