THE FINANCIAL BENEFITS OF MARKETING FEEDER CATTLE THROUGH THE USE OF ALTERNATIVE MARKETING AND GROUP SALES

Transcription

1 THE FINANCIAL BENEFITS OF MARKETING FEEDER CATTLE THROUGH THE USE OF ALTERNATIVE MARKETING AND GROUP SALES A Research paper Presented for the Master of Science in Agriculture and Natural Resources Degree The University of Tennessee at Martin Adam M. Hopkins 2014

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3 Acknowledgments I would like to thank everyone who has helped not only with this project, but with my entire academic career. I would like to thank in particular Dr. Mehlhorn and Dr. Darroch for their help and direction with this project. I would also like to extend a thank you to my colleagues, David Bilderback, Steven Huff, and Anthony Shelton, for helping with the project and data collection. ii

4 Abstract The importance of being aware of inputs, outputs, and different types of marketing is imperative to the success of modern beef producers. The first objective of this study was to determine if there were differences between the prices received at a value-added video sale and weekly cattle auctions. In each year of the study, producers did in fact receive greater payment for preconditioned animals in the HCCA sale, on average $35.43 per 700lb animal. However, the cost of the preconditioning program was higher than the added value of the cattle. The primary objective, however, was to find if producers were creating more profit for their operation through the use of the sale. Sale data from the Hawkins County Cattlemen s Association monthly video sales were compared to average weekly prices from weekly markets in Tennessee. Data were collected from 2008 to The cost of preconditioning greatly varies among producers so a standard cost was taken from an Oklahoma State Budget and was inflated to the value for each given year. This cost of preconditioning was then used to create three subgroups of producers. The first subgroup, average producers, spent $67.81 during the 45 day preconditioning program. The second subset, those producers spending more than average, were represented by increasing costs by 15% to $77.98 and the third group, the limited cost group, were considered to be those spending 15% less than average or $57.64 for the same preconditioning program. While on average there was no additional profit, greater benefits might be realized to those producers who carefully control inputs into the operation. iii

5 TABLE OF CONTENTS Introduction... 1 Objectives... 2 Literature Review... 4 Value-Added Marketing... 4 Value-Added Practices... 4 Marketing Agreements... 5 Selling Cattle in Groups... 6 Value-Added Sales... 7 Results of Value Added Practices... 8 Remaining Flexible and Diligent... 9 MATERIALS AND METHODS RESULTS CONCLUSIONS AND DISCUSSION iv

6 List of Tables Table 1. Paired t-test for Hawkins County Cattlemen s Association Video sale and Weekly Auction prices Table 2. Cost Return for Preconditioning Calves for the Hawkins County Cattlemen s Association Video Sale in Table 3. Cost Return for Preconditioning Calves for the Hawkins County Cattlemen s Association Video Sale in Table 4. Cost Return for Preconditioning Calves for the Hawkins County Cattlemen s Association Video Sale in v

7 List of Figures Figure 1. Cattle Prices at Hawkins County Cattlemen s Association video sales and weekly auctions in Tennessee During 2008 to Figure 2. Added Value of preconditioned cattle at Hawkins County Cattlemen s Association video sales and weekly auctions in Tennessee During 2008 to Figure 3. Average Price Received at Hawkins County Cattlemen s Association Video Sale and Weekly Cattle Auctions in Tennessee During Figure 4. Cost Return for Preconditioning Calves for the Hawkins County Cattlemen s Association Video Sale in Figure 5. Average Price Received at Hawkins County Cattlemen s Association Video Sale and Weekly Cattle Auctions in Tennessee During Figure 6. Cost Return for Preconditioning Calves for the Hawkins County Cattlemen s Association Video Sale in Figure 7. Average Price Received at Hawkins County Cattlemen s Association Video Sale and Weekly Cattle Auctions in Tennessee During Figure 8. Cost Return for Preconditioning Calves for the Hawkins County Cattlemen s Association Video Sale in vi

8 Chapter 1. Introduction Alternative marketing strategies and the use of value added practices is a topic that has become more popular in recent years, and is of great importance to producers of agricultural products. The financial benefits of marketing feeder cattle through marketing alliances and group sales is both an important and timely topic to research and discuss. It was not until recently that the market s structure was conducive to value added practices. For some time, producers have been adding value to animals, but it is now easier than ever to capture that value (Dolan 2011). Alternative marketing can be defined as pursuing marketing strategies or positions other than those traditionally followed. Alternative marketing strategies include direct marketing of products, group marketing, or simply taking advantage of value added practices. For producers in East Tennessee, beef cattle are a major agricultural commodity bringing in millions of dollars each year. In the current economic environment, with increasing production costs and returns that simply have not inflated at the same rate as production rates, producers must increase their overall profit using whatever avenues possible. There are many avenues producers can use to market their cattle, and producers have been successful creating new marketing channels in the last several years. One channel that has become increasingly popular is the use of marketing groups and selling truckloads of cattle instead of simply offering cattle from only one producer. Typically these loads are made of preconditioned and vaccinated animals that are grouped according to certain characteristics. The grouping of the animals provides 1

9 buyers with a uniform load lot that can then either be backgrounded or fed out for beef. One example of this practice is a video sale at Wilson Livestock in Newport, TN. ( unpublished data, 2013). Producers from several counties in East Tennessee have participated in the sale as well as some producers from surrounding states including North Carolina. While the value added through this practice is not consistent each year, or even sale by sale, long term trends show that producers have indeed been able to capture value through the sale. Objectives: Value added practices have been developed to create extra value in agricultural commodities and products to increase the overall revenue and profit that a producer might receive for a product. These practices are used throughout agriculture in both animal and plant products by producers who are willing to put effort into building value as compared to simply selling a conventional product at conventional prices. This project will focus on the beef cattle market and will highlight some local sales data to determine if producers are finding benefits in value-added practices and video sales. This project will: 1. Determine if there has been a statistical difference between prices received at weekly cattle auctions and the Hawkins County Cattlemen s Association (HCCA) video sale. 2. Determine average costs of preconditioning cattle for a minimum of 45 days (requirement for HCCA sale). 2

10 3. Compare average costs of producers who manage their operations and have outflows: a. Less than average producers b. The same as average producers c. More than average producers 4. Compare average preconditioning costs to additional value gained at the HCCA sale. 3

11 Chapter 2. Literature Review Value Added Marketing The topic of marketing is one that includes more than just the cattle industry or even agriculture in general. Marketing topics have long been a concern for various industries and have been studied in great detail. While an abundance of academic articles relating to value-added marketing of cattle might not exist, several pieces can be located and create strong evidence for the practice of value added marketing. Dolan (2011) raises several good points about alternative marketing practices in the cattle industry. It is not only about creating value, but also capturing the value those animals already have. Local markets are often a place where producers can receive premiums for their value-added cattle, but premium pay is not freely given (Dolan 2011). The idea of capturing value is not a new idea, but it is an idea that is often overlooked by producers. So often, extra time and money is spent creating value, but a lack of effort is put into actually receiving the full value of those animals. Dolan (2011) also discusses topics including genetics and preconditioning, both important when trying to reach the full marketing potential of a calf crop. Value-added Practices Value added practices can also include fairly simple management decisions including dehorning, castrating, and implanting animals. Some practices include a change in overall farm management, but the use of preconditioning programs, and vaccination protocols can be another method of adding value to a product. Many preconditioning protocols exist, but typically these programs include some combination 4

12 of other value added practices (i.e weaning, vaccinating, dehorning). Preconditioning programs exist to reduce the likelihood that animals experience health problems during and after being sold (Parish, Rhinehart, and Boland 2010). One of the largest benefits to preconditioning cattle is the improved health or perceived improved health of the animals (Avent, Ward, and Lalman 2004). More dedicated and management intensive value added practices also exist and include certified naturally grown, organic, and grass-fed beef. Certified naturally grown and organic are somewhat similar in the practices producers use to raise the animals, but the certification and inspections processes are much different. The Certified Naturally Grown certification is based on the USDA National Organic standards, but has some modifications (Certified naturally Grown 2013). While many of the same management practices can occur with a traditionally raised animal and an organically raised one, these more intense practices require different overall management and marketing strategies. Typically, buyers are willing to pay more for animals that have had value-added management practices, the fact still remains that the animal is only worth as much as someone will pay for it. Marketing Agreements Various types of marketing agreements are made when selling cattle. These arrangements can be made as cash sales or executed at a later date. The primary types of cash sales include auction barn sales (both live and video), the use of cattle brokers, and direct trade (negotiations directly between the buyer and seller). Contracts executed at a later date include a forward contract (an agreement to purchase the cattle two or more weeks in the future) or a long term agreement between buyer and seller. The long term agreement can be on-going for any length of time (Muth et al. 2008). 5

13 In the same study, Muth et al. (2008) noted that there are price differences among marketing channels. Prices received at the auction market are often higher, but are also associated with a greater risk of price fluctuation and risk to the seller. Prices received under forward contracts and long term arrangements were lower than direct sales, but carry less risk. These alternative marketing agreements tend to be the best tradeoff between price and risk (Muth et al. 2008). The volatility in payback might play a role in producer s willingness to participate in certain programs. For many years, educational efforts have been made to educate producers about the benefits of castrating and dehorning cattle, but still each week a great number of cattle are marketed without these practices. Often when talking to producers the reason for not performing said practices include I didn t have time or it s not worth my time. Sadly these producers are failing to pick up some of the easiest and most reliable value added practices, potentially reducing their return on the cattle. Selling Cattle in Groups In the United States there are a great number of opportunities for cattle producers to participate in group sales. Whether this be through a marketing alliance, an agreement among neighbors, or an organized group load lot sale, opportunities are available. The purpose of selling in load lots is fairly simple: to capture extra value. The loads are often organized ahead of time and lots will vary greatly. One load of cattle might be red hided and average 600 lbs, while another is black hided with an average weight of 800 lbs. Group loads can also be divided by the sex of the animal. Often steer lots and heifer lots are separated ( unpublished data, 2013). The purpose and value of the load is not always in what type 6

14 of cattle are present, but the consistency of the cattle in the lot. While lot weights vary, typically a load is described as a certain weight of animals to fill a transfer trailer, typically about 50,000 lbs. In the example of the video load sale in Newport, TN, cattle are separated according to only weight and sex with varying colors within any given load. Value-added Sales The use of video sales to market cattle is fairly common and has been studied. One study included a sale at the largest market in the United States, Superior Livestock Auction (Zimmerman et al. 2012). At Superior the sale is run much like that at Newport, TN. The cattle are sold through the video auction and are represented by a video of the cattle and a written description. No cattle are present at the time of the sale. The week following the sale, cattle are shipped, collected, and grouped at the facility before being loaded for shipment to the purchaser. In the value added programs at this Superior Livestock Auction Buyers preferred weaned calves with at least two rounds of respiratory vaccinations compared to the base non-vaccinated and non-weaned calves. Premiums for calves receiving a VAC45 protocol were typically $2 to $4 per cwt for steers and $1 to $2 per cwt for heifers (Zimmerman et al. 2012). The VAC45 protocol used includes both a vaccination regiment and weaning calves at least 45 days prior to shipping. The research conducted by Zimmerman et al. (2012) not only addressed the issue of the use of video sales but also demonstrated the impressive results and added premiums that can be gained through value-added practices. Cattle producers should 7

15 first look at weaning calves before marketing as a way to capture extra value ($3-$5 per cwt; Zimmerman et al. 2012). Beyond weaning, producers should take a look at their vaccination programs and consider starting a predetermined regiment designed specifically for a sale. These health programs were also seen to add value to the cattle being sold at Superior (Zimmerman et al. 2012) and can be seen at other markets as well (Williams et al. 2012). Not all value added sales are conducted by video. Sales can be conducted through video, live, private treaty, and even over the internet. The producers are responsible for choosing the best route to market their animals and the best protocols to follow. The work at Superior shows that there is extra value created when following the proper value added management practices (Zimmerman et al. 2012). Results of Value Added Practices The addition of value added premiums has led to several certification programs throughout the United States. The certification is typically done by a third party and ensures the animals are receiving the proper treatment and practices. Oklahoma has a certification program that is supported by both the Oklahoma Cattle Producers and the Oklahoma Cooperative Extension Service (Williams et al. 2012). This third party certification is designed to ensure quality, and also to assure buyers that they are getting what they paid for. A group of Oklahoma researchers studied determinants of the price differentials in value added feeder cattle auctions (Williams et al. 2012). The research showed that there is value to additional management practices for small lots of cattle, and also analyzed the value of the certification program. Producers marketing lightweight cattle (350 lb) received the greatest value from the 8

16 certification (+$2.81), while larger animals in the 750 lbs category had a negative premium (-$0.09; Williams et al. 2012). There could be several reasons for this difference, but buyers likely see the additional monies paid for the younger certified calves as a type of insurance policy against possible health problems. Remaining Flexible and Diligent Today s agricultural environment is one that becomes more competitive and unpredictable as time goes on (Riley 2013). For this reason, the education of producers has become paramount to the success of many operations. As traditional as agriculture is, the fact remains that producers must be willing to accept new norms and remain flexible in their strategies. This change not only affects producers, but also agricultural extension educators and economists. The current market and market volatility demand managers become better aware of the challenges in agriculture. They should also become more adept at managing their business and risk, seizing opportunities when presented (Riley 2013). Riley (2013) also noted that using futures prices as a price predictor can be a misstep for producers as this information is less correlative than in the past. The correlation that was once seen between prices of certain commodities is now less reliable. While change can sometimes be disconcerting, Riley s (2013) study echoes the importance of flexibility and education, and the importance of producers and educators remaining alert while searching for new marketing information. The successfulness of farmers is no longer guaranteed by the agricultural producers, but by the drive and business savvy they exhibit. 9

17 The use of alternative marketing strategies and value added practices have become more prevalent as time goes on. The list of value added practices is fairly extensive, but includes fairly simple management practices that increase an animal s value. Pre-conditioned calves are healthier, with a stronger immune system, and so are more valuable to feeder cattle buyers than are non-preconditioned calves. (Avent, Ward, and Lalman 2004). The value added to these animals is not always realized with a typical weekly market and cannot always be seen by the phenotypic appearance of the animal. The inability for a buyer to visually see all value-added practices performed on an animal are the reason that certification programs have become more popular, to reassure possible buyers of the cattle s quality. The use of a certification proved more beneficial to those selling smaller weight calves, but the value gained through the practices of dehorning and preconditioning can be reaped by producers of calves at any age (Williams et al. 2012). Regardless of what practices have been completed, it is essential for sellers to pursue the correct marketing channels to reap the greatest benefits. Cattle producers might also realize extra profit by selling livestock in group lots. The size of the lots can vary, whether it be three animals or an entire truck load, but regardless of size, groups of quality cattle can bring a premium from the buyer. Value-added practices can increase profits in any operation, but the results are somewhat variable. Cattle producers that choose to seek greater value for their animals must be willing to pursue opportunities that allow them to properly market their cattle and fully take advantage of the added value. In the end, producers can receive additional dollars per hundred weight of cattle for value-added practices. 10

18 Chapter 3. Materials and Methods Data were collected from each monthly video sale at Wilson Livestock in Newport, TN during This video sale is hosted by the Hawkins County Cattlemen s Association and includes producers from all over East Tennessee and in Western North Carolina. Cattle in this sale were preconditioned for a minimum of 45 days before the sale. The preconditioning protocol included a modified live respiratory and black leg vaccines. The cattle are co-mingled at Wilson livestock before being shipped to their respective buyers. The data that were collected included the weight, lot, and price of the animals. While each animal was not weighed individually, a slide is used to bring all animals to the base weight. The average price (per cwt) of the animals was used to compare the prices at the weekly markets. The weekly sale data were collected from the Tennessee Department of Agriculture and include the overall weekly average prices. This group of data was then matched up with the respective week, weight, and sex of the lot loads created in the video sale for comparison. A paired t-test was used to determine if there was a difference between the value-added video sale and the weekly auction. To address the question of can preconditioning programs pay for themselves? the price differences between the value added and weekly auction were compared to estimated preconditioning costs. The costs were estimated using an Extension Bulletin from Oklahoma State University, Publication AGEC-247 Costs and Benefits Associated with Preconditioning Calves. (Donnell, Ward, and Swigert, 2005) The costs quoted in 11

19 the publication were developed in and included cattle interest costs. To make the costs more relevant to East Tennessee producers in 2014, the figure for cattle interest was removed and the costs were then inflated using an inflation calculator from the US Bureau of Labor Statistics. The CPI inflation calculator uses the average Consumer Price Index for a given calendar year. This data represents changes in prices of all goods and services purchased for consumption by urban households ( The inflated costs were averaged to create a cost figure to be used in the comparisons. Producer interviews were also conducted to determine the accuracy of the figures as compared to producer costs in East Tennessee. Producer interviews confirmed the inflated costs as accurate for production in Two additional figures were then created to take into account varying management styles of cattle producers. The two additional groups, intensive management operation and limited management operation, were created by increasing 15% of preconditioning costs and subtracting 15% of preconditioning costs, respectively. Finally, costs were compared to the total added valued realized in the HCCA sale to determine if producers were indeed finding additional value over additional costs of preconditioning. 12

20 Chapter 4. Results and Discussion Results from a paired t- test confirmed that there was a significant difference (P<0.001) in the prices received through the video sale and the weekly cattle auction (Table 1). The mean price per/cwt at the Hawkins County Cattlemen s video sale was $ This was $5.08 higher than the prices seen at the weekly auction ($105.08). Cattle prices have been increasing for the last six years for both preconditioned cattle and those sold at the weekly auction (Figure 1). Data from showed that producers can indeed receive higher prices for cattle that were sold in the HCCA video sale (Figure 2). In rare instances the price was close to, or below weekly cattle market levels, but this was infrequent. On average a producer saw an additional revenue of $35.43 per 700lb calf throughout the entire time period. The highest average additional value was seen in 2012 at $54.66 per 700lb calf. In contrast the lowest average premiums were experienced in 2009 at $28.22 per 700lb calf. Table 1. Paired t Test for Hawkins County Cattlemen s association Video sale and Weekly Auction prices 2008 to 2013 HCCA Mean Variance Observations Pearson Correlation Hypothesized Mean Difference 0 df 70 t Stat P(T<=t) one tail E 20 t Critical one tail P(T<=t) two tail E 20 t Critical two tail CA 13

21 Average Price (per cwt) $ $ $ $ $ $ $ $90.00 $80.00 $70.00 $ Year Hawkins County Cattlemen's Association Video Sale Weekly Auction Figure. 1 Cattle prices experienced at Hawkins County Cattlemen s Association video sales and weekly auctions in Tennessee. 60 Added Value ($ per 700lb calf) Year Figure. 2 Added value of preconditioned cattle at Hawkins County Cattlemen s sale over weekly auction price in Tennessee. 14

22 When evaluating the results to the question, can a producer make more money at these sales?, an analysis and comparison of costs and prices were done for multiple years because 2013 results indicated a loss of total profit even though higher prices were received for the cattle in the video sale when compared to weekly prices. The additional revenue ranged from -$3.48 to $ and on average, producers received an extra $37.40 for a 700lb animal in 2013 at the Hawkins County Cattlemen s Video Sale (Figure 3). $ $ Average Price (per cwt) $ $ $ $ $ Jan. Feb. March April May June July Aug. Sept. Oct. Nov. Dec. Month Hawkins County Cattlemen's Association Video Sale (per cwt) Weekly Auction (per cwt) Figure 3. Average price received at Hawkins County Cattlemen s Association sale and Weekly auction during 2013 in Tennessee. 15

23 The average cost of preconditioning was set at $67.81 per animal for a 45 day preconditioning program. This cost included labor, vaccinations, feed, etc. For producers that choose to manage their operation more intensively, an extra 15% was added to this average, making the intensive management costs $77.97 for the same 45 day program. Those individuals that limited their management and inputs costs were estimated to be 15% below the average, $ The return of preconditioning cattle was calculated by subtracting the cost of preconditioning from the additional value gained from the video sale. All months in 2013 showed a negative return for all styles of production (average, intensive, and light) except for the month of December which showed additional value of $33.17, $23.00, and $43.43, respectively (Figure 4). The negative return on the investment of preconditioning cattle was greatest for those individuals managing their cattle more intensively, as to be expected, and ranged from -$81.46 to -$20.17 in the months of January through November (Table 2). The average additional value per 700lb calf was -$40.58 for the intensive managers during The average management costs resulted in an average return of -$30.41 per 700lb calf, while those investing the least amount, limited management, experienced an average return of -$ Video sale prices in 2012 showed more promise than 2013 with some positive return on investment. The highest return was seen in June 2012 with intensive, average, and limited producers receiving an additional $35.35, $45.52, and $55.69, respectively (Table 3). However, the overall average return for 2012 was -$23.32, - $13.15, and -$2.98 for each of the respective types of managers. Prices received for cattle during 2012 at the HCCA sale were again higher than those received at weekly 16

24 Cost Return of Preconditioing $60.00 $40.00 $20.00 $0.00 $20.00 $40.00 $60.00 $80.00 $ Jan. Feb. March April May June July Aug. Sept. Oct. Nov. Dec Month Intensive Cost Return (Average +15%) Average Cost Return ($67.81) Limited Cost Return (Average 15%) Figure 4. The cost return of preconditioning cattle and being sold at Hawkins County Cattlemen s Association video sale in Table 2. Cost return for preconditioning calves for the Hawkins County Cattlemen s Association (HCCA) Video Sale in HCCA Video Sale. (per cwt) Weekly Auction (per cwt) Difference (per cwt) Value for 700lb calf Intensive Cost Return (Average +15%) Average Cost Return ($67.81) Limited Cost Return (Average -15%) Jan $ $ $7.44 $ $ $ $5.56 Feb $ $ $0.71 $4.99 -$ $ $52.65 Mar $ $ $0.21 $1.48 -$ $ $56.16 Apr $ $ $0.50 -$3.48 -$ $ $61.12 May $ $ $8.18 $ $ $ $0.36 Jun $ $ $7.83 $ $ $ $2.83 Jul $ $ $6.92 $ $ $ $9.23 Aug $ $ $4.14 $ $ $ $28.64 Sep $ $ $5.06 $ $ $ $22.24 Oct $ $ $5.53 $ $ $ $18.91 Nov $ $ $4.15 $ $ $ $28.58 Dec $ $ $14.43 $ $23.00 $33.17 $

25 Table 3. The cost return of preconditioning cattle being sold at Hawkins County Cattlemen s Association (HCCA) video sale in 2012 HCCA Video Sale (per cwt) Weekly Price (per cwt) Difference (per cwt) Value for 700lb calf Intensive Cost Return (Average +15%) Average Cost Return ($67.81) Limited Cost Return (Average -15%) Jan $ $ $12.01 $84.05 $6.07 $16.24 $26.41 Feb $ $ $10.84 $ $2.09 $8.08 $18.25 Mar $ $ $5.92 $ $ $ $16.19 Apr $ $ $2.16 $ $ $ $42.54 May $ $ $1.48 -$ $ $ $67.98 Jun $ $ $16.19 $ $35.35 $45.52 $55.69 Jul $ $ $7.83 $ $ $ $2.83 Aug $ $ $7.27 $ $ $ $6.75 Sep $ $ $7.10 $ $ $ $7.96 Oct $ $ $8.52 $ $ $8.17 $2.00 Nov $ $ $8.51 $ $ $8.23 $1.94 Dec $ $ $8.84 $ $ $5.95 $4.22 auctions with the exception of May 2102 which saw -$1.48 as compared to those weekly auctions (Figure 5), but there prices were not high enough to offset estimated costs of preconditioning during most months in 2012 (Figure 6). Data from 2010 were also examined to see if lower cattle prices had an impact on the total return of preconditioning. Overall cattle prices were lower in 2010 as compared to recent years and an average premium of $29.34 per 700lb calf was paid when selling preconditioned cattle. All management costs were adjusted to 2010 levels. The average cost of the 45 day preconditioning program adjusted to 2010 levels was $ The intensive management cost was $71.73, and the limited management cost was $ In spite of higher 18

26 Price (per cwt) $ $ $ $ $ $ $ $ $ $ $ JAN. FEB. MARCH APRIL MAY JUNE JULY AUG. SEPT. OCT. NOV. DEC Hawkins County Cattlemen's Association Video Sale (per cwt) Weekly Price (per cwt) Figure 5. Prices received at Hawkins County Cattlemen s Association video sale and weekly cattle auction $80.00 Retrun from preconditioning $60.00 $40.00 $20.00 $0.00 $20.00 $40.00 $60.00 $80.00 $ Jan. Feb. March April May June July Aug. Sept. Oct. Nov. Dec Month Intensive Cost Return (Average +15%) Average Cost Return ($67.81) Limited Cost Return (Average 15%) Figure 6. The cost return of preconditioning cattle and being sold at Hawkins County Cattlemen s Association video sale in

27 prices for the HCCA video sale throughout 2010 (Figure 7), the average style management producer in 2010 was unable to find additional profit by preconditioning (Table 4, Figure 8). The producer in this management group saw an average return from preconditioning and selling at the HCCA sale of -$ Those individuals choosing to manage more intensively saw an average return of -$42.38 while those in the limited management group saw an average return of -$ During 2010, only those using a limited management style saw a positive return and only during the month of December with a return of $6.26 per 700lb calf. $ $ $ Price (per cwt) $95.00 $90.00 $85.00 $80.00 $75.00 $70.00 Jan. Feb. March April May June July Aug. Sept. Oct. Nov. Dec Month Hawkins County Cattlemen's Assocation Sale Weekly Auction Figure 7. Prices received at Hawkins County Cattlemen s Association video sale and weekly cattle auction in

28 Table 4. The cost return of preconditioning cattle being sold at Hawkins County Cattlemen s Association (HCCA) video sale in HCCA Video Sale (per cwt) Intensive Cost Return (Average +15%) Average Cost Return ($62.37) Limited Cost Return (Average -15%) Weekly Auction Difference (per cwt) Value for 700lb calf Jan $84.30 $79.67 $4.63 $ $ $ $20.60 Feb $87.51 $82.47 $5.04 $ $ $ $17.72 Mar $92.62 $89.26 $3.36 $ $ $ $29.49 Apr $ $97.23 $4.06 $ $ $ $24.63 May $ $ $3.61 $ $ $ $27.77 Jun $99.17 $94.09 $5.08 $ $ $ $17.45 Jul $ $ $1.83 $ $ $ $40.19 Aug $ $ $3.75 $ $ $ $26.75 Sep $ $99.80 $3.92 $ $ $ $25.56 Oct $96.00 $90.56 $5.44 $ $ $ $14.92 Nov $95.94 $94.83 $1.11 $7.77 -$ $ $45.25 Dec $ $99.02 $8.47 $ $ $3.10 $6.26 Return for Preconditoning $10.00 $0.00 $10.00 $20.00 $30.00 $40.00 $50.00 $60.00 $70.00 Jan. Feb. March April May June July Aug. Sept. Oct. Nov. Dec Month Intensive Cost Return (Average +15%) Average Cost Return ($67.81) Limited Cost Return (Average 15%) Figure 8. Cost return for preconditioning cattle and selling at HCCA Video Sale during

29 Chapter 5. Conclusions and Discussion Regardless of what practices have been completed, it is essential for sellers to pursue the correct marketing channels to reap the greatest benefits. Cattle producers might realize extra profit by selling livestock in group lots or in specialty sales. The size of the lots can vary, whether it be three animals or an entire truck load, but regardless of size, groups of quality cattle can bring a premium from the buyer. Value-added practices can increase profits in any operation, but the results are somewhat variable. Cattle producers that choose to seek greater value for their animals must be willing to pursue opportunities that allow them to properly market their cattle and fully take advantage of the added value. In the end, producers can receive additional dollars per hundred weight of cattle for value-added practices, but must be aware of the costs associated with each practice. While costs are extremely variable not only from year to year, but also between producers, the inputs in an operation can often affect the bottom line. The data collected over the past several years of HCCA Video Sales provided great insight into the importance of farm and financial management. A producer who is cognizant of his/her inputs can easily turn a situation that may lose value to one that increases overall profits. The importance of financial management goes beyond keeping records of costs, and must be used as a tool by producers to truly take advantage of any opportunities that may exist within their market. Simply preconditioning and selling cattle through the video sale did not translate into greater profits. In the end, the question for producers might not be is preconditioning worth the 22

30 money, but does preconditioning create better cattle and improve the cattle industry by providing a better product? 23

31 Literature Cited Avent, K.R., C. E. Ward, and D.L. Lalman Market Valuation of Preconditioned Feeder Calves. Journal of Agricultural and Applied Economics 36(1): Certified Naturally Grown Livestock Standards. Certified Naturally Grown. (accessed 22 Nov. 2013). Dolan, T.G Alternative Marketing Strategies for Cattle Producers. The Cattleman 98(5):82 84,86,88. Donnell, J., Ward C., Swigert S Costs and Benefits Associated with Preconditioning Calves. Oklahoma Cooperative Extension Service Publication AGEC 247. Inflation Calculator: Bureau of Labor Statistics (U.S. Bureau of Labor Statistics) Muth, M.K., Y. Liu, S.R. Koontz, and J.D. Lawrence Differences in Prices and Price Risk Across Alternative Marketing Arrangements Used in the Fed Cattle Industry. Journal of Agricultural and Resource Economics 33(1): Parish, J. A., J.D. Rhinehart, and H.T. Boland Beef Cattle Preconditioning Programs. Mississippi State University Extension Publication No.2578 Riley, J. M Extension's Role in Commodity Marketing Education: Past, Present, and Future. Journal of Agricultural and Applied Economics 45(3): Williams, G. S., K.C. Raper, E.A. DeVuyst,, D. Peel, and D. McKinney Determinants of Price Differentials in Oklahoma Value Added Feeder Cattle Auctions. Journal of Agricultural and Resource Economics 37(1): Zimmerman, L. C; T.C. Schroeder, K.C. Dhuyvetter, K.C. Olson, G.L. Stokka, J.T. Seeger, and D.M. Grotelueschen The Effect of Value Added Management on Calf Prices at Superior Livestock Auction Video Markets. Journal of Agricultural and Resource Economics 37(1):

32 Appendix Table A1. Partial budget comparisons used in estimating preconditioning management costs (from Donnell, Ward, and Swigert, 2005). Noble Foundation Oklahoma Quality Beef Network Kansas State Universit OSU Revised Traditional management Weaning weight (lbs) Shrink (%) Sale weight (lbs.) Price ($/cwt.) Gross revenue ($/head) Preconditioning management revenue Weaning weight (lbs.) Days from weaning to marketing ADG (lbs./day) Ranch (marketing) weight (lbs.) Shrink (%) Sale weight (lbs.) Weaning day price from traditional management ($/cwt.) to marketing ($/cwt.) Price slide for heavier weight ($/cwt.) Price discount for increased flesh ($/cwt.) Management premium ($/cwt.) Final price ($/cwt.) Gross revenue ($/head) Preconditioning management costs Interest rate (%) Cattle interest ($/head) Health supplies and medicine ($/head) Death loss (%) Death loss ($/head) Labor and equipment ($/head) Feed, hay, and pasture ($/head) Additional marketing costs (tags, Total cost ($/head)