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Producers try to manage cattle and
resources based on market incentives, but that’s not simple when
signals change faster than they can make adjustments.
Sometimes it helps to step back and
check the flow.
Iowa State University (ISU)
helped do that back in 2002 when it published, “Assessing the
Cost of Beef Quality.” That study showed it generally pays,
depending on the USDA Choice and Select beef price.
In feedlot profitability,
marbling turned out to be a key driver, even more important than
carcass weight when the Choice/Select spread was at the
1996-1999 average of $8 per hundredweight (cwt.) or higher.
Moreover, that study concluded, “The current trend to rewarding
higher quality-grading cattle will have the added benefit of
reduced cow cost.”
Much has changed in the last
decade, so what about those cost/value relationships? To find
out, Certified Angus Beef LLC (CAB) sponsored a “Revisit” 2009
white paper, with economist ISU John Lawrence again anchoring
the research team.
The resulting paper note several
changes since 1999: “Value-based marketing is commonplace, the
national beef cow herd has shifted toward more Angus influence,
and carcass weights have increased. Most notably, however,
cattle and grain prices have increased.”
Iowa fed cattle and corn prices
for 1996-1999 averaged $64.13/cwt. and $2.49/bushel (bu.),
respectively, compared to $88.87 and $3.04 for 2005-2008. The
ISU 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 (TCSCF) on individual gain, efficiency and carcass
measurements, the “Revisit” shows quality is at least as
important with higher costs. In fact, 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
TCSCF calves were fairly uniform, thanks to the network of
feedlots using similar management and marketing protocols,
Lawrence says.
The 2009 paper charted all the
correlations between traits. Hot carcass weight is highly and
positively correlated with ribeye area (REA), daily gain (ADG)
and placement weight.
“Faster-growing cattle have
larger carcasses, which have larger ribeyes,” he explains.
“Also, the faster they grow, the less feed it takes to put on
that gain.”
That shows up in the strong,
inverse correlation between ADG and feed efficiency.
“We calculated total revenue for
each animal based on its carcass data, the base price and a
representative grid,” Lawrence says.
Input and output prices were
standardized over time to find profit differences mainly due to
performance, efficiency and carcass traits.
The ISU model explains as much
as 78% of the variability in net return, and marbling topped the
list of individual traits, accounting for 42%.
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,” Lawrence says. “Even at $4/cwt., it is the second-most
important variable, just slightly lower than placement weight.”
However, marbling score
importance increases with the spread and, as it does, the other
variables become relatively less important. One-third of a
quality grade is worth $12.65 per head at a $4 Choice/Select
spread and $31.30 per head at a $16 spread.
“Feed to gain, placement weight
and hot carcass weight are the most sensitive to changes in feed
costs, the latter two being more important with lower costs,”
Lawrence says.
Mark McCully, CAB assistant vice
president for supply, says the paper concludes, “In spite of 22%
higher corn prices and 38% higher cattle prices, this analysis
found results similar to the original study.”
In the economic model, relative
importance of each variable on net return was less pronounced
than in the 2002 study, perhaps because of an overall 13-fold
increase in the number of data points analyzed. That could
moderate the impact of any one variable, he says.
In both studies, marbling had
the largest impact on feedlot net returns when the Choice/Select
spread is $8/cwt or higher. The latest study also notes $6/cwt
as the Choice/Select spread point where the relative importance
of marbling score is equal to other factors. Otherwise, nothing
changes in the order: carcass weight and feed efficiency are
still next after marbling, followed by ribeye area in fourth
place.
Over the last 15 years, the
Choice/Select spread has averaged lower than $6/cwt. only once,
and that was last year, McCully says. “Marbling is still the
most significant performance and carcass trait even as prices
shift, so we must learn how to keep feeding cattle to make the
most of their marbling potential.”
In every phase of the beef
industry from ranch to consumer, “it is increasingly important
to understand cost/value relationships,” he says. “In the recent
economic turmoil, consumer sales of the Certified Angus Beef ®
brand increased because of that understanding. It’s even more
important on the ranch, to know what makes more money in the
end.”
The complete white paper, “Assessing the Cost of Beef Quality,
Revisited,” is available at http://www.cabpartners.com/news/research/index.php.
To view a video with John Lawrence discussing the paper, go to
http://www.youtube.com/watch?v=vr0LXX_5RJk.
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