Value Added Marketing Opportunities

1. Value AddedMarketing Opportunities Oklahoma State University

2. Objectives and Alternatives • Identify industry trends that lead to specific alternatives • Discuss • Preconditioning calves • Cooperative marketing • Retained ownership through custom feeding • Strategic alliances

3. Industry Trend - One • Increased importance of animal health • Increased interest in preconditioning by cowherd owners and buyers • Increased willingness of buyers to pay a premium price for preconditioned calves • Thus – preconditioning is an opportunity to consider

4. Industry Trend - Two • Average cowherd size in Oklahoma is 40 head • Smaller herds limit selling large, uniform lots of calves (uniform in sex, weight, and other traits) • Smaller producers may not know how to economically improve their genetic base

5. Industry Trend - Two • Smaller producers have no leverage when buying supplies • Thus – cooperative marketing or purchasing is an opportunity to consider

6. Industry Trend - Three • Grid pricing is becoming increasingly common among cattle feeders • One reason given by feeders is to receive carcass data from packers • Cowherd owners want information on their calves to improve their cowherds • Thus – retained ownership through the feedlot is an opportunity to consider

7. Industry Trend - Four • Several strategic alliances were formed in the ’90s • Cattle feeders report increased use of alliances and marketing agreements • One reason for participation by feeders is to obtain carcass data • Thus – participating in an alliance is an opportunity to consider

8. Preconditioning Calves • Benefit-cost information • Results to date in Oklahoma

9. Preconditioning Benefits • Heavier sale weight • Gain during preconditioning • Less shrink at sale time • Price premium for preconditioned calves • Healthier calves • Better starting calves • More uniformity • Seasonal price increase (Oct-Nov to Nov-Dec)

10. Preconditioning Costs • ID tags • Animal health inputs • Feed during preconditioning • Higher marketing commissions • Opportunity cost (interest) • Labor and management commitment

11. Estimated Cost-Benefits from Preconditioning Per head • Added cost for preconditioning $60-70 • Tags, Animal health, Feed, Labor, • Interest, Marketing • Added revenue from preconditioning $60-80 • Heavier animal, Premium price, • Seasonal price increase • Net gain (loss) from preconditioning $(10)-20

12. Preconditioning Growth at Superior Livestock Auction

13. Preconditioning Price Premiums at Superior Livestock Auction

14. Related Research on Preconditioning Price Premiums

15. Estimated Performance Benefits by Feedlot Managers Preconditioned Non-Preconditioned • Percent sick 9.2 36.4 • Percent dead 1.5 4.3 • ADG 2.9 2.6 • Conversion 6.3 6.9 • Percent Choice 50.4 35.8 • Percent outs 2.5 6.9 • Market value – Average $5.25/cwt. Range $0.00 to $10.00

16. An OklahomaPreconditioning Program • The Oklahoma Quality Beef Network (OQBN) – a process verification and certification program • Sponsored by the Oklahoma Cattlemen’s Association with educational support from Oklahoma State University • See www.ansi.okstate.edu/exten/oqbn for details

17. Have OQBN Calves Earned a Premium Price? • Two approaches: • First, standard approach often used to determine price differences for feeder cattle traits • Second, an approach that groups larger lots (10 head or more) of OQBN certified (no horns, uniform, healthy) calves

18. Estimated OQBN Premium, 2001 (from largest to smallest)

19. Estimated OQBN Premium, 2002 (from largest to smallest)

20. An Alternative Estimate of the OQBN Premium, 2001

21. An Alternative Estimate of the OQBN Premium, 2002

22. Cooperative Marketing • How to evaluate the alternative • Three examples and points to consider

23. An Assessment Framework • Understand your market • Know the buyers’ needs and the competitive environment • Identify – specifically – your problem • What can a cooperative realistically accomplish? • Understand and state – clearly - the objectives of the cooperative

24. Assessment Framework(Continued) • Analyze the pros and cons of each potential cooperative (if more than one) • Determine the interest of potential members • Estimate the detailed investment and operating costs • Implement the cooperative development plan if prospects for success are favorable

25. Example 1: Group Marketing of Calves with Common Genetics • A Demonstration in N.E. OK – Common sire genetics, Group preconditioning, Groupmarketing • Objectives were to increase calf prices by • Marketing larger lots (preferably truckload) • Marketing uniform lots (weight, frame, muscling, sex, color, breed) • Marketing healthier calves (weaned, preconditioned)

26. Lot Size Effect on Prices Paid by Buyers, Joplin, December 2000

27. Calf Marketing Procedures • Purchased or leased common bull genetics • Specified common management practices (breeding period, castration, dehorning, vaccinations, implants, ID tags) • Sorted calves into uniform lots at weaning • Ownership then transferred to the cooperative • Arranged for uniform, custom preconditioning • Calves were pooled for marketing

28. Possible Modifications • Drop • Common genetics • Pooled preconditioning • Pooled marketing of calves • Add • Pooled retained ownership on forage (wheat pasture or grass) – custom stocker program • Pooled retained ownership through the feedlot – custom feeding

29. Example 2: Group Marketing of Preconditioned Calves • Adopt common pre-weaning, post-weaning management practices, such as with OQBN (castration, dehorning, vaccinations, implants, feeding, ID tags) • Preconditioning done by individual producers • Sort and pool calves into uniform, larger lots after preconditioning for marketing

30. Possible Modifications • Drop • Pooled marketing • Add • Pooled retained ownership on forage (wheat pasture or grass) – custom stocker program • Pooled retained ownership through the feedlot – custom feeding

31. Example 3: Purchasing Cooperative • Request bids from suppliers on inputs common to beef cattle production (bulls, replacement heifers, feed supplements, animal health products, cattle handling equipment, etc.) • Producer participation may be voluntary or mandatory • May be a stand-alone cooperative • May combine it with a marketing cooperative

32. Organization New generation cooperative Loosely organized group Formality Formal bylaws and articles of incorporation, investment requirements, marketing agreement, hired staff Informal bylaws, leadership, cost-sharing agreement, marketing agreement, part-time staff and volunteer input One Major Consideration: Organize a Formal Cooperative or Informal Group

33. Some Considerations for the Group • Identify your objectives specifically • Ensure objectives are consistent for all participants • Ensure there is joint decision making • Ensure the procedures are consistent with your group objectives • Carefully develop a budget • Develop an implementation plan – Who, What, When, How

34. Retained Ownership through Custom Cattle Feeding • Background information • Three examples and points to consider • Modify a base budget to fit your circumstances

35. Custom Cattle Feeding Considerations • Selecting a commercial feedlot • Compatibility, including philosophy, objectives, risk, pricing, management • Climate, weather • Location relative to packers • Transportation costs

36. Custom Cattle Feeding Considerations(continued) • Relative uniformity in cattle fed (sex, weight, breed, type) • Increases feeding performance • Have a similar finishing end point • More desirable to packers • Pen size • Typically 100-150 head per pen • Some feedlots may have 50-100 head pens

37. Custom Cattle Feeding Considerations(continued) • Expect risk management assistance from the feedlot firm • Risk management alternatives • Futures market hedge • Futures market options • Basis contracts

38. Custom Cattle Feeding Considerations(continued) • Pricing alternatives • Live weight • Lowest prices and least “value-based” • Carcass weight (in the beef) • Higher prices and one step closer to value-based marketing • Grid • Often highest prices (but no guarantee) and closest to value-based marketing

39. Develop a Custom CattleFeeding Budget • Use the budget given in the handbook as a base • Modify it to see how “what if” factors alter the outcome

40. Participating in a Strategic Alliance • Background information • Some questions to consider

41. Essential Characteristics of aStrategic Alliance • A relationship between individuals or firms in two or more adjacent production stages without full ownership of control by one firm • Participants fundamentally maintain their independence • Participants share information to improve the flow of products from producers to consumers

42. Motives for FormingStrategic Alliances • Improve the information exchange and linkages in the vertical channel • Decrease segmentation and adversarial relationships between buyers and sellers • Move toward value based pricing and improved coordination • Enable quicker and more correct response to consumer demands • Work toward mutually beneficial objectives

43. Alliances Listed in Beef Magazine, by Year Organized

44. Alliance Alignments

45. Minimum Head Requirement

46. Required Genetics

47. Source Verification and Electronic Identification Capability

48. Required Practices

49. Retained Ownership and Returns toCow-Calf Producers

50. Type of Grids