Value Added Marketing Opportunities

1. Value AddedMarketing Opportunities Master Cattlemen Program Oklahoma Cooperative Extension Service

2. Objectives and Alternatives • Identify industry trends that lead to specific alternatives • Discuss four value-added opportunities • Preconditioning calves • Cooperative marketing/purchasing • Retained ownership through custom feeding • Strategic alliances

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

4. Industry Trend Number 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 • Smaller producers have no leverage when buying supplies • Therefore – cooperative marketing or purchasing is an opportunity to consider

5. Industry Trend Number 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 • Therefore – retained ownership through the feedlot is an opportunity to consider

6. Industry Trend Number Four • Several strategic alliances were formed in the 1990s • Cattle feeders report increased use of alliances and marketing agreements • One reason for participation by feeders is to obtain carcass data • Therefore – participating in an alliance is an opportunity to consider

7. First Alternative – Preconditioning Calves • Present … • Benefit-cost information • Results to date in Oklahoma with the Oklahoma Quality Beef Network program

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

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

10. Compare Added Costs with Added 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

11. Preconditioning Growth atSuperior Livestock Auction

12. Preconditioning Price Premiums atSuperior Livestock Auction

13. Research on Comparable Programs and Price Premiums

14. 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 • Added market value – Averaged $5.25/cwt., and ranged from $0.00 to $10.00/cwt.

15. An OklahomaPreconditioning Program • The Oklahoma Quality Beef Network (OQBN) is a process verification and certification program • Sponsored by the Oklahoma Cattlemen’s Association with educational support from Oklahoma State University • See http://okcattlemen.org for details

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

17. Market Data, 2001-03 • Extension agents and specialists recorded cattle attributes during 7 special feeder cattle auctions in 2001, 8 in 2002, and 8 in 2003 • Without them, this summary would not be possible! • OQBN calves totaled 6,999 head in 2001, 5,214 head in 2002, and 4,169 in 2003 • Data came from sales at Apache, El Reno, Enid, Holdenville, Idabel, Tulsa, Welch, and Woodward

18. Summary of OQBN Calves Soldper Sale, 2001-2003

19. Average OQBN Price Differences for Gender-Weight Groups, 2001-2003

20. Weighted Average OQBN Premiumby Method 1, 2001-2003

21. OQBN Premium vs. Vaccinations Unknown, Not Weaned, 2001-2003

22. OQBN Premium vs., Vaccinations Unknown, Weaned, 2001-2003

23. Price Premium Associated with Larger Sale Lots at OQBN Sales, 2003

24. Average Premium for Selected OQBN Lots by Method 2, 2001-2003

25. Premium vs. Number of OQBN Lots (Method 2), by Sale Location Premium Number of Lots

26. Concluding Remarks on Preconditioning • Preconditioning appears to be expanding • There is no debating the fact that preconditioning requires more work and higher costs • However, it appears the willingness to pay for the benefits of preconditioning (and added costs) is increasing also • Therefore, cowherd owners must weigh the expected added revenue vs. the expected added cost – for preconditioned calves

27. Second Alternative – Cooperative Marketing • Present … • How to evaluate this alternative • Three examples and points to consider

28. 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

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

30. Three Examples • Examples presented are three among many, but ones that might fit in Oklahoma • Each could be modified to suit any interested group of producers

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

32. Price Premium Associated with Larger Sale Lots at OQBN Sales, 2003

33. 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

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

35. Example 3: Purchasing Cooperative • Request bids from suppliers of inputs common to beef cattle production (bulls, replacement heifers, feed supplements, animal health products, cattle handling equipment, etc.) • Encourage or require members to purchase from the preferred suppliers • Could be a stand-alone cooperative or could be combined with a marketing cooperative

36. Organization New generation cooperative Loosely organized group Formality Formal bylaws, 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

37. 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

38. Concluding Remarks on Cooperative Marketing/Purchasing • Offers the opportunity for smaller producers to gain some leverage by joining with other producers • Each of the three examples has advantages and disadvantages for any given group of producers • For any of the three to be successful will require an investment in time and effort and requires producer leadership

39. Third Alternative – Retained Ownership through Cattle Feeding • Present … • Points to consider • A base budget to modify to fit your specific circumstances

40. Custom Cattle Feeding Considerations • Selecting a commercial feedlot • Look for compatibility in philosophy, objectives, risk management, pricing, cattle management • Consider climate, weather • Ask about location relative to packers • Know the transportation costs

41. Further Considerations • Recognize that relative uniformity in cattle fed (sex, weight, breed, type) • Increases feeding performance • Means cattle have a similar finishing end point • Makes cattle more desirable to packers • Pen size • Typically 100-150 head per pen • Some feedlots may have 50-100 head pens

42. More Considerations • Expect risk management assistance from the feedlot firm • Be knowledgeable regarding the risk management alternatives • Futures market hedge • Futures market options • Basis contracts with packers

43. Final Considerations • Know your pricing alternatives • Live weight • Least risk and least “value-based” • Carcass weight (in the beef) • Some additional risk and one step closer to value-based marketing • Grid pricing • Most risk and closest to value-based marketing

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

45. Concluding Remarks on Retained Ownership through Custom Feeding • Retained ownership is not new; nor is custom feeding • Cattle feeding is risking and producers need to carefully consider the budgeted outcome and risk • Producers need to select a feedlot carefully and ensure their lender is informed

46. Participating in a Strategic Alliance • Present … • Background information on existing alliances • Some questions to consider

47. Essential Characteristics of aStrategic Alliance • A relationship between individuals or firms in 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

48. Motives for FormingStrategic Alliances • Improve the information exchange and coordination linkages in the vertical channel • Move toward value based pricing • Decrease segmentation and adversarial relationships between buyers and sellers • Work toward mutually beneficial objectives

49. Information Sources • Beef Yellow Pages (2000-2004) • Research and publications (since 1998) at Oklahoma State University, Kansas State University, Washington State University, and University of Saskatchewan

50. Diverse Characteristics of Alliances • Older (1978) vs. newer (2002) • Larger (Million head) vs. smaller (5,000 head) • National vs. local/regional • Coordination with feeders or packers only vs. coordination with feeders, packers, and retailers