Value Added Marketing Opportunities

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

2. Objectives • Discuss two primary value-added opportunities • Preconditioning calves • Marketing cull cows • Chapter 6 also has information on … • Cooperative or group marketing/purchasing • Strategic alliances • Retained ownership through custom feeding

3. Preconditioning Calves • Calf health is critical to cow-calf producers, stocker operators, and feedlot managers • So how can producers improve health and add value to calves marketed? • Preconditioning calves can accomplish both – but we need to consider the costs and benefits

4. General Preconditioning Guidelines • What does preconditioning entail? • Keep weaned calves on the ranch for 45 days • Follow a specified regimen of nutrition and animal health vaccinations • Castrate bull calves • Dehorn horned calves

5. Preconditioning Benefits • Market calves at heavier weight, due to • Weight gain during preconditioning period • Less shrink at sale time • Market (typically) into the upward trend in the seasonal price pattern (from October to December) • Price premium (increasingly) for • Healthier calves • Better starting calves on wheat or in the feedlot

6. Preconditioning Costs • Feed during preconditioning period • Required animal health inputs • Additional labor and management • Possibly ID tags • Higher marketing commissions (if on a % basis) • Interest incurred or lost

7. Estimated Added Costs and Added Benefits from Preconditioning Per head • Added cost for preconditioning $60-70 • Feed, animal health, labor, marketing, interest • Added revenue from preconditioning $60-100 • Selling heavier calves, seasonal price increase, premium price • Net gain from preconditioning $0-40

8. Value of Added Weight Gain • Assume a 500 lb calf, 1.33 lbs/day gain, $5/cwt price slide, 2005 prices (mid-October and early-December) • Value at weaning • 500 lbs @ 126.36 = $631.80 • Value after preconditioning • 560 lbs @ 121.36 = $679.72 • Value of gain = $47.82

9. Average Seasonal Price Increase • Price change from mid-October to early-December from 1992-2006 at Oklahoma City • A seasonal increase occurred 12 of the 15 years • Average increase was $5.74/cwt • Without the two highest increases, the average was $4.61/cwt or $25.82 for a 560 lb calf

10. Price Premiums for Preconditioning • Better performance (health, feedlot gains, carcass characteristics) merits a premium price

11. 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

12. Preconditioning Growth at Superior Livestock Auction

13. Preconditioning Price Premiums atSuperior Livestock Auction

14. Research on Comparable Programs and Price Premiums

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. OQBN Weighted Average Premium, 2001-2003

17. Noble Foundation Average Premium for Cooperator Calves, 2005-2006

18. Higher Prices for Larger Sale Lots at OQBN Sales, 2003

19. Higher Prices for Larger Sale Lots of Noble Foundation Calves, 2005-2006

20. Average Premium for Larger Lotsand Preconditioning

21. Actual Preconditioning Costs • Noble Foundation cooperators, 2004-2005 • Average costs were about $50/head • Over 80% was feed and medicine • But – costs excluded added labor and marketing costs

22. Sensitivity of Market Factors in an OSU Preconditioning Budget • A $2/cwt change in price level leads to a $1.45/hd change in net returns • A $2/cwt change in seasonal price difference (from October to December) leads to a $11.89/hd change in net returns • A $2/cwt change in price premium leads to a $11.89/hd change in net returns

23. Sensitivity of Calf Performance in an OSU Preconditioning Budget • A 0.1 lb/day change in average daily gain leads to a $4.85/hd change in net returns • Increasing death loss from 0.5% to 1.5% leads to a $6.65/hd decline in net returns

24. Sensitivity of Cost Items in an OSU Preconditioning Budget • Increasing feed/mineral and hay costs $5/hd leads to a $5/hd decline in net returns • Increasing vaccination and animal health costs $2/hd leads to a $2/hd decline in net returns

25. Livestock Market Volume, Sale Management, and Reputation Matter • Larger sales of preconditioned calves led to larger premiums in OQBN sales • Preconditioned sale lots sold as a group brought larger premiums than preconditioned sale lots mixed in with the normal run of calves

26. Larger Numbers of Preconditioned Calves Bring Larger Premiums Premium Number of Lots

27. Concluding Remarks on Preconditioning • Preconditioning is expanding despite requiring more work and higher costs • Buyers are increasingly willing to pay for the benefits of preconditioning • Cowherd owners must weigh the expected added revenue vs. the expected added cost – for preconditioning calves

28. Other Potential Value-Added Programs to Consider • Source and age verification to export cattle • May return $3-4/cwt. • Are part of USDA QSA/PVP programs

29. Source and Age Verification • Source verification is the ability to trace beef to the farm/ranch of origin • Age verification is the ability to document and verify age of the animal at slaughter • Source and age claims are validated through a USDA PVP or QSA

30. PVP/QSA Programs • Processed Verified Programs (PVP) verify claims regarding source and age, along with practices such as preconditioning, all natural, etc. • Quality System Assurance (QSA) programs are a simpler version of PVPs to verify claims regarding source and age, and non-hormone treated cattle (NHTC) for export

31. How and Where Can You Access These Programs? • Programs may be approved for breed associations, livestock markets, feedlots, or packers • Some may have “umbrella programs” which producers can access relatively easily • Usually an on-ranch evaluation is required to verify records kept • For more information, go to http://www.okanimalid.com/addingvalue.html

32. Questions, Comments?

33. Marketing Cull Cows • Cull cows may represent 15-20% of a cowherd owner’s annual income • So how can producers add value to cull cows marketed? • We need to consider the costs and benefits of retaining cows for added value

34. General Alternativesto Manage Cull Cows • Retain cows on stockpiled forage • Or feed cows in a dry lot on a higher concentrate feeding program • Attempt to rebreed open cows for later marketing as bred cows

35. Cow Feeding and Marketing Benefits • Market cows at heavier weight, due to • Weight gain during the feeding period • Market (typically) into the upward trend in the seasonal price pattern (from November to July) • Price premium (potentially) from … • Improved body condition score (BCS) • Improved slaughter grade and dressing percentage

36. Livestock Marketing Information Center

37. Estimated Added Costs and Added Benefits from Grazing Cull Cows Per head • Added cost for grazing $80-100 • Assumes feed, animal health, labor, marketing, interest (90-day program) • Added revenue $100-140 • Selling heavier cows, seasonal price increase, quality upgrade • Net gain from retaining cull cows $0-60

38. Value of Added Weight Gain • Assume a 1100 lb cow, BCS of 4-5, 1.0 lbs/day gain, feeding program (mid-October to mid-January) • Value at culling • 1100 lbs @ $45.00 = $495.00 • Value after feeding program • 1190 lbs @ $45.00 = $535.50 • Value of gain = $40.50/hd

39. Average Seasonal Price Increase • Price change from mid-October to mid-January from 2001-2005 at Oklahoma City • Average increase was $5/cwt which is added value of $59.50/hd for an 1190 lb cow

40. Price Premiums for Improved BCS and USDA Grade • Assume $1.50/cwt for 1190 lb cow is $17.85/hd

41. Cow Feeding Costs • Feed and pasture for 90 days, $70/hd • Animal health, additional labor and management, 1% death loss, additional marketing costs, and interest incurred or lost, $18-20/hd

42. Sensitivity of Market Factors in an OSU Cow Feeding Budget • A $2/cwt change in price level leads to a $1.74/hd change in net returns • A $2/cwt change in seasonal price difference (from October to January) leads to a $22.62/hd change in net returns • A $2/cwt change in price premium leads to a $22.62/hd change in net returns

43. Sensitivity of Cow Performance in an OSU Cow Feeding Budget • A 0.25 lb change in average daily gain leads to a $11.01/hd change in net returns • Increasing death loss from 1.0% to 2.0% leads to a $5.88/hd reduction in net returns

44. Sensitivity of Cost Items in an OSU Cow Feeding Budget • Increasing feed/mineral and hay costs $10/hd leads to a $10/hd decline in net returns • Increasing vaccination and animal health costs $2/hd leads to a $2/hd decline in net returns

45. Concluding Remarks on Cull Cow Marketing • Retaining healthy cull cows for a specified feeding program has several potential benefits • Cowherd owners must weigh the expected added revenue vs. the expected added cost – for retaining and feeding cull cows

46. Questions, Comments?

47. Cooperative or Group Marketing/ Purchasing • Included here are thoughts on … • How to evaluate this alternative • Three examples and points to consider

48. An Assessment Framework • Identify – specifically – your problem or opportunity • What can a cooperative or group effort realistically accomplish? • Understand – and state clearly - objectives of the cooperative

49. Assessment Framework(Continued) • Determine the interest and commitment of potential members • Estimate investment and operating costs and proceed to implementation

50. Example 1: Group Marketing of Calves with Common Genetics • A Demonstration in N.E. Oklahoma • The objective was to increase calf prices by marketing • Larger lots • More uniform lots (weight, frame, muscling, sex, color, breed) • Healthier calves (weaned, preconditioned)