Economist evaluates feedlot marketing trends

America's taste for beef has changed drastically and so have the ways in which slaughter cattle are marketed, according to South Dakota State University Agricultural Experiment Station economist Scott Fausti. He has been analyzing these trends for nearly 20 years.

Through his research, Fausti gives producers insight on marketing trends, investigates public access to reliable statistics and tracks changes that affect small producers in an industry dominated by large operations.

Using value-based system

In the 1990s, the National Beef Cattlemen's Association published a report called War on Fat, which attributed the decline in beef consumption to consumer health concerns about red meat and production innovations that made pork and poultry less expensive, Fausti recalls. The document argued that animals were overfed, raising the average cost of beef and producing $10 billion in excess fat.

To packers and consumers, "Fat is worth a lot less than red meat," he adds.

"The beef market supply chain had to be changed," Fausti says. The industry went from selling all slaughter cattle in a pen at the same price per hundredweight to a value-based marketing system.

"Each animal is evaluated with respect to yield grade and quality grade, so the producer is paid true market value," Fausti explains. Yield grade refers to the percentage of the carcass that yields boneless retail cuts, while quality grade is based on the intramuscular fat content or marbling of the meat.

This system, known as grid pricing, places a higher value on highly marbled, high-dressing percentage carcasses -- the type packers and consumers prefer. Producers benefit from selling on a grid because packers also provide specific carcass quality information on each slaughter animal, which can be used to improve herds, Fausti adds.

Shifting from cash to contract

As demand for beef decreased from the mid-1970s to late 1990s, the packing industry began looking at alternative procurement strategies. Given that four firms control 85 percent of the fed cattle slaughter market, these changes have occurred rapidly.

Packers now rely heavily on contracts called marketing agreements with feedlots. As a result, the fed cattle market has moved from being dominated by a cash market system to a market dominated by contracts. A similar structure has already come to dominate the poultry and pork industries.

Large feedlot producers have accepted this change because it "reduces the financial risk to feedlots and will guarantee a relationship where they know they will be able to sell their animals when they're ready to be sold," he explains. But, this move has also limited public information about prices and quality in the market. Limited price information reduces market transparency and hinders the producer's ability to engage in price discovery.

Regaining market transparency

"Economists had a concern about price and market transparency prior to 2001 because the livestock transactions were reported on a voluntary basis to the [U.S. Department of Agriculture]," he says. The problem with voluntary reporting is that private companies chose which statistics they shared. "You can't force firms to give you information."

Fausti's research documented how the 1999 Mandatory Livestock Pricing Reporting Act improved the reliability of USDA data. This act required that marketing

information, such as price and volume, be made publicly available, so livestock producers could easily access and understand current market conditions. A 2001 study showed that volatility had increased in publicly reported prices. But, Fausti notes this meant that the statistics gathered through voluntary reporting might have been biased.

Analyzing feedlot strategies

The emphasis on a contract rather than a cash market puts small feedlots at a disadvantage.

Packers prefer to contract with feedlots that can provide 20,000 rather than 500 head, Fausti explains. Nearly 95 percent of the state's 3,176 feedlots marketed less than 1,000 head of cattle, while accounting for 38 percent of fed cattle sales in 2007 -- the last year these statistics were made publicly available.

"Small feedlots are extremely important to the South Dakota industry," Fausti says. In addition, USDA no longer releases statistics on feedlots with fewer than 1,000 cattle as part of the public reporting process.

Nationwide, the vast majority of feedlots have less than 1,000-head capacity, according to USDA's Economic Research Service. Larger operations, which run 1,000 or more head, market 84 percent of the fed cattle. Those feedlots with 32,000 head or more account for 40 percent of the fed cattle.

The trend toward the big guys dominating in terms of feedlots and processing makes the watchdog role of economists like Fausti even more important to South Dakota producers.

With this in mind, Fausti seeks to analyze differences in marketing strategies and feeder cattle procurement strategies between small and large feedlots. The small lots will be those with less than 1,000 head of cattle.

"I hope to find out what are the current market factors influencing how animals are sold -- cash or contract market," he says. "Identifying seasonal patterns may help feedlot producers design more efficient, profitable marketing strategies."

Though the road has been bumpy, cattlemen are experiencing better markets, but he points out, "competition requires firms to adjust to changing market conditions to remain profitable and stay in business."