Beef price

[grassfarmer]

Was in discussion with some producers yesterday debating the merits of the Peace tender beef Coop plant and one guy raised a very good question - what is beef worth leaving these new plants?
We have talked endlessly about the need for competition and new plants but have we talked real economics?
Many of the proposed plants don't like to say what price their product will bring when they market it - they either don't know or won't say. Evidence of what Cargill and Tyson charge a store for a half beef is also elusive. I've pondered this one all day and it is a big question.
My experience with selling grassfeds tells me that I got the equiv. of $2.00/lb railgrade after processing but not marketing costs. I'm comfortable with that as I value their feed/pasture at $1 a day since they were weaned (@335 days)which equates to a weaned calf price of @ $1000 for 600lb calves. It's a limited market though and one that needs work to get sales.
Randy indicates his program is paying $1.60 railgrade. This is above prevailing packer prices and even with cost of gain at 70 cents in a special custom lot they look attractive when taken back to a weaned calf price. I worry with some of the new proposals that will buy your fats at a "competitive price" - if that's $1.50/lb railgrade and they have been custom fed since weaning it is not long before you find your weaned calf only really made you 95 cents. Given that historically 6 weight weaned calves have been considerably higher than that how sound are plans to build these new plants? If calf prices do pick up post border opening those of us selling beef will not be able to up our price to the consumer so the margin between the two systems will shrink.
Has anyone any ideas on what beef is really worth or am I just going crazy thinking about this too much?

[Horse]

grassfarmer, one thing that the industry needs to do is ensure that beef consumption stays up where it is in Canada, or our beef won't be worth what it is today.
I have heard about some Beef promotion events that are already in the works for this year, so hopefully ABP and local organizations such as Ag Societies will capitalize on the Centennial celebrations to hold Beef on a Bun events that will continue to keep our beef in the forefront .
In intend to contact the exectutive of our local Ag Society and Ag Service Board to encourage them to start planning an event similar to the one they hosted in 2003. The consumer needs to be continually reminded about the safety of beef, and also of the situation our industry is in. We know that things will not be all rosy even after the border opens, and relying on continued support of our product by Canadians will be a necessity .

[Cedar]

Grassfarmer: ...."weaned at 335 days".... really???

[farmers_son]

Grassfarmer: You probably are aware of the Boxed Beef Report at: http://www.canfax.ca/ Click on Boxed Beef Report and the appropriate week.

The Boxed Beef Report should shed some light on what the packers sell beef cuts for.

If you own a packing plant or have some way to participate in value adding do you really care what the price of live beef is anymore? I think not.

The decision to build a plant or value add in some other way should not be based on the “live price”. The live price is not real. It is fixed by the two big packers at their whim. Those packers can raise or lower that price to suit their ends. The decision to own a packing plant needs to be based on the desire to participate in the boxed beef and value added market as opposed to an artificial live cattle market that is controlled by the big packers.

While it fine to breakdown returns from value adding to a live price for internal analysis purposes that is as far as it should go. If you and other producers take the additional step of comparing that return to “market returns” then you are setting yourself up to continue to manipulated by the big packers, the market leaders. Those “market returns”, the live cattle price, is not something those producers who have made the step to participate further up the value chain want to be too concerned with. Producers need to bear in mind that the “live fat cattle market return” is not real. It is not really based on supply and demand or market forces. The live price of cattle in this country and I believe in the U.S. as well is arbitrary, manipulated, artificial. Just more so in Canada.

Once you have made the decision to sell beef instead of cattle that is a strategic direction that cannot be changed on a whim. You have made investments in marketing, many producers are considering making investments in infrastructure, packing plants of their own that they share the profits in. On any given day the Tysons and Cargills of this world can manipulate the live price of cattle to make that decision to value add look unprofitable. It is like a small animal being drawn towards a trap. A bit of cheese or meat under the cage will attract the gullible who will then find themselves captured and no longer free, condemned to serve their master. Producers need to learn to look away from the live fat prices that the packers are offering on a daily basis to entice you toward the trap of chronically low returns and see the opportunities that exist beyond the trap further up the value chain where real markets exist.

[grassfarmer]

Sorry for the garbled post last night.

Cedar, the 335 days was days between weaning and slaughter. They were slaughtered at @18 months old.

farmers_son, I wasn't trying to compare producer owned, packer capacity prices to prevailing monopoly prices in a dysfunctional marketplace.I was trying to see how realistic producers buying into UTM plants is. If the people currently in production and selling to higher price markets are paying $1.60-$1.80 railgrade how much can proposed plants with no experience expect to offer their rancher investors?
I would suggest that even $1.60 will not look attractive if 600lb calves are bringing $1.20 next fall. The option is take $720 at point of weaning or feed till 1300lbs (700lbs x 70c =$490)to get $1200 for a 750lb carcase.
When you add $490 to the $720 you could have had at weaning you are $10 worse off. Unless there is a clear margin to be made by being involved further up the chain why would a producer want to buy shares in a plant?
I have firmly believed that being involved further up the line is the way ahead but now i'm questioning it - it depends on the price the producer plant is able to secure for it's produce or am I missing something?

[grassfarmer]

Farmers_son, what i'm trying to get at was the price a producer owned plant could get for a 750lb carcase hanging in their cooler. Either from a domestic or overseas buyer. I understand this has been asked at meetings and no one can supply even a rough estimate - if they can't how can you even have a business plan?

[kpb]

grassfarmer, I'm afraid you aren't current with market prices for 600 lb. They are currently going for about $1.19 per pound (check out the TEAM prices on Friday). There's a couple of lots right around the 6 weight. If you say 600 lbs at $1.19 that is $714 (not including shrink). At .70 per pound cost of gain to 1,300 slaughter weight that's another $490 for $1,204 total cost. If you get a premium price of $1.60 per pound times, say, 750 pounds rail you get $1,200???
Not to rain on all your parades regarding niche markets and vertical marketing but what am I missing here? By the way I've been backgrounding and finishing for quite a while and my cost of gain is generally low 50's.(48 cents this year cuz of low grain prices)

[grassfarmer]

kpb, I was using the prices of calves last Fall - I realise that they are now stronger quite a bit. So strong I'm going to sell my backgrounding calves this week - I see little potential for upward movement given the US futures on fats and the potential downside if there are problems with the border opening. It's my risk management strategy - take a price I can live with and not be greedy waiting for more. That really is my whole point - my option was to put calves into a custom feedlot to gain entry to a "niche" program. But the cost of gain will be 70-75 c/lb with no fixed end price. I've been tempted by this talk of retained ownership but it just doesn't pencil out for me - sure the feedlot will make money but will I?
Personally I think these feeders are over priced currently relative to likely returns - but i'm just a cow/calf guy.

[kpb]

grassfarmer, are custom lots in your neck of the woods really charging 70 to 75 cents per pound of gain? I haven't checked around here for a while but it was quite a bit less in a custom lot the last time I checked.

[kpb]

grassfarmer, sorry I got distracted. I agree with you twice--putting feeders in any program like that described does not work with $1.20 6 weights and 70 cents pound of gain. I didn't think custom lots were charging that much. Cost of gain is usually in the 50's range. Also I agree with you that selling now is right--just like buying last fall with lots of doom and gloom around was right.There's lots of optimism around right now and that is generally a good time to sell.

[grassfarmer]

I don't know local custom lots rates,the Ponoka ones would be the closest. I'm talking more of the ones linked to a niche sales deal. Highland at Vegreville quoted me 70-75 cents this week. That cost was for hormone free lines that will cost a bit more to produce - it also included the hauling out to slaughter etc so there would be no more marketing expenses. It's a bit of a catch 22 you need to get them fed there to get into the program, yet there is no guarantee of a premium at the end. Not attractive - I'll have to sell my own grassfed I guess to make the real money.

[cowman]

Seems to me at 70 cents for custom feeding, there might be a few more pirates around than just Cargill and IBP? I mean 70 cents when feed barley struggles to make two bucks!!?
I wonder just how efficient these custom lots really are? But then let's face it they usually have a lot of costs that they need to pass on, right?
Like the fancy high tech mill and the expensive feed trucks, and the expensive facilities? Not to mention hired labor...with all the nightmares that can entail? And maybe a girl or two in the office?
I would suggest most farmers/cow/calf men probably have the equipment/facilities to feed out their own cattle if they had too? Of course it is a whole lot easier to just load those calves on the truck and send them out to the lot than actually doing the work yourself? The fact is usually the margins feeding cattle are so pathetic most people just don't want the hassle and on top of that you don't have enough cattle for the lazy packer buyer to get off his fat butt! He'd much rather go and make a deal for a pot load at a time than a body job!
Personally I think it is very seldom that you can actually make any money having cattle custom fed! Without a doubt the custom feeder does very well but you usually don't unless you hit a strong rising market?

[farmers_son]

Grassfarmer, you said “Unless there is a clear margin to be made by being involved further up the chain why would a producer want to buy shares in a plant?...I have firmly believed that being involved further up the line is the way ahead but now i'm questioning it - it depends on the price the producer plant is able to secure for it's produce or am I missing something?"


Is there a clear margin by staying with the status quo?

There is a market for beef, a different market than for live cattle. The market for live cattle is characterized by many weak suppliers and two strong buyers acting in concert to fix prices. The market for beef is characterized by a few strong suppliers selling to many strong buyers. Therefore there is a real functioning market at the beef level while there is not a functioning market at the live cattle level. Which market would you prefer to be in?

Definitely we want to be selling beef not live cattle. But presently we are denied access to the national and international beef markets unless we can get our live cattle processed at a federally inspected plant. The 13 federally inspected plants in this country will not custom kill our cattle for us which would allow us access to the beef markets thereby forcing producers to sell live cattle to the big packers. That is why producers are looking to build their own plants.

At a strategic level we know there is a market for our beef, nationally and internationally. And although the big packers effectively have a monopoly when it comes to buying our live cattle they do not have a monopoly on the packing plant process or the markets beyond the packing plant. I think what you are saying is that before a packing plant is built that those markets need to be lined up. Once that is done a price can be worked back to the live product. I would caution people against comparing that price to the “market price” established by the packer monopoly. Not only is that an artificial market but it ignores the opportunities available to those who have integrated further up the value chain and now can profit from value added branded beef products. It’s a little bit like comparing apples and oranges, isn’t it?