Cattle marketing during an economic downturn

Beef prices have ridden a world-class roller coaster in recent years, making profitable cattle marketing an enormous challenge. Prices peaked in 2014, going as high as they’d been in recent memory. However, they began a downward slide in mid-2015 before tanking through most of 2016.

cattle marketing

Troy Hadrick, pictured with wife Stacy, recently began doing things different when it came to his cattle marketing efforts. Those efforts helped him and other producers get through a recent run of the worst cattle prices the industry has seen in some time. (photo courtesy of advocatesforag.com)

Troy Hadrick is a producer from Faulkton, South Dakota, who rode the highs and lows in beef cattle prices, experiencing firsthand the challenges that low prices present. While fed cattle prices had rallied from October of 2016 into early this year, the business is cyclical and low prices will come around again. Hadrick said it is possible for beef cattle producers to make it through the down times, provided they’re willing to try new things.

There are a lot of theories as to why prices began a free-fall in 2015, falling at an unprecedented pace. Before prices got to that point, Hadrick says beef saw a perfect storm of conditions that drove prices to record highs in 2014. A large number of pigs in the U.S. had died of PED so pork production was way down. An Avian Influenza outbreak had pushed chicken and poultry production lower as well. Combine those facts with the lowest cattle numbers America had seen since the 1940s and you have the recipe for high beef prices.

“There wasn’t enough beef and protein to go around,” Hadrick said, “so our industry did what it always does. It responds and makes a bunch more of the product.”

But the number of cattle head in the herd doesn’t paint the full picture. It’s more about the pounds of product the industry produces. High prices meant producers were getting cattle as fat as possible to produce as many pounds as possible. The industry was at record carcass weight during the boom.

“We were producing carcass weights of approximately 850 pounds at that time,” he said. “Our recent carcass weights were around 814 pounds. So if we kill approximately 500,000 head a week, take that times 30 pounds a head, and look at the difference. The population stays the same as we’re killing the same number of head but the amount of product we’re producing is different.”

Needless to say, prices going from record highs to unbelievably low prices came down hard on the beef industry. There’s no doubt producers were pushed out of business as profits margins shrank to razor-thin levels. Theories ranging from oversupply to market manipulation abounded as the industry was under stress. Hadrick is very sympathetic to the plight of his fellow producers, having gone through the downturn himself. He does want to point out that if producers are willing to try new things, it’s possible to weather the downturns more efficiently.

Back in 2012, the Hadricks began changing their breeding and marketing programs for their cattle. There are different grades of beef and those grades are priced differently.

 

 

Higher quality beef demands a higher price because there’s less of it available. There’s a good demand for higher quality beef because it tastes better.

“We started shooting to produce cattle that would give us the beef that would qualify for these premium programs, such as Certified Angus Beef and USDA Prime,” he said. “If you produce cattle that fit into those categories then you get a nice premium price for your product.”

They did a couple of different things to try to speed up the process of producing premium beef. The family implemented an AI program on the ranch that covered the entire herd, using the best genetics they could find on the market to help them produce the highest quality beef. There’s a lot of data being collected on sires and they looked for the bulls that could get the job done.

So, with that as their focus, here’s where they did something different from what might be considered the ‘norm’ in beef production. Their cattle go down south to be finished but the Hadricks retain ownership.

 

 

“Those cattle are then marketed on a grid,” Troy said. “They harvest those cattle, they hang on the rail, and they’re graded by a USDA Inspector. Based off of that grade and the weight, that’s how the price we receive is calculated. We don’t know the final value of the cattle until they’re hanging on the rail as meat.”

Obviously, there’s a risk of being discounted when you market on a grid. The actual grid is just like other grids you may have seen. For example, if a particular animal graded Prime and was a Yield Grade 3, you follow those two columns and where they meet, that’s what the price was that week for that animal and that’s what we’re paid.

“We started our program with AI and then combined it with genomic testing,” Hadrick said. “We would take DNA samples from some of our cattle, get it analyzed, and that would give us an indicator as far as which cattle would perform well on the grid. We’d also keep back those females that would produce the best calves.”

Between those two technologies, Hadrick said their production went from grading 90 percent Choice, 35 percent Certified Angus Beef, and no Prime, to cattle that finished 57 percent prime, and 100 percent Choice. Hadrick said producers get really good premiums for numbers like that.

“The nice part about it is it doesn’t cost us any more money to raise those cattle,” he said. “It doesn’t cost us any more to feed them, either. Of course, we have to get them bred, but at the end of the day, they’re worth more money.”

There is an additional cost with the genomic testing, but Hadrick says it’s worth it to them because the idea is to identify the cattle that are going to make the family money and those that won’t. They sort cattle accordingly and market those cattle accordingly.

The Hadrick cattle are harvested through a cooperative called U.S. Premium Beef. It’s a rancher-owned cooperative based in Kansas that owns parts of the National Beef Packing Plants in Dodge City and Liberal, Kansas. Hadrick said some visionary people put this idea together back in the 1990s.

“They wanted to give producers the incentive to produce better beef,” Hadrick said, “and they wanted food service businesses and consumers that need beef to be able to come and know they’re getting the highest quality beef. They also wanted to reward the producers that could give them the highest quality beef consistently.”

The grid system runs off what they call plant average. Hadrick said in order to get the premiums, producers have to bring in cattle that are better than what everyone else brings in. That can be a big challenge as they’re attracting a lot of cattle that are high quality right from the start.

The plant isn’t buying cattle from the Hadricks, but instead, they’re buying carcasses. Hadrick said that makes it much harder for producers to try to sneak a bad one through the plant. There’s no hiding a poor carcass once the hide comes off.

He said the new system has advantages from the traditional way of doing business in the cow/cattle industry.

 

 

“On the farming side of things, we got into ethanol, we got into crushing soybeans, in order to get our product closer to the end point,” he said. “The closer you sell your product to the final consumer of your product, the more you’re going to get for it because you’ve added some value to it.”

He said doing business this way isn’t easy. Producers have to manage risk more, they have to have a relationship with the packer, and with the feedlots they work with. Producers also have to know their cattle because they won’t get away with trying to slip a bad one through the chain.

“If you market average cattle, you’re going to get an average price,” Hadrick said. “We’re trying to do things a little differently to do things better.”

Railroads aim to improve grain handling

Inconsistency in the grain handling industry, specifically as it relates to rail transportation, was a topic of extensive discussions throughout 2014.

The Surface Transportation Board received numerous complaints about service problems in the rail industry, and held a public discussion back on April 10, 2014 to discuss the challenges shippers face and some possible solutions to improve efficiency. The discussions continued through October, but the cause of the problems and potential solutions depend on whom you talk to in the industry.

Grain trains

Agriculture is looking for more consistency in grain handling, and the railroads say they’re listening (photo from exactrix.com)

“Personally, I think they have some infrastructure problems,” said Kurt Glinn, a transportation coordinator for the Aurora Cooperative in Aurora, Nebraska. “There are some holes in their infrastructure that they haven’t serviced before. For example, in South Dakota, there are smaller operations that are basically land-locked.”

He said larger co-ops like Aurora, have a big advantage when it comes to loading grain cars.

“Two of our shuttle locations have a natural rail loop,” said Glinn, “and it runs in a full circle. So when the train gets on there, they leave the locomotive hooked up and it goes in a full circle. You load it, and then they come back and get it 10-12 hours later. It takes a lot of ground to do that. Both sit on 75 to 80 acres, and there is some industry in there, but it takes that big of a footprint.”

The Aurora, Nebraska Co-op is a larger business that has adequate access to railroads and grain cars, but there are plenty of others that may not even get rail service, because some tracks have been abandoned (photo from Auroracoop.com)

The Aurora, Nebraska Co-op is a larger business that has adequate access to railroads and grain cars, but there are plenty of others that may not even get rail service, because some tracks have been abandoned (photo from Auroracoop.com)

He added, “There are also lines across the country that they’ve flat out abandoned.”

At least one of the major rail carriers, Burlington Northern Santa Fe (BNSF), is committing large amounts of capital to improve some of the infrastructure challenges.

“BNSF is planning on $6 billion dollars in capital expenditures to improve operations in 2015,” said Amy Casas, Director of Corporate Communications for BNSF. “It’s a direct reflection of our pledge to meet our customers growing freight demands. The plan includes $2.9 billion dollars to replace and maintain the core rail network and its related assets.”

While the projected improvements will take place across the country, not all states appear to be struggling with grain handling transportation issues.

Amy Casas is the Director of Corporate Communications for the BNSF railroad (photo from linkedin.com)

Amy Casas is the Director of Corporate Communications for the BNSF railroad (photo from linkedin.com)

“We actually have more than adequate supplies of rail cars and service for our grain shippers,” said Tom Tunnell, the President and CEO of the Kansas Grain and Feed Association. “Our current condition shows empty elevators waiting for the winter wheat harvest.”

He said recent rainfall is welcome, but it’s creating delays in winter wheat harvesting.

“As a result, we don’t have any transportation issues right now,” said Tunnell. “We don’t have anything to ship until they cut it. We also anticipated the harvest and emptied our storage, so whatever is cut early will be retained at the elevator because we can store it.”

Although things look good so far this year, Tunnell said they have had some big grain handling challenges in recent years.

Tom Tunnell

Tom Tunnell is the President and CEO of the Kansas Grain and Feed Association (photo from ksgrainandfeed.org)

“We had a lot of grain on the ground about 18 months ago,” said Tunnell. “The cost to get rail cars was extremely high, way above normal. The premiums were in the thousands of dollars per car range, but all that’s gone away. We’re back down into a more normal range.”

Fewer rail cars means more demand and higher prices. Amy Casas said one of the improvements BNSF intends to make should help lower prices come fall harvest.

“In 2015, we plan to acquire approximately 7,800 more rail cars,” said Casas. “Of that total, about 900 will be the new cover-hopper grain cars. We also plan to acquire more than 300 locomotives this year too.”

Kurt Glinn said the ethanol industry may have lowered demand for shipping grain, but thanks to advances in seed technology, demand for grain shipping may be on the rise again, hence the need for more cars.

“When ethanol came in over the last 15-20 years,” said Glinn, “I think the railroad saw a decrease in their business. Because of the ethanol industry, there was less grain to be shipped due to ethanol plants using a lot of corn.

“Now, we’ve got better hybrids, agronomy practices, herbicides and stuff like that,” said Glinn. “We’re raising more corn per acre than we’ve ever raised before, so even with ethanol usage, we have a lot more corn to ship than in recent years even with the same number of acres planted. There’s more grain and the railroad is struggling to keep up.”

Tom Tunnell said railroads are also struggling with increasing demand for cars because of the Bakken oil field in North Dakota.

Bakken Oil Well

Ag experts say the Bakken Oil Fields may have taken some railroad cars that otherwise would have shipped grain (photo from deq.mt.gov)

“Much of the railroad’s equipment was taken by the efforts in the Bakken oil exploration in North Dakota,” said Tunnell. “It was taking up a lot of the railroad’s interest and time as well. However, since that time, oil prices have gone down and that situation doesn’t exist anymore.”

Glinn has a similar perspective on the railroad hauling oil out of the Bakken. “To me, personally, I think they would rather haul oil than grain,” said Glinn. “That’s just a personal opinion.”

Glinn said he thinks the shipping challenges can get better, but it will take some time.

“I think they’ve got some logistical problems,” said Glinn. “I think in the next few years we’ll see these shuttle loaders that can load 110-120 cars will improve things. The railroads would like to see more of these. Railroads want more efficiency. They want to pick that train up in 15 hours and move on.”

The price of corn’s steep drop may have played a role in some of these challenges.

“If the price of corn stayed at $7 a bushel, the railroad would have been very grain efficient,” said Glinn. “If you cut that price by 60%, and then you start whacking it another 15 cents a bushel for increased freight to compete with oil or the refrigerated cars to haul fruits and vegetables, they can’t do it.”