Where in the U.S. Are Feeder Cattle Most Valuable?

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In regions where commodity crops are produced and exported, the rule of thumb is that basis (the difference between cash and futures prices) are typically stronger in locations that are closer to delivery markets and weaker for farther locations. But is the same the case in feeder cattle markets?

On the surface, it would seem that it would be. With some reconnaissance work by my colleague Gary Brester and some of my own personal communications, I confirmed my initial assumption that the cattle buyer is the party that typically pays for transportation expenses after purchasing the animals. Some of those costs are likely to be passed on to sellers in the form of lower prices (similar to crops markets). Therefore, basis (and, thus, prices) should be highest in Colorado, Kansas, and Nebraska—locations of many feedlots and processing facilities—with ranchers receiving lower prices in Wyoming, South Dakota, and Oklahoma, because there would be higher costs to ship from those locations to the central Great Plains. And, producers in Montana, North Dakota, and Texas should see the lowest prices.

Right?

If you answered “yes,” you’re in the same boat as me. But the figure below, which presents average 2011–2015 volume-weighted prices per hundredweight across the Great Plains, shows a bit of a different marketing landscape.

Chart notes: Data are from beefbasis.com and represent monthly sales prices at auctions for 550-600 pound, 1-2 class, medium and large frame steers. Annual averages for each state are calculated by weighting each reported price by the proportion of cattle sold at the sales location relative to all cattle sold in the state during a particular year. 
The figure shows that between 2011 and 2015, average prices in states with a large density of feedlots (and the lowest transportation costs to deliver feeder cattle to the feedlots) are 8-9 cents per hundredweight lower than in states that are farther away. This seems to indicate the inverse relationship between prices and delivery locations that exists in crop markets.

While I haven’t been able to find any research to identify the specific reasons for this relationship, some conversations with colleagues and a bit of anecdotal evidence has led to two possibilities: quality and economies of scale. First, northern U.S. cattle may just be more hardy animals, produced in cool-temperature climates and on operations that specialize in cattle rather than having animals as a small portion of a crop operation’s portfolio. These animals are more likely to outperform others when delivered to feedlots and may have higher quality carcass characteristics. A white paper that considered the economic returns to Montana’s Beef Quality Assurance Program showed that cattle in the program (thus signaling a higher quality) received a $1.00-$1.56 per hundredweight premium.

A second reason—related to production specialization—is the ability to take advantage and better market economies of scale. Larger, more focused operations are more likely to sell pens of cattle (rather than individual or a small number of animals) to feedlots, which could also improve these animals’ performance in feedlots as well as provide a more homogeneous, consistent product quality across animals. This can reduce the variability in quality and, ultimately, returns that feedlot operators face when marketing their finished animals.

Next week, I’ll take a look at how feeder cattle prices changed in the past year and how these changes differed across the Great Plains states.

(Photo by cosmo_71 is licensed under CC BY 4.0)

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About Author

Dr. Anton Bekkerman is an associate professor in the Department of Agricultural Economics and Economics at Montana State University, joining the faculty in 2009 after completing his PhD at North Carolina State University. Bekkerman’s primary areas of research are grain marketing, basis and price forecast modeling, understanding how grain prices are affected by changes in supply chain infrastructures and quality demands, and analyzing the economic trade-offs of adopting alternative dryland cropping systems in Montana. One of his current projects is an investigation of how new grain loading technologies are affecting prices that Montana farmers receive for their wheat. Bekkerman is also examining the economic impacts that Montana’s rapidly expanding dry pulse industry will have on the state’s crop industry. Although Bekkerman grew up on the east coast, he has recently made a small step toward production agricultural after acquiring three backyard chickens.

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