Most growers either in crop or livestock production are painfully aware of those annoying deductions that appear on statements accompanying their cheques. Many are just the cost of doing business like checkoff, insurance fees, inspections, transportation and so on.
You can try to reduce those deductions through various creative means, but there are other somewhat invisible costs that are taking a big chunk out of the producers pocket. The situation is most prevalent in the cattle industry and it’s becoming an economic issue. I refer to the added cost of marketing cattle throughout the chain.
Unlike the hog industry, where marketing arrangements have become direct — that is, primary producer to packer — much of the cattle industry is still marketing through multiple hoops, just like it did 100 years ago. There is nothing really wrong with that marketing approach ... it’s just that it adds a cost of $50 to $100 to a finished steer.
In a world of tight margins, that really hurts — especially at the beginning of the chain. How that figure can be reduced is the big question, and industry analysts have been ruminating on it for years.
The situation is this — cow/calf producers generally sell their calves through auction markets, where they are purchased by order buyers or dealers. Those folks then send them off to clients or other markets on speculation. Everyone involved in that takes a piece of the action. Subsequently, many of those same cattle will sooner or later go through the same process, incurring more costs. Sometimes, feeder cattle are moved multiple times through speculative channels. Whilst all of that goes on, inspection fees, checkoffs and shrink take their toll on returns.
That situation is nothing new to the industry and many folks have tried to mitigate those costs. Direct to feedlot sales occur, Internet sales are becoming more popular and, of course, retained ownership is an option. In every case, producers are trying to reduce or capture those transaction costs. But each of those avenues has its own costs, be it weighing fees, sales fees and, of course, risk. One hears of producers trying different marketing angles but finding that each has its own problems. In the end, producers in many cases are finding that convenience is worth a price.
Those making their living in the cattle marketing business are doing nothing wrong. They are merely providing a service to willing customers. No one is forcing cattle producers to sell their livestock through auction markets, order buyers or dealers. Cattlemen do complain about their profits being sliced off by middlemen, but that’s an old argument — producers have choices.
The feedlot industry long ago stopped selling cattle through auction markets. The big dogs sell direct to packers and smaller operators sometimes sell through co-op type consolidation marketers. Cow/calf operators have sometimes banded together to offer large lots for sale, but that’s the exception, most still sell through local auction markets. One can assume that regardless of the cost, the system is working. But one ponders for how long.
The entire cattle and beef industry depends on the cow/calf operator staying in business. If the system is seeing costs of up to $100 per head or more being taken out of the process, one can assume that a good chunk of that is being taken out of the primary producers hide one way or another. I cite as an example many up the chain benefit from national ID tags, traceability and age verification, but it’s the producer at the bottom that has to pay the price. The same can be said for all the multiple transaction and transportation costs that occur up the line, the primary producer pays for that with a lower price sooner or later. Maybe a good chunk of those compulsory costs need to be added to the retailers bill upon purchase of the beef — just an idea.
The point is not to blame the various players in the market ... they are doing a good service or are taking on risk. The point is that a lifetime marketing cost of $100 or more per head could be the difference in keeping a cow/calf operator in business.
We’re seeing the Alberta cowherd seriously declining and more producers are exiting the business. There’s a message there that those in the marketing business and others need to pay attention to. Sure, there are many other extenuating circumstances in the decline and marketing costs are just one. But there needs to be a better handle on how those particular costs need to be mitigated before it’s too late.
— Ahead of the Heard