Grid vs. Live

By : Jill J. Dunkel

 

Does Premium Potential Outweigh Shipping Costs?

Last November, Certified Angus Beef’s Paul Dykstra wrote a column for the CAB Insider that is featured every two weeks in FEED-LOT’s eNews. This column caught the attention of several, and we wanted to expand on Paul’s thoughts. The topic-shipping matters.

When it comes to selling fed cattle, there are many considerations on how cattle will be sold. Over the last two decades, selling cattle on the grid has become the choice of many as a way to get paid for the carcass quality they produce. However, feeders who are a longer distance to the packing house have another factor to consider -shipping cost.

Cattle sold on a live basis are weighed at the feedyard and become the packer’s responsibility when they go across the scales. Thus the packer pays to ship the cattle to their end destination. But when sold on a grid, the feedyard typically stands the freight cost with payment for the cattle determined on a delivered carcass weight basis. With nearby deliveries, the shipping cost to the packer is minimal and a “cost of doing business” to sell on the grid. Half of the fed cattle are mathematically better than average, so the carcass premium potential is worth more than the freight cost in many cases.

But what if it’s 200 miles to the packer? Dykstra says don’t discount the opportunity.

“Analysis using 2018 fiscal USDA grading data and year-to-date average grid premiums and discounts suggest delivering a load of industry average steers for quality and yield grades can negate most of the shipping cost up to at least 200 miles,” he said. Dykstra’s calculations do not account for Yield Grade thresholds (allowances) which are offered on some grids.

Using the 2018 Choice/Select spread of $11.20/cwt, Dykstra said the average grid premium is nearly $26 head given the annual fed cattle grade averages. Even considerations like 5% of overweight carcasses (above 1,050 lbs) still pencils, with a premium at approximately $20/cwt.

“Compare that to a freight bill on a standard twin-axle trailer is about $800 for a 200-mile trip where the shipping cost comes to around $23/head,” he said. “The net negative $3/head, on just average cattle, can be overcome by sorting pens into optimum marketing groups with multiple harvest dates, thereby decreasing Yield Grade 4s and perhaps almost eliminating the 5% of overweight discounts.”

It is a risk, but looking at the opportunity, it’s something for feedyards to consider.

“Some feeders opt to transfer both opportunity and risk to the packer, saving freight and settling for a flat cash bid,” he said, “and there are often good reasons to do that”. However, if the cattle grade well, the feeder is leaving a lot of premium on the table.

The obvious alternative is to reserve grid marketing for cattle that are likely to achieve higher quality grades and CAB acceptance, Dykstra said. Average percent Prime across the industry is 8%, but if you bump that to 15% prime and move CAB carcasses from the 2018 average of 33% up to 55%, and the Choice share from 72% to 80%, that increases the premium to $45/head more than the ‘average’ of $23/head.

“That easily covers the freight differential, adding to the bottom line on those long-haul finished cattle.”

Dykstra admits not all grids are created equal, and neither are all pens of cattle. However, after putting a pencil to it, feeders with a long haul to the packer shouldn’t immediately discount the opportunity to sell on the grid. “Being aware of the seasonal price spreads and how grid values are adjusting compared to the live bid is a solid approach. There doesn’t have to be a ‘one size fits all’ mentality,” he notes.

“Running the ‘what if’ scenarios is a worthwhile endeavor for feeders with shipping distance to cover.”

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