MANHATTAN, Kan. – The cattle business has had more than its share of changes in the past 20 years, not the least of which is the way cattle are sold. But, is that change for the better?

For the most part, yes, according to two Kansas State University agricultural economists.

"Packers’ growing need to provide customers beef products with specific quality attributes and their inability to judge quality on a live animal basis also encouraged them to shift some of their purchases to a more value-based marketing system," said Ted Schroeder, agricultural marketing specialist with K-State Research and Extension. "At the same time, some cattle producers and beef packers found long-term contractual relationships mutually beneficial for a variety of reasons.

"The result is a cattle marketing system that looks much different today than it did 20 years ago, but it is also a marketing system better positioned to satisfy consumer demand and reward cattle producers for producing the type of product consumers want."

In the long run, the beef industry needs to improve coordination among ranchers, cattle feeders, packers and retailers so that it does a better job of meeting consumer demand." For that reason, Schroeder said, attempts to restrict innovation in cattle marketing via legislation seem "misguided and short-sighted."

"The stage was set for a change in cattle marketing practices by a dramatic downturn in retail beef demand that started sometime in the late 1970s," said James Mintert, K-State Research and Extension livestock marketing specialist.

That trend began to turn around in the late 1990s, but not before beef demand slid nearly 50 percent, from 1980 through 1998. As a result, inflation-adjusted retail beef prices fell to less than $3 per pound by the late 1990s from $4.29 per pound in 1980.

Researchers who studied beef’s fall from grace over the past two decades found the following reasons: poor and inconsistent quality; changing consumer demographics and preferences; health and nutrition concerns; food safety concerns; and failure to develop innovative and convenient-to-prepare beef products.

At the same time, competing groups like the poultry industry, were coming up with more innovative products and advertising campaigns.

"One of the principal reasons why the beef industry failed to provide consumers what they wanted was a lack of vertical coordination in the production and marketing chain," Mintert said. "In other words, prices paid for cattle, starting with cattle ready for slaughter all the way back to calves, did not adequately communicate consumer preferences to cattle producers."

Not long ago it was standard operating procedure for cattle feeders to price all cattle on a live animal or dressed weight basis, where all cattle in a pen or in some cases, an entire showlist, received the same price, regardless of varying quality within that pen or on that list.

Since producers did not receive the necessary economic incentives to produce the type of cattle desired by consumers, they did not alter their production programs to produce a more desirable product.

"Starting in the late 1980s, progressive cattle producers began to search for an alternative marketing system that would provide premiums for desirable traits and discounts for undesirable traits," Mintert said. By working with packers, they came up with "grid-based pricing systems" which increased the prices they received for cattle that possessed quality traits consumers wanted.

A recent survey of the 15 largest U.S. packers indicated that the two most compelling reasons for entering into forward contracts and marketing agreements were to secure higher quality cattle and to secure a more consistent quality animal. Other reasons cited were improved risk management, improved slaughter plant capacity utilization, and greater assurances of food safety.

Two surveys of cattle feeders, one a decade ago and another in the late 1990s, showed that cattle feeders who entered into contractual arrangements with packers did so because they improved price risk management; provided access to more financing options; provided a guaranteed buyer for the cattle; created an opportunity to earn more money for higher-quality cattle; and reduced marketing costs.

But such marketing programs have their detractors.

"The use of forward contracts and formula-based marketing agreements is opposed by some producers because of the belief that they dramatically lower cattle prices," Schroeder said.

Several studies have been conducted in the past 10 years on this topic, with one of the most recent findings indicating that fed cattle price expectations on the part of the cattle producer might cause captive supply deliveries rather than the reverse, he said.

"Many marketing agreements have a base price that is determined by the cash market price of fed cattle purchased the week before the cattle are delivered. And, under most marketing agreements, producers decide what week to deliver cattle (providing the contracting packer about two weeks notice), and which pens to deliver under the marketing agreement and on the cash market.

"Under this system, if producers expect fed cattle prices to increase in two weeks, they have an incentive to hold off on delivering marketing agreement cattle until the third week, since the higher prices in week two will determine the price they receive for the marketing-agreement cattle," Schroeder explained.

Alternatively, they could market their cattle via the cash market in week two instead of via the marketing agreement. In both cases, if the expectation for higher fed cattle prices in week two is realized, it will correspond with low deliveries of marketing-agreement cattle that week.

The bottom line, according to K-State’s Mintert is that "there is no compelling evidence that packers’ use of marketing agreements has a negative impact on cash market prices."

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K-State Research and Extension is a short name for the Kansas State University Agricultural Experiment Station and Cooperative Extension Service, a program designed to generate and distribute useful knowledge for the well-being of Kansans. Supported by county, state, federal and private funds, the program has county Extension offices, experiment fields, area Extension offices and regional research centers statewide. Its headquarters is on the K-State campus in Manhattan.