Over Time and Across Markets cont.
In this third installment of the Marketing 101 series based on the university bulletin “Livestock Marketing and Risk Management,” we will look at a number of marketing alternatives and their relative advantages and disadvantages.
Local and regional auctions
Local and regional auctions are a very traditional and primary marketing method for many producers. Generally the timing of the marketing decision is simply linked to the production process itself.
When producers are ready to sell and deliver their livestock they truck them to the auction market. The auction then promotes the livestock and tries to bring in the best price for the producers. They may sort them into multiple sale lots as they best see fit. Price is then dictated by the market of the day.
When considering this marketing strategy the obvious advantage is the overall ease for producers. No real prior considerations or preparations are required to participate in the auction.
Another advantage is that, in general, there is always an auction, so cattle can be sold year round.
Some of the disadvantages of an auction are yardage and commission. Another disadvantage is that the costs of transportation and auction fees make it difficult to “no sale” cattle if the market is down on auction day.
In more recent years one marketing option that has continued to grow in popularity is a video auction.
When producers are ready to price their livestock, but prior to when they are ready to deliver them, they contact a representative from a video sale auction and have them come to their ranch and film their livestock and help to write a description of the cattle. Then on a specified date, an auction will takes place and buyers may be at a specific auction location or scattered across the U.S. in their own homes bidding on the cattle.
This has become an attractive option for many reasons.
First, the actual handling of the livestock is reduced to a bare minimum.
Second, price risk can be reduced by obtaining the forward price for livestock. Of course, with this added security of a guaranteed forward price, producers run the risk of missing out on price rises in the market at the future date.
Video auctions typically carry higher commission fees than a typical local or regional auction.
Similar to video auctions, internet auctions are also a relatively new form of livestock marketing.
When using an internet auction, a written description of the livestock is posted to an internet ad, as well as pictures. Depending on the auction, videos may also be prepared and posted to the ad. Bidding is opened for a set period of time and all buyers may bid up until the predetermined auction end time.
Using internet auctions is an attractive option for many producers because they are able to market their livestock to a large number of buyers without ever having to move their livestock.
Internet auction sites do charge sales commission fees that can offset the benefit.
Direct commodity markets
Direct markets are perhaps the most basic and traditional livestock marketing strategy.
When producers are ready to sell and deliver their livestock, a neighbor, a local feedlot operator or any potential buyer comes directly to look at the livestock for sale and offers to buy them for an agreed upon price. The buyer is generally responsible for transporting the livestock of the ranch.
Advantages of the direct commodity market include avoiding commission and yardage fees, as well as no transportation cost to the producer.
However, because producers are typically working with a single buyer to try to negotiate a price, there is no competition between buyers to help drive up the price.
Direct niche markets
Producers have two different options for niche marketing.
The first is to participate in preexisting large-scale niche markets, such as lean, organic or natural. Of course to participate in these markets, producers must be willing and able to meet very specific qualifications for their livestock to be eligible to be sold under these labels.
By participating in an existing niche market, one can capitalize on the expertise of others who have risked market development, investment and processing arrangements. For producers who have livestock and a production system that fits with the requirements of these programs, it can be a low-risk means to reach a niche-market and capitalize on added premiums on the market price.
The second option that producers have to participate in niche marketing is to develop a micro-niche of their own. This can be more complicated and usually carries a greater risk but also has the potential for greater rewards.
Direct market sales to a cooperative are similar to the traditional direct market sales in most aspects. However, one large difference is that producers are a part of the ownership of the entity to which they are selling their livestock.
One exception is that many calf cooperatives do not take ownership of the calves but rather bind together collectively to potentially receive a better price for feeder calves. Large lots of calves often bring higher prices due to economies of scale.
In the next article in this series we will look at risk management through cash sales, forward contracts, futures and options, insurance, and packaging cattle. Remember if you are interested in looking at the full bulletin. Go to uwyoextension.org/ranchtools then click on “Fact Sheets” and selecting “Livestock Marketing.”