PD Poll Question
|1207 PD: Understanding the market for Holstein steers|
|Archives - Past Articles|
|Friday, 30 November 2007 02:41|
The Holstein beef market is a fascinating and integral part of the beef supply chain. Holstein steers have been largely overlooked in academic research. The primary motivation behind this study is to develop an understanding of, and document the driving forces that are active in, the markets for Holstein feeder steers and finished steers.
Beef from Holstein steers has always suffered from perceptions of poor quality. The Holstein beef market is seen by many industry outsiders primarily as a ground beef market similar to that of cull cows. It is not clear how this perception started, but there are a few possibilities. First, many plants that slaughter Holstein steers also slaughter cull cows. However, the meat is separated and sold in different market channels. Also, Holstein trimmings were used in the past to upgrade trimmings from cull cows. Whatever the reason, recent evidence is changing the poor quality perception associated with beef from Holstein steers.
Another major trend in Holstein production has been the shift towards a calf-fed production model. Traditionally, Holstein steers have been backgrounded to heavy feeder weights of 800 to 1000 pounds and then placed on full feed. The result was an extremely heavy carcass between 1400 and 1800 pounds. Cuts of meat from these carcasses were simply too large for many retail and foodservice markets. In order to keep portion size at industry standard levels, steaks were being sliced extremely thin. The calf-fed model was started in response to this concern.
In a calf-fed system, calves are placed on feed directly after weaning, weighing between 300 and 400 pounds. Although calf-feds may be on feed for a longer period of time, the backgrounding stage is eliminated completely. By placing a younger, smaller calf on feed, the resulting carcass is lighter, usually between 1200 and 1400 pounds. More importantly, the cuts are similar in size to what has become commonplace in the industry.
In the process of documenting the driving forces that are active in the markets for Holstein steers, this study will address two specific questions. First, it will explore whether the long-held perception of poor quality associated with Holstein steers has been justified. This will be determined primarily by examining the market for finished Holstein steers. Secondly, the study will evaluate the impacts that the shift towards calf-fed production may have had in the Holstein market. This impact will be evaluated largely by studying the market for Holstein feeder steers.
Based on breed composition of the U.S. dairy herd and estimated calving rates, it is likely that between 3.5 and 4 million Holstein steers are born in the United States each year, representing slightly less than 10 percent of the U.S. calf crop. In many ways, these Holstein steers are a byproduct of the dairy industry. Between one-fourth and one-third will enter calf slaughter programs while the rest will enter the beef markets as finished steers.
Understanding and predicting livestock price relationships has always been a difficult task for the agricultural economist. One of the most common price forecasting methods used by economists is futures based estimation. Futures based estimates, using a five-year weighted average basis, have been shown to be as accurate as many complex price prediction methods at predicting livestock prices. Due to convergence and the threat of delivery and/or cash settlement, futures prices represent a reasonable estimation of livestock prices at a specified future point in time.
Finished steers (live cattle) are sold to packers who then sell boxed beef; therefore boxed beef prices are known to be key drivers of the live cattle markets. The second component of the income stream for packers is the offal credit they receive. Live cattle basis has also been shown to be affected by corn prices, the Choice-Select price spread and seasonality.
Feeder cattle markets are similar to fed cattle markets in that both are margin industries. However, feeder cattle markets are characterized by longer time lags, leading to increased uncertainty. Feeder cattle prices have been shown to be largely dependent on fed cattle prices. Corn prices are also widely known to have a large impact on feeder cattle prices, as corn is the primary input into cattle finishing operations.
Basis for Holstein steers has been found to be much more variable than basis for native cattle. Holstein basis reaches its strongest point in spring and is weakest during the winter. Much of this may be explained by the fact that Holstein steers do not winter as well as their non-dairy counterparts. Increased basis volatility left many questioning whether hedging was possible for Holsteins.
Despite the basis variation that exists in Holstein markets, efficient hedging opportunities were still found to exist. A 1996 study of three high-volume markets for finished Holstein steers examined hedging effectiveness on a weekly basis. Hedge ratios in all markets were found to be statistically equal to one, which suggested the presence of efficient hedging opportunities.
Buhr’s finding were taken to suggest that despite differences in the markets for Holstein steers and native steers, many of the same factors are likely to be active in both markets and the two markets tend to move in the same direction.
Overall, and what may be surprising for some, was that the Holstein sector was not found to be greatly different than the traditional beef sector. Production and marketing differences clearly exist, but the same factors appear to be present in both systems. Holstein beef is being used to fill market needs that native beef can not readily fill. At the same time, marketers of Holstein beef are finding ways to stay competitive in markets that are typically dominated by native cattle. As individuals within the Holstein sector move forward, the results of this study should prove useful.
The analysis found little evidence to suggest that the market for finished Holstein steers was being driven by the price of ground beef. The persistent perception that middle-meats from Holsteins are removed and the rest of the carcass is ground into hamburger does not appear to be very accurate. Rather, the market for finished Holsteins appears to be primarily driven by boxed beef prices much like the market for native steers.
If the perception of Holstein steers as a ground beef market were true, one would expect prices for finished steers to move in relation to trim prices. Instead, regression results suggest that trim prices do not affect the sale prices of Holstein slaughter steers, but that a strong relationship exists between the price of Holstein steers and choice cutout price. Based on these findings, it is unlikely that this long-time perception of Holstein beef has been justified.
Additional insight into this question was gained by considering the relationship found to exist between the premium level paid for prime carcasses and the price of Holstein slaughter steers. The perception that Holsteins produce leaner cuts and a higher percentage of select carcasses is not consistent with econometric results. This perception was also contradicted through personal interviews with industry personnel and tested through econometric modeling.
If the perception were accurate, one would expect buyers to back away from Holsteins as the premium levels for prime carcasses increased. However, that is not what was found through modeling. Although the estimated impact was small, the positive relationship that was found to exist between the prime premium level and slaughter Holstein price is an indication that buyers of Holstein steers recognize the fact that Holsteins are more likely to be graded prime and are paying more for them when this premium level increases. Holsteins have suffered from these perception problems for some time and this study has cast doubt on their validity.
Further differences in the markets for Holstein calves and backgrounded Holstein steers surfaced during this work. As in native markets, Holstein feeder steer prices are driven by the expectation of finished cattle prices in the future and the costs of inputs into the finishing process. However, the magnitude of the impact of these fundamental factors was quite different.
Holstein calf prices show greater sensitivity to changes in deferred futures prices than heavier feeder steers. Some of this difference is no doubt due to nominal price levels being higher for lighter calves. However, longer feeding periods and greater market uncertainty are also likely to be influential.
An even greater difference is seen in the way that prices for the two categories respond to changes in corn prices. Light Holsteins, placed directly on feed, would certainly be on feed for a greater period of time. Hence, it is not surprising that prices of Holstein calves are more sensitive to the corn market. More time on feed means more total corn is fed, which means greater impact on potential feedlot profits and lower bids for these calves when corn prices increase.
The market for Holstein steers is not a ground beef market. Holstein steers are fabricated in the same way that native cattle are. Separate markets for their products exist due to quality differences and differences in the size of middle-meat cuts. This hypothesis was derived from conversations with industry leaders and validated through pricing models. In fact, Holstein steers were found to be crucial to supplying the high-end Asian market with high-quality, well marbled beef.
The shift towards the calf-fed model has affected the industry, as one would expect. Heavy Holstein steers are being discounted on the market as a result of this change. Light Holstein calf prices have been largely unaffected. Concerns by individuals within the industry that consolidation was affecting these prices appear to be oversimplified. As market preferences change, cattle that do not meet the desire of the market will suffer market consequences.
Backgrounders and finishers of heavy Holstein calves must realize first and foremost that they are operating within a market that is shrinking. Although there will probably always be a market for traditionally fed Holstein steers, it is unlikely that the shift towards the calf-fed model will slow any time soon. If the West Coast model is indeed a model for the future, the calf-fed system may soon dominate Holstein production in the East. Since the market for traditionally fed Holstein steers is heavily dependent on exports, backgrounders must understand the volatility that is likely to exist.
It has been shown following the finding of BSE first in Canada and then later in the United States that Asian consumers have high food safety standards and will quickly change their purchasing behavior when food safety appears to have been threatened. When the United States lost its beef market in the Pacific Rim, processors who slaughtered traditionally heavy Holsteins were devastated. The export market is vital to the survival of the traditional system and those individuals who produce these types of cattle must keep these factors in mind.
Producers of starter calves and calf finishers are in a slightly different market environment. They are most likely operating within a market segment that will continue to grow. A system like this can only have a positive effect on the market for calf-fed Holsteins.
The negative aspect of the calf-fed market is that it is very sensitive to traditional market factors. Since calf-fed Holsteins are on feed for a longer period of time and more corn is needed to finish them, market effects seem to be amplified. An incremental increase in corn price or decrease in deferred futures price will have a dramatic effect on Holstein calves, whereas the effect on heavier steers would be moderate. The market for light Holstein calves is mostly susceptible to changes in traditionally important market factors, while the market for heavy Holstein feeder steers is probably more susceptible to changes in market structure and consumer preferences. PD
—Excerpts from American Agricultural Economics Association Annual Meeting Proceedings