Selling on the Grid
Grid marketing can enhance the returns from marketing good cattle. And if cattle aren’t as good… it can put a dent in your return.
Dr. Derrell Peel, Oklahoma State University agricultural economist, told Ozarks Farm & Neighbor, “One of the challenges of grid marketing for a producer, particularly in the early stages, is that you really have to understand what your animals are, how they perform and how they grade to recognize whether grid marketing is going to offer potential for enhancing the value of those animals.” Under grid marketing, cattle are priced on a carcass basis rather than on live weight, and premiums and discounts are assessed for variations in yield and quality grades. There can also be adjustments for carcass characteristics, like deviation from a range of weights.
Grid marketing replaces average pricing, the traditional method of selling fat cattle, where the buyer makes assumptions about the percentage of cattle in a pen that will grade Choice on quality and 1-2 on yield, and offers a price based on that. Peel said looking at the industry as a whole, grid marketing helps to enhance value. “The implication of pricing fed cattle on the old pen average basis was that there were always at least some high-quality animals that really did not receive the value they should receive and in essence, they subsidized the rest of the animals across a whole feedlot,” he said.
Cattle raisers can benefit from grid marketing, but it takes some work; in addition to using genetics and management to raise the quality of their cattle, they also have to understand how those cattle will be graded and evaluated. It also helps to develop a relationship with the feedlot, perhaps through retained ownership where the producer still owns a share of the cattle and can capture part of the additional value at the packer.
It’s important to remember that by buying on the grid, the packer is laying the risk onto the feeder. “If you just sell them all live weight, all the risk is essentially borne by the buyer,” Dr. Arley Larson, professor of agricultural sciences at Northwest Missouri State University, told OFN. “They don’t want to buy cattle that won’t grade high and yield well, and of course they have to make a judgment on the hoof. If they use the grid approach they make that determination after they’ve been slaughtered and hung, and they know exactly what they grade and what the yield is. Buyers like that because they can know absolutely what they have before they price it.”
In 2010, Larson and colleagues conducted a study to determine whether cattle feeders could benefit by investing in a sonogram and using it to decide which animals would bring a premium when sold on a grid. The device is similar to the ones used by doctors to monitor women’s pregnancies; its ultrasonic waves provide a picture of tissue under the skin. Larson explained, “If you’re a producer and you’re going to use the grid system, what you would want to do is determine which cattle in your feedlot are choice or prime, and sell them on the grid; you’d sell the rest of them live weight in the marketplace.”
But although they were able to measure the loin eye, and to an extent the degree of marbling, they concluded the method wouldn’t work; there was too much error in the readings for them to be reliable. The cost was also a major factor; Larson said the university’s sonogram unit probably cost about $25,000, although it’s also used for other things like preg checking and calf sexing. In addition, “It’s relatively labor intensive; you’ve got to run the cattle through the chute, put the sonogram on them and then interpret it.”
If everybody used such a method, or another means of separating out cattle that would receive a premium under the grid, it wouldn’t work, either; buyers would realize the cattle being sold live weight are of lesser quality, and would lower their bids accordingly. Larson added, “To some extent, it would take the risk out the marketing process on both sides of the equation.”