Grid Marketing: How to Minimize Risk, Maximize Reward

by Sherry Bunting

Lawrence5856Cattle value was top-of-mind as 175 producers heard West Texas A&M meat scientist Dr. Ty Lawrence during Cattle Feeders Day in Lancaster on January 27. The morning session focused on marketing, especially Grid marketing on a carcass basis.

“The Texas Panhandle is home to 3 million cattle on-feed in 125 feedlots. Only two sell live, and 90% of the cattle are now sold on the Grid,” said Lawrence, adding that in the West, “Fats are all sold direct to packers. The auctions are for feeders and culls.”

Lawrence found our feedlots very different, of course, and he learned live auctions still exist here, giving producers an additional marketing option if they know their cattle, the market, and the value of a good sort.

That detail aside, marketing cattle is an exercise in passing beef value straight through the fabrication floor from farm to fork, with the packer using the drop credit to run the plant.

Lawrence demonstrated the relationship between direct sales on a live and carcass basis: Live weight x $159/cwt or Carcass weight x $256/cwt (Jan. 23 pricing). He showed the value of 35 steers to the feedlot operator was right around $77,450, either way, as the live price x live weight virtually equaled the carcass price x carcass weight.

Selling on the Grid? Now that is different. Risks and rewards are transferred from the packer to the producer — from the buyer to the seller. Lawrence showed examples of sales that would benefit and those that would not.

Grid marketing essentially rewards value in three key areas: hanging carcass weight, quality grade and yield grade. It starts with establishing a base carcass value — the negotiated price — and adjusting it for the individual beef value. It forces producers to be more in touch with the market readiness of their cattle, what they buy as feeders, when they sell their fats and whether to sort some out for the auction, since we still auction fats here in this part of the world.

Using probabilities, he showed producers how to figure out the optimum point of sale for “your market’s Grid.” And he emphasized his “Top 5 rules of engagement” for selling fats on the Grid.

#1 Develop.
An “other than adversarial relationship” with one or more packers. Lawrence urged producers to learn and understand the packer’s business. “Ask what they need from you as a supplier, and understand what their customers are asking from them,” he said, adding that packers get constant requests from retailers looking for a unique labeled beef item they can call their own.

Relationships are important, said Lawrence. In the fine print of the Grid is the fact that the producer pays for mistakes — his and theirs. Improper live cattle handling at the feedlot, during transport, or at the plant can lead to costly bruises and dark cutters. Poor workmanship in how that carcass is handled before it gets to the cooler can lead to excessive trim losses.

Having a relationship with more than one packer allows the cattle supplier to see performance in different plants. This, plus #2 below, helps the seller talk with the buyer about on how to avoid trim losses in handling at both the feedlot and the plant.

#2 Know your cattle.
Know, with some confidence, how they may perform in the grading cooler. Lawrence urged producers to build up and keep their cattle history.

“Unknown cattle are a big risk,” he said. “If you have no idea how they will perform, don’t sell them all on the Grid.” On the other hand, selling some cattle on the Grid helps the producer build up a history to find that confidence in selling on the Grid.

The conversion of cattle to beef is a passthrough. “The drop credit — the hide, head, heart, lungs, all of the offal — is running the plant,” Lawrence explained. “The beef is a trade, a wash. Some weeks in 2014, packers paid more to fabricate cattle than they were worth. There’s a whole lot of labor involved in the middle of that equation.”

In Grid marketing, the packer’s customer is now the cattleman’s customer, and several influencers determine how each individual animal converts on a carcass basis:
1) Fill / dressing percentage
2) Degree of muscling
3) Degree of fat
4) Sex of the animal
5) Age of the animal
6) Condition of the animal
“The base price is what you negotiate,” said Lawrence. “That price is the majority of the value. The Grid then applies quality discounts or premiums, yield discounts or premiums and weight discounts.”

#3 Sorting is key!
Lawrence urged producers to learn how to sort cattle when they are received as feeders, at re-implant and a few weeks prior to harvest. “You have to do #3 to accomplish #2,” he said.

#4 Crunch the numbers and know the Grid.
By managing the distribution and number of cattle types in the feedlot, the operator knows where they are, when to move them and how to market them. “Also know your Grids,” said Lawrence. “If this area of the country gives top premiums for quality, make sure you also know how the yield grade 4 discount affects the net value of that premium on that Grid.”

#5 Understand the market.
By knowing the historical trends and knowing the market the cattle are being sold to, the cattle feeder can then “buy cattle with the sell in mind,” said Lawrence.