Price Discovery for Direct Sales of Beef
A recent survey conducted for the Pennsylvania Department of Agriculture indicated that about 40 percent of beef producers surveyed sold some of their cattle via direct sales to consumers. In some cases, such as with grass-fed beef producers, all of the production on the farm may be marketed directly. In an earlier survey by Steinberg (2009), grass-fed producers indicated price discovery for their products was a frequent problem.
When it comes to price discovery for direct sales of beef, you should:
1 Know the cost of production, including all costs for the beef to reach the point of sale.
2 Use price determination factors to get a baseline value for beef products.
3 If beef is sold as partial carcass pieces and cuts, know the break-even value and percentage of the carcass for each cut.
4 Compare prices for traditional and nontraditional beef products in the same marketplace.
5 Determine the features that add value to beef products to be sold.
6 Match potential customers with price points.
7 Keep prices as consistent as possible.
Cost of production is not an easy issue for many farmers, and is usually inaccurate. The best way to determine a cost of production is to go through a complete budgeting process using the prices, budget items and values on your farm. The items to include in the budget are all the "things" seen when standing at the farm gate that are used in the cattle enterprise (land, fences, cattle, equipment, buildings, grass, hay, etc.).
In the case of direct sales, budget items of "what happens to the beef I do not sell," the cost of transportation and handling to the point of sale, processing costs, rental fees at markets, labor to sell the products at the point of sale, returns, packaging, advertisement and others are necessary. An interactive budget for the beef enterprise can be found at www.ag-econ.ncsu.edu/extension/budgets/beef/Beef20-1Cowbud06Print.pdf.
Extension educators in most states can provide assistance in developing cost of production and budgets on farms.
The following discussion by Ward and Schroeder (2002) helps define price determination and price discovery:
"Price discovery is frequently confused with price determination. These are two related but different concepts that need to be understood when discussing pricing issues.
"Price determination is the interaction of the broad forces of supply and demand that determine the market price level.
"Price discovery is the process of buyers and sellers arriving at a transaction price for a given quality and quantity of a product at a given time and place."
The most effective tool to use for price determination is to find carcass prices for beef at a packing plant as close to the potential markets as possible. These prices are available on a daily basis, and it should be noted that wide swings in price are possible in a matter of days.
The "seven-state average" price for cattle available on the U.S. Department of Agriculture (USDA) website will have limited value in figuring out carcass price for beef in the Northeast. When a reasonable value for commodity beef is found, price for individual sales can be determined as a feature of actual and perceived additional value.
Most direct sales of beef are "middle meats," composed primarily of steaks. How does one price a steak relative to a baseline carcass price? See Table 1.
From these data, the break-even value of a pound of steak can be determined by multiplying the percentage of the carcass by the total carcass weight to get the weight of these cuts, and then dividing total dollar value by the pounds of the cuts in the carcass.
In most cases, producers value their products based on what the market will bear wherever they are selling the beef: privately, at farm markets, on the Web, etc. Comparison with other beef products at the same market is necessary, but premiums and discounts can be applied for features of the beef. For example, if the beef you're marketing is ungraded, then there may be a discount applied compared to beef in the same market that has a USDA quality grade, even though the beef may be similar. Similarly, grass-fed beef may have a premium value in a market where there are customers for this product compared to grain-fed beef. Some of the features that add value to beef in direct sales are:
1 Type of production: High grain-fed, grass-fed and organic all have value to different customers.
2 Local with source verification: I spoke to a farmer selling beef in markets in Philadelphia who had been producing and selling organic beef. He had dropped the organic certification because he discovered his customers were paying a premium for knowing he was the producer and they could ask him how it was produced, regardless of the label. This knowledge of the potential customers in a market is vital to identifying the premium values that can be applied to the beef.
3 Cattle breed or color: The premium value of Angus, which is usually a function of color and not breed, is an important feature, but premium values can be attributed to novelty breeds (e.g., Longhorn, Highland).
4 Quality grade: Grade is usually a feature of beef in high-end markets such as high choice and prime cuts.
5 Production methods: Natural, organic, antibiotic use, feeding systems, use of growth promotants and other features of production have value to certain customers.
Consistency of pricing beef is desirable to consumers. Larger retailers as well as smaller marketers find that keeping price consistent will increase repeat buyers. For smaller marketers, this may indicate consistent pricing for up to a year.
Price discovery for direct sales of beef will help ensure the products are being competitively priced based on a number of location and production factors.
Dr. John Comerford is an associate professor and extension beef specialist at Pennsylvania State University.