It is probably not surprising, though it is ironic, that packers are also being criticized when they lack leverage, are experiencing negative margins, and act to match capacity with supply.

This is what the market does. It sends signals, and participants respond to those signals to bring the market into equilibrium.

Volatility not based on fundamentals

The frustration is understandable. All of these gyrations in the marketplace were not in response to changes in the basic fundamentals of supply and demand, which continue to be extremely positive. Instead, they were in response to outside influences, or things out of our control. Changes in government policy, overall economic conditions and the weather are hard to predict out in front, so they are difficult to manage.

The recent market fall was dramatic and swift. Thankfully, the recovery has been strong, as well. Of course, if you were selling cattle during this time frame, the rebound does little more than rub salt into the wound. As good as the fundamentals of our market are, the market’s volatility is also increasing. At today’s price levels, risk has never been greater than it is today. A 10% correction when calves are selling at $4.50 per pound (lb.) is $0.45!

Risk mitigation strategies

For all the reasons stated above, risk mitigation has become paramount to remaining successful in the cattle industry. Government-subsidized insurance programs and the futures market can be valuable tools to reduce risk, and they are valuable tools. Increasingly though, the industry is recognizing that the most effective way to mitigate risk and increase upside potential is through genetics and health.

Health is easy to calculate, easy to measure and largely dependent upon management. It is paramount in the marketplace, but it is largely about avoiding “breaks” or those pens of cattle that experience significant problems.

To some regard it is a binary trait; it is either positive or negative. If the cattle have been managed properly to remain healthy (low stress, proper vaccinations, nutrition, etc.) there are marginal gains to be realized.

Genetic differences, on the other hand, represent a far greater continuum and a path for consistent, steady, predictable and realizable gains. Improvements in efficiency, yield, quality grade and pounds of saleable product routinely have a much bigger effect on the bottom line than fluctuations in prices for the market in general. In simple terms, day to day we see more dollar differences due to genetics than we see in changes in overall market prices.

This is driving a quantum shift in the marketplace. The difference between above average and average genetics is widening, and the whole concept of commodity marketing where you buy and sell strictly based on averages is disintegrating.

Certainly, there are still commercial cattlemen who make selection decisions based strictly on phenotype, but most progressive cattlemen combine that with reputation and objective measures of genetic merit (expected progeny differences, or EPDs) to base their decisions.

Conversely, there are still feeders who have a commodity mindset, relying on the game of averages. Yet, most progressive cattle feeders are beginning to incorporate reputation and objective measures of genetic merit into their selection decisions.

Programs like AngusVerified^SM and the Genetic Merit Scorecard^® (GMS^®) are designed to help producers provide the information buyers need to buy with confidence and to manage and market those cattle more effectively. Their growing popularity is based on their ability to consistently achieve two things — reduce risk while increasing margins through more accurate descriptions of their genetic merit.

Editor’s note: Troy Marshall is director of commercial industry relations for the American Angus Association. For more information about AngusLink, click here.

Angus Beef Bulletin EXTRA, Vol. 17, No. 12-A