In the fall of the year, cow-calf producers have calf crops to sell. A producer can take his calves to the local livestock auction or forward contract them, but there are alternative marketing options. The producer can utilize video, satellite, or Internet auction markets (VSI).
There are three main players in this market, Superior Livestock Auction, Ft. Worth, Texas; Western Video Market Auction, Cottonwood, Calif.; and Northern Livestock Video Auction, Billings, Mont. Western Video Market serves the California-to-Oklahoma area and has sold more than 400,000 head this year. Northern Livestock markets to the northern Midwest area. This was its first year and it marketed approximately 77,000 head. Superior Livestock markets cattle nationally with a run of approximately 1.5 million head in 2004.
Some aspects of various VSI auctions are the same. A producer contacts his VSI representative and arranges to have his livestock videotaped. At that time a consignment contract will be negotiated and drawn up. The contract specifies issues for both seller and buyer.
For example, issues addressed are age, sex, condition, breed, approximate number of cattle, and weight of the animals. It will set out how the cattle have been handled — whether the bulls were knife cut or banded and what vaccination and feeding program the cattle have been held on. Contracts will also specify a delivery time window and a price slide from stipulated weight.
A consignment charge of $2 to $5 per head covers video taping and representative services. If the cattle are passed over or given a no-sale at auction time the consignment charge is forfeited. If the sale is consummated, a sale contract will specify date of delivery, etc., Any consignment charges will be credited to the seller's commission assessment.
Before sale day, a sale catalog of consigned cattle is assembled and circulated to prospective buyers. The auction is broadcast from a central location, the VSI headquarters, for example.
Proposed buyers have their credit checked by the VSI before they are allowed to place a bid.
On sale day, the auction is broadcast over satellite and/or the Internet as the video of each lot is showcased on screen. Buyers stand by on telephones to bid on different lots.
- There are more potential buyers at VSI since buyers across the auction's coverage area can view and bid on the livestock. That becomes important if poor local weather or local forage conditions have depressed market prices, because another part of the auction's coverage area may have good weather and grazing conditions. Average price in that area, therefore, may be significantly higher than it would otherwise.
- Cattle tend to bring higher prices at VSI auctions. With VSI auctions, buyers are able to view and bid on a much greater number of cattle from their homes or offices than they otherwise could without the technology. Cost reductions (travel cost and time) can be re-directed to purchase cattle, sometimes increasing market price.
- VSI auctions also guarantee to sellers that buyers will perform as promised or the VSI sponsor assumes responsibility.
- As source verification (effect of COOL legislation) becomes a greater issue over time, it may be easier for buyers to tell which sales lots have verification records and which cattle do not. That may make cattle easier to sell and/or bring greater prices than they otherwise would.
- Cattle are handled less using VSI auctions, resulting in less stress, injury, and weight loss. If the seller no-sales, the cattle are still in the pasture and have not been handled and stressed.
- Cattlemen retain control over selected marketing decisions with VSI auctions which may enhance their bargain positions.
- Producers are able to market their cattle up to several months in advance. Feeder cattle prices typically are higher in the months of June, July, and August but average 3 to 5 percent lower in September through November. Thus the producer can schedule and sell his calves in August, for example, for delivery in October and receive a price increase of as much as 5 percent and an additional two months of gain.
- Truckload sale size requirement (truckload size is approximately 48,000 pounds net). Smaller producers may be able to get around this disadvantage by pooling cattle with friends and/or neighbors to meet this requirement. However, it is necessary for cooperating producers to have negotiated and agreed upon all possible partnership issues ahead of time. Nobody likes surprises at delivery time.
- If market prices increase after the auction and before cattle are delivered, the producer will receive the net auction price and the buyer will gain this price increase. If this is an issue for the producer he can hedge with the purchase of a feeder cattle call option at the time of the auction. The seller will then profit from any market price increase.
- Out-of-pocket marketing costs come due and payable at different times with VSI than direct marketing alternatives. Consignment charges must be paid at the time of consignment and video taping. If the auction sale is then consummated — the animals are sold — any consignment charge is credited toward commission charges.
The University of Arkansas Division of Agriculture does not endorse any auction company named in this article. For further information contact your local Extension personnel, state Extension specialists, or the authors of this article.
Rob Hogan, Scott Stiles, Kelly Bryant, and James Marshall are University of Arkansas Extension economists. Comments or questions? Call 870-460-1091 or e-mail [email protected].