Transcript Optimal Hog Marketing Weights

Optimal Hog Marketing Weights
James Mintert, Ph.D.
Professor
Department of Agricultural Economics
Kansas State University
K-State Research & Extension
Hogs Have Been Getting Heavier
for A Long Time
Commercial Hog Live Weights .
280
Carcass Weights
Trend
Pounds
270
260
250
240
230
70
72
74
76
78
80
82
84
86
88 90
Year
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98
00
02
04
Source: USDA
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Why Have Weights Gotten Heavier?
1. Technology
– Genetics
– Feeding regimens
2. BECAUSE IT’S PROFITABLE
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How Does Weight Impact Returns?
• Three keys to examining impact of weight
– More pounds
– Sort Loss
– Lean Premiums
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Sort Loss Is Highly Correlated With Weight
Hog Sort Loss
By Weight ($/pig)
1
(1)
(2)
(3)
(4)
$/pig
(5)
(6)
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(9)
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(11)
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(13)
Sort Loss = -0.0053weight sq'd + 2.6393weight - 332.1
R2 = 0.6576
(14)
(15)
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Live Weight (Lbs.)
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Lean Premiums Are Also Correlated With Weight
Hog Lean Premiums
Lean Premium ($/pig)
By Weight ($/pig)
12
11
10
9
8
7
6
5
4
3
2
1
0
(1)
(2)
(3)
(4)
(5)
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(7)
200
Lean Prem. = -0.0046weight sq'd. + 2.344weight - 289.52
R2 = 0.3163
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Live Weight (Lbs.)
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Adding Model Results for Lean & Sort
Hog Lean Premiums Plus Sort Discounts
By Weight ($/pig)
6
4
2
0
-2
$/pig
-4
-6
-8
-10
-12
-14
-16
-18
-20
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Live Weight (Lbs.)
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Expected Net Prices At Various Weights
Net Hog Price, Carcass Base Price = $65/cwt.
By Weight
$75
$/cwt.
$70
$65
$60
$55
$50
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Live Weight (Lbs.)
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Premium/Discount Schedules Vary By Firm
Hog Lean Premiums Plus Sort Discounts
$/pig
By Weight ($/pig)
6
5
4
3
2
1
0
-1
-2
-3
-4
-5
-6
-7
-8
-9
-10
-11
-12
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Live Weight (Lbs.)
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Which Changes Weight-Net Price Relationship
Net Hog Price, Carcass Base Price = $65/cwt.
By Weight
$/cwt., carcass weight
$75
$70
$65
$60
$55
$50
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Live Weight (Lbs.)
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Expected Net Prices Vary Across Firms
Net Hog Price, Carcass Base Price = $65/cwt.
$/cwt., carcass weight
By Weight
$71
$70
$69
$68
$67
$66
$65
$64
$63
$62
$61
$60
$59
$58
$57
$56
$55
Processor A
Processor B
Processor C
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Live Weight (Lbs.)
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Economic Principles
Goal is to maximize profits
• Determine marginal revenue for a weight change
• Determine marginal costs for a weight change
• Maximize profit when
Marginal revenue = marginal cost
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Compute Marginal Revenue
At each weight
• Estimate base carcass value
• Estimate expected sort loss
• Estimate expected lean premium
• Base + sort + premium =
Exp. Net Carcass Value
Calculate revenue gain for additional pound
of gain
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Compute Marginal Cost
• Pounds of feed per lb. of gain
– Increases as weight rises
• Feed cost per lb.
• # of feed X cost/lb = marginal cost
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Profit Is Maximized
When Marginal Revenue Equals Marginal Cost
Marginal Revenue vs. Marginal Cost
Carcass Base Price = $65/cwt., Feed Cost = $100/ton
$0.80
$/cwt., carcass weight
$0.70
$0.60
$0.50
$0.40
$0.30
$0.20
$0.10
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Live Weight (Lbs.)
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Optimal Weight Declines When Base Price Falls
Marginal Revenue vs. Marginal Cost
Carcass Base Price = $55/cwt., Feed Cost = $100/ton
$0.70
$/cwt., carcass weight
$0.60
$0.50
$0.40
$0.30
$0.20
$0.10
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Live Weight (Lbs.)
K-State Research & Extension
Higher Feed Prices Reduce Optimal Weight
Marginal Revenue vs. Marginal Cost
Carcass Base Price = $65/cwt., Feed Cost = $130/ton
$0.80
$/cwt., carcass weight
$0.70
$0.60
$0.50
$0.40
$0.30
$0.20
$0.10
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Live Weight (Lbs.)
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Estimating Your Optimal Weight
• Use your kill sheet data to estimate
relationship between weight and
– Sort loss
– Lean premium
• Use models to predict sort loss and lean
premium at each weight
• Calculate expected marginal revenue for a
one lb. weight gain
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Estimating Your Optimal Weight
• Estimate your marginal costs
• Know your costs
• Key is feed costs
– Pounds of feed per lb. of gain
– Cost per lb. of feed
• Other variable costs per lb. of gain
• Compare your expected marginal costs to
your expected marginal returns
• Profit Max occurs when MR = MC
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Next Step
• Development of a downloadable spread
sheet tool
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Thank You