Transcript Do’s & Don'ts of Grid Pricing

For Updated
Livestock Marketing Information
Visit the
K-State Livestock & Meat Marketing
Web Site
www.agecon.ksu.edu/livestock
Dealing With Market
Consolidation
James Mintert, Ph.D.
Professor &
Extension Ag. Economist, Livestock Marketing
Dept. of Agricultural Economics
Kansas State University
K-State Research & Extension
“This squall between the packers
and the producers of this country
ought to have blown over forty years
ago, but we still have it on our
hands…”
Senator John B. Kendrick of Wyoming
(1919)
K-State Research & Extension
Concentration Has Increased Dramatically
1976
• 145 steer and heifer slaughter plants with
capacity greater than 50,000 head
• Slaughtered a total of 22.4 million head
• 5 plants slaughtering more than 500,000
head, accounted for 15% of slaughter
K-State Research & Extension
Concentration Has Increased Dramatically
1998
• 38 steer and heifer slaughter plants with
capacity greater than 50,000 head
• Slaughtered a total of 26.7 million head
• 14 plants slaughtering more than 1,000,000
head, accounted for 67% of slaughter
• Average slaughter in large plants nearly
doubled from 1976 to 1998
K-State Research & Extension
Concentration Has Increased Dramatically
1976
Steer & slaughter of four largest firms
equivalent to 25% of total
1998
Steer & slaughter of four largest firms
equivalent to 80% of total
K-State Research & Extension
Concentration Driven By Cost Considerations
• Historically, gross profit margins have been
about the same for all major meat packers
• Differences in profitability across firms was
attributable to differences in costs
• Low cost firms came out on top
• Economies of size in slaughtering and
fabrication were very large
(Sersland, Duewer & Nelson; McDonald; Paul)
K-State Research & Extension
While concentration was increasing,
beef demand was declining
K-State Research & Extension
Plotting Inflation Adjusted Price vs. Per Capita
Consumption Provides A Picture of Beef Demand
Beef Price Quantity Relationships
Annual, 1980-2000.
Deflated Beef Price - Cents per Lb
450
80
425
81
400
82
375
91
350
83
90
93
84
89
85
92
325
88
94
95
300
96
97
65
66
86
00
99
98
275
64
87
67
68
69
70
71
72
73
74
Per Capita Consumption - Retail Weight
75
76
77
78
79
80
.
Source: USDA & Commerce Dept.
Price Deflated by GDP Implicit Price Deflator 1999=100
K-State Research & Extension
Declining Demand Has Plagued The Beef
Industry For 20 Years
Beef Price Quantity Relationships
Annual, 1980-2000.
Deflated Beef Price - Cents per Lb
450
425
400
375
91
350
90
93
89
92
325
95
300
96
97
65
66
81
82
83
84
87
85
86
00
99
98
275
64
Beef Demand
Declined
Precipitously
During The
1980’s
88
94
80
67
68
69
70
71
72
73
74
Per Capita Consumption - Retail Weight
75
76
77
78
79
80
.
Source: USDA & Commerce Dept.
Price Deflated by GDP Implicit Price Deflator 1999=100
K-State Research & Extension
Declining Demand Has Plagued The Beef
Industry For 20 Years
Beef Price Quantity Relationships
Annual, 1980-2000.
Deflated Beef Price - Cents per Lb
450
Demand
Continued To
Decline
During the
1990’s
89
425
400
375
91
350
90
93
80
81
82
83
84
85
92
325
88
94
95
300
96
97
65
66
86
00
99
98
275
64
87
67
68
69
70
71
72
73
74
Per Capita Consumption - Retail Weight
75
76
77
78
79
80
.
Source: USDA & Commerce Dept.
Price Deflated by GDP Implicit Price Deflator 1999=100
K-State Research & Extension
Best
News In
Beef
Industry
In 20
Years
K-State Research & Extension
Demand Showed Signs of Strengthening In
1999, 2000 & Again In 2001
Beef Price Quantity Relationships
Annual, 1980-2001
450
Deflated Beef Price - Cents per
Lb
80
425
81
400
82
375
83
91
350
90
01
92
325
94
96
97
66
87
85
86
99
98
275
65
88
00
95
300
64
84
89
93
67
68 69 70 71 72 73 74 75 76 77
Per Capita Consumption - Retail Weight .
78
79
80
Source: USDA & Commerce Dept.
Price Deflated by GDP Implicit Price Deflator 1999=100
K-State Research & Extension
Another Look At Demand
Compute a demand index
The index accounts for changes in beef
quantity
The index relates current beef prices to
prices expected if demand was held
constant at some prior year’s level
K-State Research & Extension
Beef Demand Is Improving
Retail Choice Beef Demand Index
100
90
80
Index Value
70
60
94
88 86
83
79
Retail Choice Beef Demand
Increased 5.3% during 2002
76
70 69
66 65
63
60 59
57 56 54
52
50
55 58
51
53
40
30
20
10
0
81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01
Year
Source: USDA, Dept. of Commerce & K-State Research & Extension
Price Deflated By CPI, 1980 =100 for Beef Demand Index
K-State Research & Extension
Changing Marketing Methods
• Increase in plant size
• Increase in firm size
• & desire to deliver products consumers
want
Led to change in marketing methods
– Declining share of cash sales
– Increasing share of contract sales
K-State Research & Extension
Concentration Among Food
Retailers Is Also Taking Place
26.5%
K-State Research & Extension
Big Supermarkets Dominate
The Retail Food Landscape
K-State Research & Extension
Where Are We Headed?
• Lower costs encouraged growth of large
plants
• Lower costs, procurement, marketing and
food safety advantages have all encouraged
growth of large firms
• Procurement requirements & desire to
market more consistent products are
encouraging vertical integration
K-State Research & Extension
Vertically Coordinated Supply Chains
• Cattle feeders need to consider how to fit in to a
supply chain with more vertical coordination
• Alliances offer the opportunity to reap some of the
benefits of a vertically coordinated supply chain
• Consider how you market your cattle
– How desirable are your cattle?
– Will they be in demand in the future?
K-State Research & Extension
Cattle Valuation Methods
Live Weight Pricing
1. Start with est’d. boxed beef price
2. Adjust for est’d. quality of cattle in pen
3. Convert to live weight: multiply by est’d. dress. %
4. Add est’d. by-product value
5. Subtract processing costs & profit target
6. Result: Live weight bid price
K-State Research & Extension
Cattle Valuation Methods
Dressed Weight Pricing
1. Start with est’d. boxed beef price
2. Adjust for est’d. quality of cattle in pen
3. No Need To Est. Dressing % Since Paying On Dressed Wt.
4. Add est’d. by-product value
5. Subtract processing costs & profit target
6. Result: Dressed weight bid price
K-State Research & Extension
Live Weight vs.
Dressed Weight Pricing
• Dressed weight pricing reduces buyer
uncertainty
• Buyer’s risk reduction leads to modest
increase in prices paid for cattle priced on
dressed weight vs. live weight
(Feuz, Fausti, & Wagner, 1993)
K-State Research & Extension
Grid Pricing
• Another evolution in cattle pricing
– Matrix of price discounts and premiums
– Each animal fits within a particular “grid”
• Instead of estimating cattle quality prior to
slaughter, cattle are valued based on actual cattle
quality after slaughter
• Result
– Higher quality cattle receive higher prices
– Lower quality cattle receive lower prices
K-State Research & Extension
Why Is A More Accurate Pricing
System Desirable?
• Beef demand declined during 1980s and
most of 1990s
• Industry needs to do a better job of
providing consumers what they want
• Pricing cattle individually based on actual
carcass characteristics is a step toward
providing industry with price signals to
provide customers what they want
K-State Research & Extension
Example Grid
($/cwt carcass weight)
Quality Grade
Prime
Certified Angus Beef
Choice
Select
Standard
- - - - - - - - yield grade - - - - - - - 1
2
3
4
5
8.00
7.00
6.00 -14.00 -19.00
3.00
2.00
1.00
2.00
1.00
0.00 -20.00 -25.00
-10.25 -11.25 -12.25 -32.25 -37.25
-20.25 -21.25 -22.25 -42.25 -47.25
Dark Cutters, Stags, Hardbones
-20.00
Carcass Weights
Greater than 950 lbs.
Less than 550 lbs.
-25.00
-25.00
K-State Research & Extension
Example Grid
($/cwt carcass weight)
Quality Grade
Prime
Certified Angus Beef
Choice
Select
Standard
- - - - - - - - yield grade - - - - - - - 1
2
3
4
5
8.00
7.00
6.00 -14.00 -19.00
3.00
2.00
1.00
2.00
1.00
0.00 -20.00 -25.00
-10.25 -11.25 -12.25 -32.25 -37.25
-20.25 -21.25 -22.25 -42.25 -47.25
Dark Cutters, Stags, Hardbones
-20.00
Carcass Weights
Greater than 950 lbs.
Less than 550 lbs.
-25.00
-25.00
K-State Research & Extension
How Does A Grid Work?
Start With BASE PRICE
Attribute
Prime
CAB
Choice
Select
Standard
Outs
YG 1
YG 2
YG 3
YG 4
YG 5
<550 lbs.
>950 lbs.
Choice, YG-3 price
USDA Grid
+$7.00
+$3.00
+$0.00
-$8.50
-$17.00
-$20.00
+$2.00
+$1.00
+$0.00
-$14.00
-$24.00
-$20.00
-$20.00
x
x
x
x
x
x
x
x
x
x
x
x
x
Percent
6.2
=
24.9
46.5
21.0
0.7
0.7
1.5
33.2
61.2
3.6
0.5
0
7.3
=
$118.00/cwt
+ $0.43/cwt
+ $0.75/cwt
+ $0.00/cwt
- $1.79/cwt
- $0.12/cwt
- $0.14/cwt
+ $0.03/cwt
+ $0.33/cwt
+ $0.00/cwt
- $0.50/cwt
- $0.12/cwt
- $0.00/cwt
- $1.46/cwt
$115.42/cwt
carcass weight
Value of Managing Cattle Attributes
Attribute
Prime
CAB
Choice
Select
Standard
Outs
YG 1
YG 2
YG 3
YG 4
YG 5
<550 lbs.
>950 lbs.
PRICE
USDA Grid
+$7.00
+$3.00
+$0.00
-$8.50
-$17.00
-$20.00
+$2.00
+$1.00
+$0.00
-$14.00
-$24.00
-$20.00
-$20.00
Percent
6.2
24.9
46.5
21.0
0.7
0.7
1.5
33.2
61.2
3.6
0.5
0
7.3
$115.42/cwt carcass weight
186 steers on feed 147 days, ADG=3.8, Conversion=6.9,
Live wt=1419lbs, 883 lb carcass, Choice, YG-3 price = $118.00/cwt
Value of Managing Cattle Attributes
Attribute
Prime
CAB
Choice
Select
Standard
Outs
YG 1
YG 2
YG 3
YG 4
YG 5
<550 lbs.
>950 lbs.
PRICE
USDA Grid
+$7.00
+$3.00
+$0.00
-$8.50
-$17.00
-$20.00
+$2.00
+$1.00
+$0.00
-$14.00
-$24.00
-$20.00
-$20.00
Percent
6.2
24.9
46.5
21.0
0.7
0.7
1.5
33.2
61.2
3.6
0.5
0
7.3
$115.42/cwt
Percent
6.2
24.9
46.5
21.0
0.7
0.7
1.5
33.2
61.2
3.6
0.5
0
0.00
$116.88/cwt
$2,397 pen revenue
186 steers on feed 147 days, ADG=3.8, Conversion=6.9,
883 lb carcass, Choice, YG-3 price = $118.00/cwt
Value of Managing Cattle Attributes
Attribute
Prime
CAB
Choice
Select
Standard
Outs
YG 1
YG 2
YG 3
YG 4
YG 5
<550 lbs.
>950 lbs.
PRICE
USDA Grid
+$7.00
+$3.00
+$0.00
-$8.50
-$17.00
-$20.00
+$2.00
+$1.00
+$0.00
-$14.00
-$24.00
-$20.00
-$20.00
Percent
6.2
24.9
46.5
21.0
0.7
0.7
1.5
33.2
61.2
3.6
0.5
0
7.3
$115.42/cwt
Percent
6.2
24.9
46.5
21.0
0.7
0.7
1.5
33.2
65.3
0.0
0.0
0
0.0
$117.50/cwt
$3,421 pen revenue
186 steers on feed 147 days, ADG=3.8, Conversion=6.9,
883 lb carcass, Choice, YG-3 price = $118.00/cwt
Value of Managing Cattle Attributes
Attribute
Prime
CAB
Choice
Select
Standard
Outs
YG 1
YG 2
YG 3
YG 4
YG 5
<550 lbs.
>950 lbs.
PRICE
USDA Grid
+$7.00
+$3.00
+$0.00
-$8.50
-$17.00
-$20.00
+$2.00
+$1.00
+$0.00
-$14.00
-$24.00
-$20.00
-$20.00
Percent
6.2
24.9
46.5
21.0
0.7
0.7
1.5
33.2
61.2
3.6
0.5
0
7.3
$115.42/cwt
Percent
6.2
24.9
Value of
57.9
Managing
10.0
0.0
Attributes
0.0
$3.27/cwt
1.5
or
33.2
$28.87/head
65.3
0.0
0.0
0
0.0
$118.69/cwt
$5,381 pen revenue
186 steers on feed 147 days, ADG=3.8, Conversion=6.9,
883 lb carcass, Choice, YG-3 price = $118.00/cwt
A Grid Pricing Example
• Grid Data Analyzed
• - 183 steers from one herd
• - Carcass data collected
• - Valued based upon a recent grid
K-State Research & Extension
A Grid Pricing Example
Yield Grade
Quality Grade
1
2-2.49
2.5-2.99
3
4
5
Prime
$130.80
$129.20
$128.40
$127.00
$115.00
$108.00
Choice
$123.80
$122.20
$121.40
$120.00
$108.00
$101.00
Select
$114.30
$112.70
$111.90
$110.50
$98.50
$91.50
Standard
$110.80
$109.20
$108.40
$107.00
$95.00
$88.00
<550 lbs.
-$15.00
>950 lbs.
-$15.00
K-State Research & Extension
Unsorted Steer Carcass Data
ID
CARC. WT.
Qual. Grade
Yld Grd Price
Revenue
1
761
CHOICE-
3.5
$120.00 $913.20
2
686
SELECT
2.9
$111.90
3
659
CHOICE-
1.8
$123.80 $815.84
4
841
SELECT
3.3
$110.50 $929.31
5
774
CHOICE-
3.2
$120.00 $928.80
6
734
SELECT
3.0
$111.90
$767.63
$821.35
K-State Research & Extension
Sorted Steer Carcass Data
worst
ID
CARC WT
Qual Grade
Yld Grade
Price
62
553
STANDARD
1.4
$110.80 $612.72
40
582
STANDARD
1.4
$110.80 $644.86
144 626
SELECT
2.3
$112.70 $705.50
145 633
SELECT
1.9
$114.30 $723.52
88
660
SELECT
2.6
$111.90
17
672
SELECT
3.4
$110.50 $742.56
33
831
CHOICE-
2.8
$121.40 $1,008.83
146 858
CHOICE-
3.7
$120.00 $1,029.60
84
849
CHOICE-
2.8
$121.40 $1,030.69
15
865
CHOICE-
2.9
$121.40 $1,050.11
8
874
CHOICE
2.8
$121.40 $1,061.04
129 895
CHOICE
3.2
$120.00 $1,074.00
CHOICE
3.2
$120.00 $1,105.20
best 127
921
Revenue
$738.54
K-State Research & Extension
Distribution of Revenue per Head
Large Revenue Variability
30
Avg.=$877/head
Number of Head
25
20
15
10
5
0
600
650
700
750
800
850
900
950
1000
1050
1100
Revenue ($/head)
K-State Research & Extension
Distribution of Carcass Weights
1. Carcass Weight Problems?
40
Number of Head
35
30
25
20
15
10
5
0
500
550
600
650
700
750
800
850
900
950
1000
Carcass Weight (lbs.)
K-State Research & Extension
Distribution of Quality Grade
2. Quality Grade Issues?
80%
70%
Percent of Cattle
60%
53%
46%
50%
40%
30%
20%
10%
1%
0%
0%
Prime
Choice
Select
Standard
Quality Grade
K-State Research & Extension
Distribution of Yield Grade
3. Yield Grade Concerns?
60%
50%
Percent of Cattle
42%
40%
35%
34%
30%
20%
20%
10%
3%
0%
0%
YG 1
YG 2-2.49
YG 2.5-2.99
YG 3
YG 4
YG 5
Yield Grade
K-State Research & Extension
A Grid Pricing Example
Yield Grade
Quality Grade
1
2-2.49
2.5-2.99
3
4
5
Prime
$130.80
$129.20
$128.40
$127.00
$115.00
$108.00
Choice
$123.80
$122.20
$121.40
$120.00
$108.00
$101.00
Select
$114.30
$112.70
$111.90
$110.50
$98.50
$91.50
Standard
$110.80
$109.20
$108.40
$107.00
$95.00
$88.00
<550 lbs.
-$15.00
>950 lbs.
-$15.00
Cattle Distribution
Yield Grade
Quality Grade
1
2-2.49
Prime
0
0
Choice
1
11
Select
3
25
Standard
2
0
<550 lbs.
0
>950 lbs.
0
2.5-2.99
3
4
5
0
0
0
32
53
0
0
32
23
1
0
0
0
0
K-State Research & Extension
Scatter Plot of Revenue vs. Carcass Weight
1,200
Revenue ($/head)
1,100
1,000
900
800
700
600
500
550
600
650
700
750
800
850
900
950
Carcass Weight (lbs.)
K-State Research & Extension
Scatter Plot of Revenue vs. Quality Grade
1,200
Revenue ($/head)
1,100
1,000
Avg.
$918
900
Avg.
$836
800
700
Avg.
$629
600
500
Choice
Select
Standard
Quality Grade
K-State Research & Extension
Grid Variability Over Time
Premiums and Discounts vary over
time as market conditions change
K-State Research & Extension
10
Weekly USDA Packer Survey Quality Grade Grid
Premiums/Discounts, 1998 - January 2002
Prime
Premium ($/cwt carcass)
5
CAB
0
-5
Select
-10
-15
-20
Standard
-25
-30
1/5/98
7/5/98
1/5/99
7/5/99
1/5/00
7/5/00
1/5/01
7/5/01
1/5/02
Date
Source: USDA
K-State Research & Extension
Choice-Select Spread
Follows A Seasonal Pattern
Index Value
(% of Annual Average)
.
.
.
Choice Minus Select Box Beef
Price Spread, Seasonal Index
180
170
160
150
140
130
120
110
100
90
80
70
60
50
40
Jan
.
.
1991-2000 Choice -Sele ct Inde x
1996-2000 Choice -Sele ct Inde x
Feb
Mar
Apr
May June July
Aug
Sep
Oct
Nov
De c
Month
Source: USDA & K-State Research & Extension
K-State Research & Extension
5
Weekly USDA Packer Survey Yield Grade Grid
Premiums/Discounts, 1998 - January 2002
YG 2-3
YG 1-2
0
Premium ($/cwt carcass)
YG 3-4
-5
-10
YG 4-5
-15
YG 5
-20
-25
1/5/98
Source: USDA
7/5/98
1/5/99
7/5/99
1/5/00
7/5/00
1/5/01
7/5/01
1/5/02
Date
K-State Research & Extension
0.00
Weekly USDA Packer Survey "Out" Carcass Grid
Premiums/Discounts, 1998 - January 2002
Dairy Type
Discount ($/cwt carcass)
-5.00
-10.00
-15.00
Bullock/Stag
Heiferrette
-20.00
-25.00
-30.00
Dark Cutter
-35.00
-40.00
1/5/98
Source: USDA
1/5/99
1/5/00
1/5/01
1/5/02
Date
K-State Research & Extension
-5.00
Weekly USDA Packer Survey Weight Discounts,
1998 - January 2002
Discount ($/cwt carcass)
950-1,000 lbs.
-10.00
-15.00
500-550 lbs.
400-500 lbs.
-20.00
1,000 up lbs.
-25.00
-30.00
1/5/98
Source: USDA
7/5/98
1/5/99
7/5/99
1/5/00
7/5/00
1/5/01
7/5/01
1/5/02
Date
K-State Research & Extension
Conclusions
• Grid pricing increases risk for producers
– Increase in risk, on average, leads to increase in
returns (Feuz, Fausti & Wagner)
• Grid pricing leads to greater price variability
– Grid price variation about double live-weight
price variation (Schroeder & Graff)
K-State Research & Extension
Conclusions
• Grid pricing yields higher prices for cattle with
– high quality grades
– better yield grades &
– few heavy or light carcasses
• Comparisons among live weight, dressed weight
and grid pricing indicate that only about half of
cattle receive highest price under a grid
• So, cattle need to be managed aggressively to
“target a grid”
K-State Research & Extension
Conclusions
•
Factors that affect revenue per head
1. Carcass weight variability
2. Choice-Select price spread
3. Yield grade variability less important
•
But avoid YG 4’s & 5’s
•
So, important to manage weight & quality
grade
•
Emphasis on quality grade should depend
on Choice-Select spread
K-State Research & Extension
Conclusions
• Method to establish base price is important
• Use of plant average base prices can result in
cattle sold at same time to different plants
receiving different base prices
• Ward & Lee found base price variation resulted in
$16/head revenue variation on a single day
• Base prices tied to plant averages are problematic
K-State Research & Extension
Conclusions
•
Discounts for undesirable qualities exceed
premiums for desirable characteristics
•
Example
•
Heavy & light weight discounts
•
YG 4’ and 5’s
•
Hardbones & dark cutters
•
Must manage cattle to avoid these
discounts
K-State Research & Extension
Conclusions
• Target Cattle With Specific Attributes to the Right
Grid at the Right Time
• Manage cattle aggressively
Market cattle before
• they are Y4-Y5 and have heavy carcasses
Sell high quality cattle on a “Quality Grid”
Sell high yielding cattle on a “Yield Grid”
K-State Research & Extension
Essential Data For Cow-Calf Producer
1.Carcass I.D. matched with
carcass weight
yield grade
quality grade
price
revenue
Traced to cow and bull
2. Calf birth date, weight, sex,
weaning weight, unique circumstances
K-State Research & Extension
Questions to ask
1. Can “worst” calves be eliminated?
Growing/finishing management - quick
Genetics – slow
2. Can distributions of quality grade, yield grade etc.
be improved?
Genetics
3. Should I sort and/or target different grids?
high yield grade, lower quality to a yield grid
high quality, lower yield to quality grid
Keep in mind long run goals
K-State Research & Extension
For Updated
Livestock Marketing Information
Visit the
K-State Livestock & Meat Marketing
Web Site
www.agecon.ksu.edu/livestock