Transcript Livestock Marketing Decisions Where to sell • Type of market • Location What to sell • Live, carcass, grid When to sell • Weight, grade, costs.

Livestock Marketing Decisions
Where to sell
• Type of market
• Location
What to sell
• Live, carcass, grid
When to sell
• Weight, grade, costs
What to sell
Live weight
• One average price for all live pounds
• Negotiated price before delivery or at
auction
• Weighing conditions important
» Mud, shrink (fill, time, stress)
• Was most common for hogs but not now
• Still common in large cattle feedlots, less
in Iowa
• Used for feeder cattle and feeder pigs
What to sell
Carcass weight (“in-the-meat”)
• One average price for all carcass pounds
• Negotiated price before delivery
• Dressing percent (also called yield)
» Important to compare bids
» Not important in determining value
• Farmer stands risk of trimming and
condemnation
• Common for fed cattle in Midwest
What to sell
Dressing percent
• DP = carcass weight / live weight
• DP hogs approximately 73-76%
• DP cattle approximately 61-64%
DP impacted by:
•
•
•
•
Weighing conditions
Shrink
Fat thickness
Genetics
What to sell
Value-based marketing
• Each carcass evaluated and priced individually
• Premiums and discounts determined ahead of
delivery
• Base price may be negotiated or come from formula
• Carcasses are graded and values assigned
• Farmer stands grading risk
• Different buyers have different systems
• Nearly all hogs
• Increasingly popular for fed cattle
Hog Carcass Weight Discounts
Carcass Weight
145#
155#
165#
175#
185#
195#
205#
215#
225#
Range
-27.70
-27.70
-10.39
-3.40
-1.36
-0.68
0.00
-3.00
-5.26
-8.16
-5.00
-0.67
0.00
0.00
0.00
0.00
1.36
0.00
IOWA/MINNESOTA DAILY DIRECT NEGOTIATED HOG PURCHASE MATRIX
LM_HG204, Fri, Aug 26, 2005, USDA Market News Des Moines, Iowa
Hog Carcass Price by Backfat and
Loin Eye Area
Hog Carcass Price by Loin Eye Area/depth (inches)
Backfat
4.0/1.4
5.0/1.7
6.0/2.0
7.0/2.3
8.0/2.7
0.40
62.00
75.05
63.50
75.00
65.00
75.00
66.00
76.00
66.00
76.00
0.50
59.50
75.05
62.00
75.05
65.00
75.05
66.00
75.00
66.00
76.00
0.60
59.50
75.60
62.00
75.60
63.50
75.60
65.00
75.60
66.00
75.60
0.70
59.50
75.60
59.50
75.60
62.00
75.60
65.00
75.60
66.00
75.60
0.80
57.50
75.60
59.50
75.60
62.00
75.60
63.50
75.60
66.00
75.60
0.90
57.50
72.10
59.50
72.10
59.50
72.55
62.00
73.05
65.00
73.80
1.00
56.50
72.10
57.50
72.10
59.50
72.10
62.00
72.10
63.50
73.05
1.10
55.50
67.90
57.50
68.05
59.50
69.05
59.50
70.27
63.50
71.66
1.20
55.50
67.90
56.50
67.90
57.50
67.90
59.50
68.87
62.00
70.96
1.40
52.00
64.00
55.34
64.70
55.34
66.09
56.86
67.48
56.86
68.87
IOWA/MINNESOTA DAILY DIRECT NEGOTIATED HOG PURCHASE MATRIX
LM_HG204, Fri, Aug 26, 2005, USDA Market News Des Moines, Iowa
Comparing bids
Price in appropriate $/cwt
Bid Price (live)
Bid Price (carcass)
Lean premium
Sort discount
Dressing percentage
Adjusted to live
Transportation
Net farm gate price
A
$44.50
------74.5
44.50
-.85
$43.65
B
--$59.50
+1.25
-.70
74.5
44.73
-.35
$44.38
Value-Based Cattle Marketing
Three factor impact premiums
1. Carcass Weights
2. Quality Grade Distribution (USDA Grader)
Based on marbling, proxy for eating
experience
3. Yield Grade Distribution (USDA Grader)
Based on lean meat yield
4. Other specs:
Product safety & quality assurance
Acceptable color
Youthfulness
Value-Based Cattle Marketing
Common Ground for Targets
1. Carcass Weights
2. Quality Grade
3. Yield Grade
550 - 950 lbs
> Se+ or > Ch0
1’s and 2’s
Carcass Merit Grid and Premium Trends
Quality
Grade
Prime
+
Yield Grade
1
2
3
+$$$$$ +$$$$ +$$$
o
Choice and Choice
ChoiceSelect
Standard
Out Cattle
+$$$
+$$$
+$$
+$$$ +$$ Base
-$
-$$
-$$$
-$$$$ -$$$$ -$$$$
-$$$$$ -$$$$$ -$$$$$
4&5
-$$
-$$
-$$$
-$$$$
-$$$$
-$$$$$
Where are the Grid Rewards & Discounts?
Iowa Quality Beef Grid 2005
 Base: NE Wted Avg 65-80%
Choice
 Par: Ch YG3 =Base + $2.00 or
Plant clean up which ever is
greater
 Quality Grade
• Prime:
• Certified Angus:
• Select
• Standard
• Commercial
• Dark Cutters
• Other
$/cwt
$6.00
$3.50
USDA
-$15.00
-$30.00
-$30.00
-$30.00
Yield Grade $/cwt
1:
$4.00
2:
$3.00
3:
Par
4:
-$20.00
5:
-$25.00
Carcass weights$/cwt
Under 500 -$40.00
500-549
-$15.00
950-999
-$8.00
1000 & up -$35.00
Comparing Bids ($/carcass cwt)
Price in appropriate $/cwt
Base bid price
A
122.00
B
121.00
3%
45%
30%
60%
3%
-----------
+6.00
+3.50
-8.00
+2.50
-15.00
Transportation
Net farm gate price
-.65
120.35
-1.25
120.16
Prime
Top 2/3 Ch
Select
Yield 1&2
Off weight
Bid A is a straight in the meat bid, Bid B is a valued-based bid.
When to sell
 Classic production function
• Optimal selling weight is where MC=MR
• The cost of the next pound = the price of the next pound
 Cost per pound decrease then increase with weight
• Costs are a function of
» Genetic potential
» Cost of diet
» Opportunity costs of future production
 Price per pound increases then decreases
• Weight discounts outside optimal range
• Fatter carcasses are discounted
• Adding extra weight
Market timing
Cycles
Seasonals
Marginal costs and returns
Biological and price cycles
Cycle is a pattern that repeats itself
over a period longer than a year in a
relatively predictable pattern
JANUARY 1 TOTAL CATTLE INVENTORY
U.S., Annual
2009 = 94.5 Million Head
-1.6 Percent
19
49
19
54
19
59
19
64
19
69
19
74
19
79
19
84
19
89
19
94
19
99
20
04
20
09
Mil. Head
140
130
120
110
100
90
80
70
Livestock Marketing Information Center
Data Source: USDA/NASS
TOTAL CATTLE INVENTORY BY CYCLE
U.S., January 1
Mil. Head
135
125
115
105
95
85
75
65
0 1 2 3 4 5 6 7 8 9 10 11 12 13 14
193849
194958
195867
196779
197990
199004
200409
US December Market Hog Inventory (1,000) head
65,000
60,000
55,000
50,000
45,000
09
20
07
20
05
20
03
20
01
20
99
19
97
19
95
19
93
19
91
19
89
19
87
19
85
19
83
19
81
19
79
19
19
77
40,000
US December Hog Breeding Herd (1,000 Head)
10,000
9,500
9,000
8,500
8,000
7,500
7,000
6,500
6,000
5,500
09
20
07
20
05
20
03
20
01
20
99
19
97
19
95
19
93
19
91
19
89
19
87
19
85
19
83
19
81
19
79
19
19
77
5,000
What causes cycles
Response to economic signals
Time lag
• Psychology
• Biology
• Investment
Livestock
Tree crops
Land development
Cattle Cycle and Timing
Prices are cyclical
Heifer cost impact profitability
Calf prices impact annual income
Two alternatives
• Steady Size: Same number of heifers
• Dollar Cost Averaging: Same value of
heifers
Heifer Prices 1970-2008
140
Heifer Prices ($/cwt.)
120
Heifer and Offspring Price Comparison
1970's
1980's
1990's
2000's
1975
1985
1995
2005
80 Heifer
Offspring 1
60 Offspring 2
27.32
58.64
55.58
114.43
36.34
76.73
72.86
93.39
64.55
82.44
69.04
108.5
40 Offspring 3
Offspring 4
20
Offspring 5
77.33
82.76
80.41
95.38
66.65
90.63
90.35
57.76
82.89
83.72
100
0
1970
1975
1980
1985
1990
1995
2000
2005
Number of Cows and Heifers Calving
140
120
100
80
60
Average
104
40
DCA
20
Steady Size 100
05
20
00
20
95
19
90
19
85
19
80
19
75
19
19
70
0
Average Value Per Head by Strategy
$800
$750
$700
$650
$600
$550
$500
$450
$400
$350
$300
Steers
Heifers
SS
Cows
DCA
Return Over Cash Cost
$70,000
$60,000
$50,000
$40,000
$30,000
$20,000
$10,000
$$(10,000)
$(20,000)
DCA
Steady Size
05
20
00
20
95
19
90
19
85
19
80
19
75
19
19
70
$(30,000)
Herd Net Worth
$2,000,000
$1,800,000
$1,600,000
$1,400,000
$1,200,000
$1,000,000
$800,000
$600,000
$400,000
DCA
$200,000
Steady Size
05
20
00
20
95
19
90
19
85
19
80
19
75
19
19
70
$-
Seasonal price patterns
Patterns that repeat themselves with
some degree of predictability within
a year’s time frame.
Driven by supply and demand
factors that are impacted by time of
year
• Weather
• Holidays
• Input prices
Seasonal Price Index for Iowa Fed Cattle and Hogs
115%
110%
105%
100%
95%
90%
Cattle
Hogs
pr
.
M
ay
Ju
ne
Ju
ly
A
ug
.
Se
pt
.
O
ct
.
N
ov
.
D
ec
.
A
M
ar
.
Fe
b.
Ja
n.
85%
How to calculate seasonal index
Pick time period (number of years)
Pick season period (month, quarter)
Calculate average price for season
Calculate average price over time
Divide season average by over time
average price x 100
Sioux Falls Cull Cow Prices
Jan
Feb
Mar
Apr
May
Jun
Jul
Aug
Sep
Oct
Nov
Dec
Annual
2000
41.70
41.19
42.38
46.40
48.25
47.63
47.50
43.50
41.70
38.18
39.00
41.55
43.25
2001
41.56
43.75
45.15
46.25
47.75
49.20
47.63
47.38
45.45
42.87
37.50
38.37
44.41
2002
39.10
41.88
44.06
42.88
42.45
41.50
37.67
37.50
37.88
35.80
35.38
35.83
39.33
2003
39.20
40.25
42.50
45.13
47.75
46.06
49.96
49.13
50.50
48.85
51.83
49.67
46.74
2004
47.10
46.00
49.88
53.40
56.38
60.00
59.50
59.75
58.00
54.75
55.50
52.50
54.40
2005
54.25
55.25
60.30
61.25
62.75
61.50
58.25
54.90
55.63
52.75
50.90
52.13
56.66
2006
47.13
49.75
49.80
47.63
47.80
47.94
47.75
49.85
50.25
48.31
43.06
41.50
47.56
2007
48.50
52.63
52.00
52.13
55.50
54.25
54.08
55.25
52.88
53.20
46.25
48.75
52.12
2008
50.00
55.94
55.69
54.40
59.38
58.13
63.35
63.00
59.00
53.60
44.75
41.75
54.92
2009
45.63
46.75
46.88
49.33
53.17
45.88
48.63
47.06
46.90
44.94
43.08
45.83
47.01
45.42
47.34
48.86
49.88
52.12
51.21
51.43
50.73
49.82
47.33
44.73
44.79
48.64
93
97
100
103
107
105
106
104
102
97
92
92
100
Average
Mon/Yr
Using Seasonal Index to Forecast
Observe price in time t1
Forecast price in time t2
 Start with P1/ I1 = P2 / I2
 Then P1 x I2 / I1 = P2
Assume that cows are selling at
$50/cwt in November. What is the
forecast of February?
P1
P2
$
MC
MR
Weight
Cost of Production
Raised livestock
•
•
•
•
Farrow to finish, Cowherd to finish
Accumulate cost from birth through finish
Relatively stable cost over time
Impacted by input prices and production
» Feed is typically 60-70% of cost
» Low productivity increases the cost of those
that make it to finish because the fixed costs
are divided by a smaller number.
Cost of Production
Purchased feeder livestock
• Derived demand for feeder animal
• Highly variable price
• Depends upon
» Expected selling price for finished animal
» Feed costs
Cost of production budgets
Starts with production function
Incorporates input prices
Project cost per unit sold
• Variable $/unit
• Total $/unit
http://www.extension.iastate.edu/agd
m/livestock/html/b1-21.html
Swine Production - Finishing Weaned 12 lb Pigs, Total Confinement - One Pig
Ag Decision Maker -- Iowa State University Extension
For more information see Information File B1-21 Livestock Enterprise Budgets.
Place the cursor over cells with red triangles to read comments.
Enter input values in yellow grid-lined cells.
Income
Market Hogs
Price
Unit
$0.00 per lb
Variable Costs
Weaned Feeder pig
Interest
Price
Unit
$32.00 per head
9%
Feed Costs
Corn
Soybean meal
Dried distiller grain
Vitamin & minerals
Pre-nursery diet
Feed Additives
Feed processing & delivery
Other
Total Feed Costs
$3.80
$0.15
$0.06
$0.45
per bu
per lb
per lb
per lb
x
Quantity Unit
260 lbs
=
=
$32.00
$1.18
=
=
=
=
$37.24
17.85
1.92
6.48
3.00
3.00
6.75
0.00
$76.24
Quantity
x
x
x
x
x
Unit
1 head
4.9 months
=
Total
$0.00
9.8
119.0
32.0
14.4
bu
lbs
lbs
lbs
Veterinary and medical
Fuel, repairs, utilities
Marketing, miscellaneous
Other
Manure application cost
Interest on variable costs
Death loss
Labor
Total Variable Costs
Income over Variable Costs
Fixed Costs
Facilities & equipment
Total All Costs
Income over All Costs
Break-even selling price for variable costs
Break-even selling price for all costs
$0.01 per gal
9%
$14.00 per hour
220
3
0.05
0.7
gal
months
head
hours
=
=
=
=
$5.00
4.20
4.00
0.00
2.20
1.03
1.60
9.80
$137.25
($137.25)
$11.28
$148.53
($148.53)
$52.79 per cwt
$57.13 per cwt
Using budgets in planning
Project a breakeven “point estimate”
Sensitivity analysis for key variables
Back calculate from revenue to what
you can afford to pay for feeder animal
Economic v. Financial costs
Objective Based Pricing Strategy
Feeder & Financing
+ Feed Costs
+ Operating Costs
+ Labor Costs
+ Fixed Costs
+ Desired Return
Cost/hd
$/cwt
729.24
186.71
30.46
36.55
24.63
25.00
60.77
76.33
78.87
81.91
83.96
86.05
550# steer calf fed to 1200 slaughter weight
How much to pay for feeder animal
Work back from total revenue
Expected revenue
- Interest Costs
- Feed Costs
- Operating Costs
- Labor Costs
- Fixed Costs
- Desired Return
Cost/hd
$/cwt
1020.00
41.74
186.71
30.46
36.55
24.63
25.00
185.45
177.87
143.92
138.38
131.74
127.26
122.71
550# steer calf fed to 1200 slaughter weight
Breakeven Purchase Price for 550# Steers
Fed Cattle Price
FCOG
$81
$83
$85
$87
$89
24.72
119
123
127
131
136
26.72
117
121
125
129
133
28.72
114
119
123
127
131
30.72
112
116
120
125
129
32.72
110
114
118
122
126
Corn
WDGS
hay
int
yard
other
$1.75
$32.00
$50
7%
$0.30
$30