Transcript ECON 337: Agricultural Marketing Chad Hart Assistant Professor [email protected] 515-294-9911 Econ 337, Spring 2012 Livestock Marketing Decisions Where to sell Type of market Location What to sell Live, carcass, grid When to.

ECON 337:
Agricultural Marketing
Chad Hart
Assistant Professor
[email protected]
515-294-9911
Econ 337, Spring 2012
Livestock Marketing Decisions
Where to sell
Type of market
Location
What to sell
Live, carcass, grid
When to sell
Weight, grade, costs
Econ 337, Spring 2012
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
Econ 337, Spring 2012
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
Econ 337, Spring 2012
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
Econ 337, Spring 2012
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
Econ 337, Spring 2012
Hog Carcass Weight Discounts
Carcass Weight
145#
Range
-30.00
-12.90
155#
165#
175#
-30.00
-15.00
-3.25
-6.02
-2.58
2.25
185#
195#
205#
215#
-1.50
0.00
0.00
0.00
4.00
4.50
4.50
4.25
225#
0.00
1.00
IOWA/MINNESOTA DAILY DIRECT NEGOTIATED HOG PURCHASE MATRIX
LM_HG204, Fri, Feb. 17, 2012, USDA Market News Des Moines, Iowa
Econ 337, Spring 2012
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
79.00
89.75
80.50
90.75
81.50
92.25
82.50
93.75
83.00
94.75
0.50
76.00
88.75
79.00
89.75
81.50
91.50
82.00
93.00
83.00
94.25
0.60
76.00
88.00
79.00
88.75
80.50
90.75
81.50
92.25
82.50
93.75
0.70
76.00
87.50
76.00
88.00
79.00
89.75
81.50
91.50
82.00
93.00
0.80
75.00
87.00
76.00
87.50
79.00
88.75
80.50
90.75
82.00
92.25
0.90
75.00
86.50
76.00
87.00
76.00
88.00
79.00
89.75
81.50
91.50
1.00
73.00
84.50
75.00
86.50
76.00
87.50
79.00
88.75
80.50
90.75
1.10
72.00
82.75
75.00
84.50
76.00
87.00
76.00
88.00
80.50
89.75
1.20
72.00
82,75
73.00
82.75
75.00
86.50
76.00
87.50
79.00
88.75
1.40
68,50
82,75
70.02
82.75
72.14
82.75
73.71
86.50
75.27
87.50
National Daily Direct Prior Day Hog Report, Plant Delivered Purchase Data
LM_HG200, Fri, Feb. 17, 2012, USDA Market News Des Moines, Iowa
Econ 337, Spring 2012
Comparing Bids
Let’s say you raise hogs halfway between two
packers (so transportation costs are the same to
both packers)
Packer A offers you $65.00/cwt. live for your
hogs
Packer B offers you $82.00/cwt. carcass for your
hogs
Packer B will grade the carcasses, paying premiums
for lean carcasses (+$1.25/cwt.), but charging a
$0.75/cwt. sorting discount
You expect a dressing percentage of 75%
Econ 337, Spring 2012
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
Econ 337, Spring 2012
A
$65.00
--------65.00
-.35
$64.65
B
--$82.00
+1.25
-0.75
75
61.88
-.35
$61.53
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
Econ 337, Spring 2012
Econ 337, Spring 2012
Econ 337, Spring 2012
Value-Based Cattle Marketing
Common Ground for Targets
1. Carcass Weights
550 - 950 lbs
2. Quality Grade
> Se+ or > Ch0
3. Yield Grade
1’s and 2’s
Econ 337, Spring 2012
Carcass Merit Grid and Premium Trends
Quality
Grade
Prime
Yield Grade
3
2
1
+$$$$$ +$$$$ +$$$
Choice+ and Choiceo +$$$
ChoiceSelect
Standard
Out Cattle
Econ 337, Spring 2012
+$$$
+$$
4&5
-$$
-$$
-$$$
Base
+$$
+$$$
-$$$ -$$$$
-$$
-$
-$$$$ -$$$$ -$$$$ -$$$$
-$$$$$ -$$$$$ -$$$$$ -$$$$$
Grid Rewards & Discounts
 Base: Choice YG3 550-900 lbs.
 Quality Grade
$/cwt
 Prime:
$6.00
 Certified Angus:
$1.00
 Select
-$9.00
 Standard
-$18.00
 Other
-$30.00
Econ 337, Spring 2012
Yield Grade
1:
2:
3:
4:
5:
$/cwt
$2.00
$1.00
Par
-$15.00
-$20.00
Carcass weights $/cwt
Under 550
-$19.00
900 & up
-$19.00
Comparing Bids ($/carcass cwt)
Price in appropriate $/cwt
Base bid price
Prime
Top 2/3 Ch
Select
Yield 1&2
Off weight
3%
45%
30%
60%
3%
Transportation
Net farm gate price
A
121.00
B
121.00
-----------
+6.00
+3.50
-8.00
+2.50
-15.00
-0.65
120.35
-0.65
120.76
Bid A is a straight in the meat bid, Bid B is a valued-based bid.
Econ 337, Spring 2012
When to Sell
 Classic production function
 Optimal selling weight is where marginal costs=marginal revenue
 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
Econ 337, Spring 2012
$
MC
MR
Weight
Econ 337, Spring 2012
Market Timing
Cycles
Seasonals
Marginal costs and returns
Econ 337, Spring 2012
Econ 337, Spring 2012
Year
08
20
02
20
96
19
90
19
84
19
78
19
72
19
66
19
60
19
54
19
48
19
42
19
36
19
30
19
24
19
18
19
12
19
06
19
00
19
Million Head
All Cattle & Calves, Jan. 1 Inventory
140
130
120
110
100
90
80
70
60
50
All Cattle & Calves, By Cycle
140
130
Million Head
120
110
100
90
80
70
60
50
1
2
3
4
5
6
7
8
9
10
11
12
13
Year of Cycle
1928-1937
1967-1978
Econ 337, Spring 2012
1938-1948
1979-1989
1949-1957
1990-2003
1958-1966
2004-on
14
Econ 337, Spring 2012
Market
Year
Breeding
11
20
08
20
05
20
02
20
99
19
96
19
93
19
90
19
87
19
84
19
81
19
78
19
75
19
72
19
69
19
66
19
63
19
Million Head
60
9
55
8
50
7
45
6
40
5
Million Head
65
Hogs
10
Class web site:
http://www.econ.iastate.edu/~chart/Classes/econ337/
Spring2012/
Lab in Heady 68
Econ 337, Spring 2012