Livestock Marketing Decisions uWhere to sell Type of market Location uWhat to sell Live, carcass, grid uWhen to sell Weight, grade, costs

What to sell uLive 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 uCarcass 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 uDressing percent DP = carcass weight / live weight DP hogs approximately 73-76% DP cattle approximately 61-64% uDP impacted by: Weighing conditions Shrink Fat thickness Genetics

What to sell uValue-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 WeightRange 145# # # # # # # # # 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) Backfat4.0/1.45.0/1.76.0/2.07.0/2.38.0/ 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 $/cwt AB Bid Price (live)$ Bid Price (carcass)---$59.50 Lean premium Sort discount Dressing percentage Adjusted to live Transportation Net farm gate price$43.65$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 lbs 2. Quality Grade > Se + or > Ch 0 3. Yield Grade1’s and 2’s

Carcass Merit Grid and Premium Trends Carcass Merit Grid and Premium Trends

Where are the Grid Rewards & Discounts? Where are the Grid Rewards & Discounts? Iowa Quality Beef Grid 2005 uBase: NE Wted Avg 65-80% Choice uPar: Ch YG3 =Base + $2.00 or Plant clean up which ever is greater uQuality Grade$/cwt Prime:$6.00 Certified Angus:$3.50 SelectUSDA Standard-$15.00 Commercial-$30.00 Dark Cutters-$30.00 Other-$30.00 Yield Grade$/cwt 1:$4.00 2:$3.00 3:Par 4:-$ :-$25.00 Carcass weights$/cwt Under 500-$ $ $ & up-$35.00

Comparing Bids ($/carcass cwt) Price in appropriate $/cwt AB Base bid price Prime3% Top 2/3 Ch45% Select30% Yield 1&260% Off weight3% Transportation Net farm gate price Bid A is a straight in the meat bid, Bid B is a valued-based bid.

When to sell uClassic production function Optimal selling weight is where MC=MR The cost of the next pound = the price of the next pound uCost per pound decrease then increase with weight Costs are a function of »Genetic potential »Cost of diet »Opportunity costs of future production uPrice per pound increases then decreases Weight discounts outside optimal range Fatter carcasses are discounted Adding extra weight

Market timing uCycles uSeasonals uMarginal costs and returns

Biological and price cycles uCycle is a pattern that repeats itself over a period longer than a year in a relatively predictable pattern

Livestock Marketing Information Center Data Source: USDA/NASS

What causes cycles uResponse to economic signals uTime lag Psychology Biology Investment uLivestock uTree crops uLand development

Cattle Cycle and Timing uPrices are cyclical uHeifer cost impact profitability uCalf prices impact annual income uTwo alternatives Steady Size: Same number of heifers Dollar Cost Averaging: Same value of heifers

Seasonal price patterns uPatterns that repeat themselves with some degree of predictability within a year’s time frame. uDriven by supply and demand factors that are impacted by time of year Weather Holidays Input prices

How to calculate seasonal index uPick time period (number of years) uPick season period (month, quarter) uCalculate average price for season uCalculate average price over time uDivide season average by over time average price x 100

Sioux Falls Cull Cow Prices JanFebMarAprMayJunJulAugSepOctNovDecAnnual Average Mon/Yr

Using Seasonal Index to Forecast uObserve price in time t 1 P 1 uForecast price in time t 2 P 2 u Start with P 1 / I 1 = P 2 / I 2 u Then P 1 x I 2 / I 1 = P 2 uAssume that cows are selling at $50/cwt in November. What is the forecast of February?

MR MC Weight $

Cost of Production uRaised 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 uPurchased feeder livestock Derived demand for feeder animal Highly variable price Depends upon »Expected selling price for finished animal »Feed costs

Cost of production budgets uStarts with production function uIncorporates input prices uProject cost per unit sold Variable $/unit Total $/unit uhttp:// m/livestock/html/b1-21.html

Using budgets in planning uProject a breakeven “point estimate” uSensitivity analysis for key variables uBack calculate from revenue to what you can afford to pay for feeder animal uEconomic v. Financial costs

Objective Based Pricing Strategy 550# steer calf fed to 1200 slaughter weight Cost/hd$/cwt

How much to pay for feeder animal uWork back from total revenue 550# steer calf fed to 1200 slaughter weight Cost/hd $/cwt

Breakeven Purchase Price for 550# Steers Fed Cattle Price FCOG$81$83$85$87$ CornWDGShayintyardother $1.75$32.00$507%$0.30$30