Intro to Livestock Marketing Price discovery and reporting Marketing decisions Cost of production Price objectives

Price Determination and Discovery is the broad forces of supply and demand establishing a market clearing price for a commodity. Price Discovery is the process by which buyers and sellers arrive a a specific price for a given lot of produce at a given location for a specific time period. Reading Assignment Understanding Livestock Pricing Issues

Price Determination and Price Discovery S P Pe D Q Qe

Price Discovery A human process, subject to relative bargaining power of the buyer and seller. Two stage process Evaluate S&D and Pe Estimate the price for the specific trade. Price reporting is important

Information and markets Price reporting Role of the government (public good) Collection and dissemination and timely reporting of prices that were discovered. Other private treaty buyers and sellers incorporate new information into their negotiation. Facilitates formula pricing USDA Agricultural Marketing Service http://www.ams.usda.gov/AMSv1.0

Types of Price Discovery Centralized pricing Decentralized pricing Hybrid markets Formula pricing Performance Issues “Least cost” method of price discovery Effect of the mechanism on price behavior Marketing v. pricing efficiency

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

What to sell Live weight Carcass weight (“in-the-meat”) One average price for all live pounds Carcass weight (“in-the-meat”) One average price for all carcass pounds Value-based or Grid marketing Each carcass evaluated and priced individually What are the risks and who stands them???

What to sell Dressing percent Grade DP = carcass weight / live weight Hogs 73-76%, Cattle 61-64% Impacted by: weighing conditions, shrink, fat thickness, genetics Grade Determined after slaughter Impacted by: genetics, nutrition, weight, management

Livestock and Carcass Grades Provide description efficiently Economically important traits Live animal grades: conformation Carcass grades: meat yield and eating Yield grade or percent lean are estimates of retail meat yield Quality is proxy for eating experience Cattle v. hogs

Carcass Merit Grid and Premium Trends

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 $/cwt Prime: $6.00 Certified Angus: $3.50 Select USDA 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: -$20.00 5: -$25.00 Carcass weights $/cwt Under 500 -$40.00 500-549 -$15.00 950-999 -$8.00 1000 & up -$35.00 Grids are more complicated than cash or in the meat pricing, but get closer to the true value of the animal. Different grids have different premiums and discounts to try to attract a particular type of cattle.

Carcass Merit Grid and Premium Trends Percent Lean Weight >56 54-55 52-53 <51 160-170# -$$$ -$$$$ -$$$$$ 170-185# -$ -$$ 185-205# +$$$$ +$$$ Base 205-215# +$ Over 215#

Where to sell Terminal markets have declined Auction markets important when assembly is needed Feeder cattle and cull cows Growing interest in fed cattle in fringe areas Direct sales Slaughter cattle and hogs Feeder pigs Growing in feeder cattle where source verification is important Terminal markets were located in the population centers and animals were moved to the city. Packing plants were located by the stockyards. It was better to move live animals than meat. After WWII with better roads, refrigeration, and communication the packing plants located near the production of livestock. It become more efficient to move meat to the people rather than move livestock. Animal health is important in choosing a market for feeder animals. Auctions or centralized pricing method are rarely used for feeder pigs.

Where to sell Transportation cost Law of one price Truck size Freight rate Constant on short hauls Based on loaded mile on longer distance Law of one price

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 Livestock marketing is complicated because livestock are not storable like grain. As a result cost of production changes daily as does the value of the animal.

MC $ MR Weight

Most livestock prices follow a strong seasonal price pattern Most livestock prices follow a strong seasonal price pattern. There are times of the year when there is a high probability of higher prices in a week or two weeks. Other times of the year there is a high probability of lower prices in a week or two.

Optimal marketing weigh example

Demand considerations Demand for meat by consumers Derived demand for animal by packers Derived demand for feeder livestock by feedlots and finishers

Derived Demand S Px Pretail Pwholesale Pfarm Dretail Dwholesale Dfarm Vertical distance is the difference in price at 3 levels There is cost associated with moving from one level to the next S Px Pretail Pwholesale Pfarm Dretail Cuts of meat Carcasses Animals Dwholesale Dfarm Q Qx

Derived Demand for Pork Average retail price $/lb $2.50 Value of trim and scrap $/lb $0.10 Costs from whlse -retail $/lb -$1.00 The most retail will pay $/lb $1.60 Retail pounds per carcass 100 The most retail will pay $/head $160

Derived Demand for Hogs Wholesale carcass value $/hd $160 Value hide and offal $/hd $25 Costs to slaughter and fab $/hd -$20 The most packer will pay $/hd $165 Wholesale pounds per carcass 200 The most packer will pay $/lb $.825

Derived Demand for Feeder Pig Slaughter value $/hd $165 Feed cost per $/hd -$85 Non-feed variable cost $/hd -$25 Fixed cost $/hd -$20 Most finisher will pay $/hd $35

Cost of Production Quantity of inputs Price of inputs Production efficiency Influenced by management Relatively stable Price of inputs Market prices Highly variable

Cost of Production Raised livestock Purchased feeder livestock Accumulate cost from birth Relatively stable cost over time Impacted by input prices and production Purchased feeder livestock Start with purchase cost of feeder animal Highly variable

Cost of Production Budgets Accumulate costs Planning tool Estimate input quantities and price How to price inputs??? Accumulate costs Divide by selling weight to put cost in the same units as selling price

Budgeting

Objective Based Pricing Strategy Cost/hd $/cwt http://www.extension.iastate.edu/Publications/FM1815.pdf If the farmer offered $80/cwt it would pay for the animal and market prices for feed and operating costs, but not labor and fixed cost. At $84/cwt he would know that it would cover all his cost up through total fixed cost, but not leave much profit. Any price over $86/cwt would meet his profit objective of $25/head. 550# steer calf fed to 1200 slaughter weight

How much to pay for feeder animal Work back from total revenue $/cwt Cost/hd This is a exercise to do before buying the feeder animal to determine how much to pay given the current market conditions. Interest cost on the feeder animal depends on the price of the feeder animal, but can be estimated. Each category of animals that have different weight and efficiency will need their own caculation. 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 30.72 112 116 120 32.72 110 118 122 126 Corn WDGS hay int yard other $1.75 $32.00 $50 7% $0.30 $30 A simple price grid with breakeven purchase price as a function of feed cost of gain (FCOG) and fed cattle selling price.

Summary Marketing decisions: what, when, where Derived demand Cost of production Budgeting and estimates Marginal costs at marketing time Next time Homework on cost of production Prepare for futures, options and insurance