Pork Carcass Lean Value Pricing Prepared by: Dr. Davey Griffin Texas A & M University

Conversion of “Pig to Pork” $

Carcass Grading Systems Most Meat Animal Species Have a Dual Grading System That Addresses Both the Quality/Palatability of the Product as well as the Yield of Edible Lean.

Carcass Evaluation of: Lean Quality Lean Quantity

Lean Quality

Ideal Pork Quality Color Drip Loss Ultimate pH Marbling Reddish-pink < 0.5% Ultimate pH 5.6 - 6.2 Marbling Equivalent to 2.5 - 4% intramuscular fat By having an understanding of how pork quality traits develop and what processes and inputs affect the final product, the industry will be able to make strides to consistently produce high quality products that meet the demands of the wide variety of pork consumers.

Lean Quality May Be Influenced By: Genetics Nutrition On-Farm Handling Transportation Carcass Handling Stunning Many facets of the pork chain have vital roles to play in improving and maintaining the quality of pork. As described in this presentation, all inputs from the genetics of the pigs through carcass handling have impacts on the final quality of the product. Pre-Slaughter Handling

Lean Quantity

Pork Carcass Measurements Backfat Measurements: Last Lumbar Vert. Last Rib 1st Rib Carcass Length: Anterior Edge of First Rib to Anterior Edge of Aitch Bone

USDA Pork Carcass Grades Expected Yield of the Four Lean Cuts By Grade, Based on Percentages of Chilled Carcass Weight U.S. No. 1 60.4% and Over U.S. No. 2 57.4 to 60.3% U.S. No. 3 54.4 to 57.3% U.S. No. 4 Less than 54.4% U.S. Utility USDA Yield Grade Equation: (4 x Last Rib Fat Measurement) – Muscling Score NOT commonly applied in commercial operations

Percent Lean (Ribbed Carcasses) Hot carcass weight Fat depth at the tenth rib Loin eye area at the tenth rib Most accurate, but NOT commonly applied in commercial operations because most carcasses are not ribbed

Fat Free Lean Equation Pounds of Percentage Fat Free Lean = 8.5876–(21.8957 x 10th rib fat, in) +(3.0047 X LEA, in.2) +(.4650 x HCWT, lbs.) Percentage Fat Free lean = (Pounds of Fat Free Lean/ Hot Carc. Wt.)x100

Percentage Fat Free lean Typical values: 48-60% Extremely lean pigs >60% As live or carcass weight increases, what happens to fat? With heavy-weight hogs, FRAME is very important

Hog Procurement Live Cash (Spot) Market Auction Delivery to Packing Plant Hog Buying Station Few Hogs Traded on Live Cash Market 62% in 1994 17% in 2001 9% in 2007

Hogs Sold on Carcass Basis Versus Live Cash Market hogs sold on a carcass basis (%) Operation size/ 1,000 hd. mktd. 2000 2006 1-3 63 80 3-5 91 5-10 90 10-50 77 92 50-500 97 98 500+ 99 100 Source: Lawrence, John and Glenn Grimes. Production and Marketing Characteristics of U.S. Pork Producers, 2006,

Hog Procurement Marketing and Production Contracts Specifies time and quantity of hogs to be delivered Production Contract - Contractor supplies hogs Marketing Contract - Types, numbers, pricing formula are normally specified

Carcass Weight Pricing Producer Paid on a Carcass Weight Basis Dressing Percentage Is The Most Important Factor! 74% 26% 250 lbs. “Dress-Off Items” Head, Viscera, Pluck, Hair, Blood, etc. 65 lbs. 185 lbs.

Carcass Pricing Carcass pricing is heavily affected by dressing percentage Dressing percentage is affected by: Amount of fill Amount of fat Amount of muscle Amount of carcass trimming Producer is not paid if carcass is condemned

Lean Value or Carcass Merit Pricing Lean Value Pricing Lean Value or Carcass Merit Pricing Differential pricing by carcass, based on the estimated lean merit of each individual carcass Lean Merit estimation is completed by a variety of methods, but usually takes the form of a prediction equation using on-line measurements to estimate total lean. A base carcass price is established and adjusted according to the results obtained by the prediction equation The majority of lean value pricing formulas do not currently include estimates of quality.

Lean Value Pricing On-Line Methods and Measurements Ruler Invasive Optical Probe Ultrasound – Hanging Carcass Ultrasound – Entire Carcass MRI – Entire Carcass or Primals

On-Line Methods and Measurements Lean Value Pricing On-Line Methods and Measurements Ruler

Lean Value Pricing On-Line Methods and Measurements Invasive Optical Probe (Fat-O-Meater, Hennessy Grading Probe)

Lean Value Pricing On-Line Methods and Measurements Ultrasound – Hanging Carcass (Animal Ultrasound Systems CVT, UltraFom)

Lean Value Pricing On-Line Methods and Measurements Ultrasound – Entire Carcass (AutoFom)

Lean Value Pricing On-Line Methods and Measurements MRI – Entire Carcass or Primals (TOBEC)

Lean Value Pricing Merit Estimations Typically Percent Lean or Percent Wholesale Cuts derived from a formula (regression equation) Merit = 55.234 - (.4 x Fat Depth) + (6.2 x Muscle Depth) Calculated for each individual carcass (not an average)

Lean Value Pricing Caution!! Equations are only as good as the data used in deriving the equation They are an estimate (based on data), not absolute Typically varies due to differences in weight, genetic type, etc.

Lean Value Pricing Carcass merit estimates do differ from plant to plant Different equipment, different data collected, human to human differences, etc. Each processor develops their buying program (grid) to meet their product needs. It is the producer/seller’s challenge to match the right hogs with the right carcass merit program to maximize value.

Each carcass is priced individually Lean Value Pricing Each carcass is priced individually Different Plant Examples: PRICE = Base Price + Value Premium - Deductions PRICE = (Base Price x Relative Value) - Deductions

Lean Value Pricing Base Price Does Differ From Plant to Plant Each packer/plant sets it own base Base can differ from supplier to supplier, based on market forces and past history Base Price Negotiated From: Publicly reported cash or “spot” market trades Futures market price Publicly reported feed price Plant averages

Lean Value Pricing This figure indicates the premiums and discounts paid by two different packers using their lean value pricing equations. Packer A does not pay high premiums for high percent lean hogs, but also does not heavily discount those that are below the average. Packer B pays greater rewards for those hogs with a high percentage lean, but obviously has no need for the below average percent lean hogs as seen by the greater discounts. A producer who has prior information on that his/her hogs will have a high percent lean might be more likely to contract with Packer B, while a producer with no previous history of carcass results might be safer to contract with packer A.

Lean Value Pricing In this example, the packer will pay a premium for carcasses that weigh above 173 pounds until they have more than 1.1 inches of backfat at the last rib. To get a premium for carcasses between 167-173 pounds, carcasses would need to have .6 to .9 inches at the last rib. Any carcasses with more than 1.1 inches of backfat receive a discount.

Lean Value Pricing Grid carcass weight and leanness adjustments may be applied: Fixed premiums (known dollar amount) Relative premiums (percent adjustment) Carcasses are not typically USDA (third party) graded Packer employee measures Objective measures Fat-O-Meater, ruler, ultra-sound, etc.

Example Program 1 Begin with a negotiated base price and adjust according to the grid below:

Example Program 1 Begin with a negotiated base price and adjust according to the grid below: Carcass Price = $85/cwt x 1.08 = $91.80/cwt. 200 lbs. X $91.80/cwt = $183.60 Total Value Example: Base Price = $50/cwt., Carcass Wt. = 200 lbs., LR Fat = .90 in.

Example Program 2 Begin with a negotiated base price and adjust according to the grid below:

Example Program 2 Begin with a negotiated base price and adjust according to the grid below: Carcass Price = ($85/cwt + $0.00) + $1.50 = $86.50/cwt. 200 lbs. X $86.50/cwt = $173.00 Total Value Example: Base Price = $85/cwt., Carcass Wt. = 200 lbs., 10thR Fat = .90 in., LEA = 7.00 in2, %Fat-Free Lean = 51.5%.

Example Program 3 Begin with a negotiated base price and adjust according to the grid below: Fat-O-Meater % Lean Premium/Discount Carcass Wt. ≥59% $7.25 <124 ($32.06) 57-58% $5.75 124-130 ($19.84) 55-56% $4.75 131-137 ($10.68) 53-54% $3.75 138-143 ($4.58) 51-53% $2.50 144-150 ($1.52) 49-50% $1.25 151-157 Base 47-48% 158-163 45-46% ($1.25) 164-170 43-44% ($2.50) 171-177 41-42% ($3.75) 178-183 39-40% ($4.75) 184-190 ($0.76) 37-38% ($5.75) 191-196 ($2.29) 35-36% ($7.25) 197-203 ($3.81) 204-210 ($6.87)

Example Program 3 Begin with a negotiated base price and adjust according to the grid below: Fat-O-Meater % Lean Premium/Discount Carcass Wt. ≥59% $7.25 <124 ($32.06) 57-58% $5.75 124-130 ($19.84) 55-56% $4.75 131-137 ($10.68) 53-54% $3.75 138-143 ($4.58) 51-53% $2.50 144-150 ($1.52) 49-50% $1.25 151-157 Base 47-48% 158-163 45-46% ($1.25) 164-170 43-44% ($2.50) 171-177 41-42% ($3.75) 178-183 39-40% ($4.75) 184-190 ($0.76) 37-38% ($5.75) 191-196 ($2.29) 35-36% ($7.25) 197-203 ($3.81) 204-210 ($6.87) Base Price = $85.00/cwt FOM Adj. + $2.50/cwt Carc. Wt. Adj. – $3.81/cwt Carcass Price = $83.69/cwt Total Value = X 200 lbs. $167.38 Example: Base Price = $85/cwt., Carcass Wt. = 200 lbs., 10thR Fat = .90 in., LEA = 7.00 in2, %Fat-Free Lean = 51.5%.

Lean Value Pricing Summary Selling On: Live weight One average price for all live pounds Negotiated price before delivery Weighing conditions important Mud, shrink (fill, time, stress) Was most common for hogs

Lean Value Pricing Summary Selling On: Carcass weight One average price for all carcass pounds Negotiated price before delivery Dressing percent (also called yield) is extremely important! Producer stands risk of trimming and condemnation losses

Lean Value Pricing Summary Selling On: Lean Value Pricing (Grid Marketing) Each carcass evaluated and priced independently by the packer (not third party) Producer stands grading risk Base price may be negotiated or come from packer-generated formula Premiums and discounts typically determined ahead of delivery Different buyers have different systems Most market hogs are sold by some variation of this method today

Lean Value Pricing Summary Lean Value Pricing differentiates carcass merit and the producer is paid its worth to the packer. Producers must determine how best to capture relative value of the pigs produced by matching them with the most profitable pricing program (limitations due to transportation costs or other variables may also influence marketing decisions).