Econ 337, Spring 2014 ECON 337: Agricultural Marketing Chad Hart Associate Professor Lee Schulz Assistant Professor

Econ 337, Spring 2014 Today’s Topic Livestock Marketing Decisions

Econ 337, Spring 2014 Livestock Marketing Decisions Where to sell –Type of market –Location When to sell –Weight, grade, costs What to sell –Live or carcass –Value-based

Econ 337, Spring 2014 Where to Sell Terminal markets –Feeder cattle and fed cattle Auction markets –Feeder cattle, cull cows, fed cattle in fringe areas Direct sales –Fed cattle and hogs, feeder pigs

Econ 337, Spring 2014 Terminal Markets Also called central markets or public stockyards Facilities are owned by a stockyard company –The company charges for the use of the facilities and feed fed while they are in the stockyard –Title to the livestock does not pass to the stockyard company Charge for –Yardage, feed, insurance, selling fees –Seller receives the net amount after the charges are taken out

Econ 337, Spring 2014 Terminal Markets Exist for both feeder cattle and slaughter cattle Today there are < 30 –Compared to the 80 that existed in the 1920’s and 30’s Most are in western states Terminal markets are located near population centers and packing plants

Econ 337, Spring 2014 Auction Markets Sold by public bidding Also called local sale barns and community auctions Popular due to their convenience for buyers and open competition Of the most value to the smaller producers

Econ 337, Spring 2014 Auction Markets Yardage Feed Insurance Brand inspection Health inspection Check-off dollar Charges are based on either a percent of the selling price or a fixed fee Costs are paid by the seller

Econ 337, Spring 2014 Where to Sell Direct sales (most common) –Animals are delivered directly to the packing plant Spot or cash sales –Seller contacts buyer when ready to sell –Negotiate price and terms on each group Contract sales –Defines delivery, specification, pricing, and in some cases production practices –Common in slaughter cattle and hogs, feeder pigs

Econ 337, Spring 2014 When to Sell Classic production function –Optimal selling weight is where marginal cost = marginal revenue –The cost of the next pound = the price of the next pound –Costs increase beyond optimal selling weight 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 2014 MR MC Weight $

Econ 337, Spring 2014 Cost Quantity MC ATC AVC

Econ 337, Spring 2014 Cost Quantity MC ATC AVC P1P1 Q1Q1

Econ 337, Spring 2014 Cost Quantity MC ATC AVC P1P1 Q1Q1 P2P2 Q2Q2

Econ 337, Spring 2014 Is More Always Better? When does it make sense for me to ‘stop’ adding weight? –When it costs me more to add additional weight than it generates in additional revenue

Econ 337, Spring 2014 Feed Efficiency and Marginal Cost Near Market Weight Example

Econ 337, Spring 2014 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, feeder pigs, cull cows –Buyer stands quality risk

Econ 337, Spring 2014 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 2014 What to Sell Dressing percent –Carcass weight / live weight –Hogs approximately 73-76% –Cattle approximately 61-64% Dressing percent impacted by: –Weighing conditions –Shrink –Fat thickness –Genetics

Econ 337, Spring 2014 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 and increasingly popular for fed cattle

Econ 337, Spring 2014 Cattle Pricing Method LiveCarcassGrid Price Each Animal No Yes $ Animal Variability None High $ Packer Variability LittleModerateHigh Trucking Costs BuyerSeller

Econ 337, Spring 2014 Cattle Pricing Method LiveCarcassGrid Pricing Location Feedlot + Shrink Packing Plant Meat YieldEstimatedCarcass Weight Yield Grade Quality Grade Estimated Actual Base PriceLive Market Dressed Market Varies

Econ 337, Spring 2014 Cattle Pricing Method LiveCarcassGrid Large Discounts NoSomeYes Price Set Each Time Yes No Seller’s Knowledge Not Critical Somewhat Critical Very Critical

Econ 337, Spring 2014 Value-based Hog Marketing Base price –Formula based on another market –Negotiated before delivery Factors impacting premiums/discounts –Carcass weight, leanness Fixed (known dollar amount) Relative premiums (percent adjustment) Not USDA graded –Packer employee measures Fat-O-Meter, ruler, ultra-sound

Econ 337, Spring 2014 Purchase TypeDescription Negotiated Cash TradeCarcass-based negotiated cash market trade Swine or Pork Market FormulaFormula based on a USDA – quoted hog or pork price Other Market FormulaFormula typically based off of lean-hog futures price Other Purchase AgreementOther agreements such as feed cost, breed programs, etc. Value-based Hog Marketing

Econ 337, Spring 2014 NEGOTIATED OTHER MARKET FORMULA SWINE OR PORK MARKET FORMULA OTHER PURCHASE ARRGMENT HEAD COUNT14,01925,262132,55257,406 CARCASS BASE PRICE AVERAGE NET PRICE AVERAGE CARCASS WT AVERAGE SORT LOSS AVERAGE LEAN PERCENT NATIONAL DAILY DIRECT HOG PRIOR DAY REPORT - SLAUGHTERED SWINE Slaughter Data Barrows and Gilts (Live and Carcass Basis): 339,933

Econ 337, Spring 2014 CARCASS WEIGHT DIFFERENTIALS 145# # # # # # # # # NATIONAL DAILY DIRECT HOG PRIOR DAY HOG REPORT Plant Delivered Purchase IOWA/MINNESOTA DAILY DIRECT NEGOTIATED HOG PURCHASE MATRIX LM_HG204, USDA Market News Des Moines, Iowa

Econ 337, Spring 2014 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/ National Daily Direct Prior Day Hog Report, Plant Delivered Purchase Data LM_HG200, USDA Market News Des Moines, Iowa

Econ 337, Spring 2014 Value Range*Average* VOLUME TRANSPORTATION DELIVERY TIME BREED PORK QUALITY ASSURANCE NATIONAL WEEKLY DIRECT SWINE NON- CARCASS MERIT PREMIUM FOR WEEK * Prices reported per hundred pounds carcass basis

Econ 337, Spring 2014 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 2014 Comparing Bids Price in appropriate $/cwt AB Bid Price (live)$ Bid Price (carcass)---$82.00 Lean premium Sort discount Dressing percentage Adjusted to live Transportation Net farm gate price$64.65$61.53

Econ 337, Spring 2014 Value-Based Cattle Marketing Three factors 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 2014

Livestock Marketing Information Center Data Source: USDA-AMS, Compiled & Analysis by LMIC

Econ 337, Spring 2014

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

Econ 337, Spring 2014 Marbling = Slight Quality = Select Marbling = Small Quality = Choice - Marbling = Modest Quality = Choice 0 Marbling = Slightly Abundant Quality = Prime - USDA Quality Grades

Econ 337, Spring 2014 Carcass Merit Grid and Premium Trends

Econ 337, Spring 2014 Grid Rewards & Discounts  Base: Choice YG lbs  Quality Grade$/cwt  Prime:$6.00  Certified Angus:$1.00  Select-$9.00  Standard-$18.00  Other-$30.00 Yield Grade$/cwt 1:$2.00 2:$1.00 3:Par 4:-$ :-$20.00 Carcass weights$/cwt Under 550-$ & up-$19.00

Econ 337, Spring 2014 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.

Econ 337, Spring 2014 Marginal revenue –Added weight –More upper Choice, Choice & Prime –Fewer lights –More heavies –More Y4s (Y3.5) –Fewer Y1s + Y2s Marginal costs –Added cost of gain on every animal held Should I Feed a Few More Days?

Econ 337, Spring 2014

Estimated Steak Brand Premiums Compared to Unbranded Product, January 1, 2004, through March 31, 2009 Schulz, L.L., T.C. Schroeder, and K.L. White “Value of Beef Steak Branding: Hedonic Analysis of Retail Scanner Data.” Agricultural and Resource Economics Review 41(2):

Econ 337, Spring 2014 Class web site: Spring2014/