1. Agricultural Marketing
ECON 337:
Agricultural Marketing
Lee Schulz
Assistant Professor 1

2. Overview of the U.S. Livestock Production and Marketing System
Background on overall system
Production, consumption, trade
Basic biological / timing patterns and how they affect markets
Industries within the beef and pork sector
Cow-calf, stocker, backgrounding, feedlot, packing, retail
Farrow-to-finish, farrow-to-wean, wean-to-feeder, feeder-to-finish, farrow-to-feeder, wean-to-finish
Contract arrangements: Producer and integrator
Competition as it applies to the industries within each sector

3. Economics of Livestock Production
Competitive industry
Long-run economic profits = $0/head
Can expect average return for capital, labor, management, etc.
Average returns reflects the risk in the industry
Tremendous variance in profitability across producers
Identify key factors that drive profitability
Capitalize on them,  probability of business survival
Failing to recognize
Not Competitive → equity drain → forced to downsize or exit

4. Efficiency of the industry relative to other livestock industries
Efficiency of the industry relative to food industries outside the livestock sector
Efficiency of the industry relative to other livestock industries
Efficiency of one producer relative to others in the (e.g., beef) industry
Efficiency of production
+ Greater return on investment
+ Expansion or new participants
= Increased production
= Lower costs to consumers
= Greater consumption
Main source of long-term profitability for a producer lies in their efficiency relative to other producers

5. Data Source: USDA-NASS, Compiled by LMIC
Livestock Marketing Information Center

6. Data Source: USDA-NASS, Compiled by LMIC
Livestock Marketing Information Center

7. Data Source: USDA-NASS, Compiled & Analysis by LMIC
Livestock Marketing Information Center

8. Data Source: USDA-NASS, Compiled & Analysis by LMIC
Livestock Marketing Information Center

9. Overview of the U.S. Beef System
Cow-Calf Operations
Sell weaned calves
Stocker / Backgrounding
Sell feeder cattle
Feedlots / Finishing
Sell slaughter cattle
Packing Plant / Slaughter
Sell boxed beef
Retail / Restaurant

10. Basic Beef Definitions
Cow – mature female to produce calves
Bull – in-tact male
Calf – young cattle, typically used through weaning time
Steer – young male, no longer in-tact
Heifer- young female, prior to first calf

11. Basic Beef Definitions
Weaned calves – calves after being removed from cow
Feeder cattle – cattle ready to be placed on feed in feedlots
Fed cattle – cattle ready for harvest
Boxed beef – beef processed and ready to be sold at retail level

12. The Cow-Calf Operation
Own cows, produce weaned calves
Spring vs. fall calving
Usually weaned around 6-7 months of age
Key impacts
Weather
Production costs
Price of calves
Future beef outlook

13. CHANGE IN BEEF COWS 2008 TO 2018 (1000 Head)
-565
-169
-126
-68
-59
-54
-40
-37
-36
-32
-30
-27
-26
-19
-18 -9 -8 -6 -4 -2 -1 1 2 3 5 15 27 47 50 57 61 78 85 96
157
-565 to -26
-26 to 0
0 to 6
6 to 158
Livestock Marketing Information Center
Data Source: USDA-NASS

14. BEEF COWS THAT CALVED JANUARY 1, 2018 (1000 Head)3 5 6 7 9 10 15 46 75
102
105
174
187
203
208
215
236
238
285
296
338
365
370
397
473
483
485
501
510
536
633
660
714
809
886
910
924
970
985
1033
1497
1507
1801
1910
2131
2166
4585
0 to 174
174 to 473
473 to 924
924 to 4586
~30%
~15%
~10%
~21%
~24%
Livestock Marketing Information Center
Data Source: USDA-NASS

15. The Cow-Calf Operation
Cow-calf operations are heavily capitalized
Land, cows, equipment, etc.
Timing issues
Revenues tend to come in big chunks, expenses tend to be more spread out
Fixed cost structures can be very high!
Especially for small operations who want to do it all
Profits tend to run in cycles

16. Why do profits tend to run in cycles?

17. Data Source: USDA-NASS
Livestock Marketing Information Center

18. The two terms
Price cycles – multi-year trends in prices that result from patterns in inventory changes
Changes in inventory affect marketings, production, and price
Price seasonality – price trends within a year (January to December)
Seasonal patterns tend to repeat themselves

19. Why do we have cycles? Biology and time lags of animal production
Production levels change in response to profitability
Producers tend to be small and unable to individually affect the market

20. Steps to a Cattle Cycle
Prices are strong and producers are making nice profits, they want to expand
Heifers are held for replacements, fewer heifers on market, prices actually rise further in short-run
This amplifies the expansion signal, high prices = more expansion

21. Steps to a cattle cycle
4. Eventually, those heifers become cows and calf crops increase in size, pushing prices down, producers want to liquidate
5. More heifers come to market, pushing prices down even further
6. Eventually smaller cow herd leads to small calf crop and higher prices again
7. Go back to Step 1.

22. Time lag in cattle production
Heifer calf is born in spring 2018
She is weaned in fall 2018
She is bred in summer of 2019
She calves 1st time in spring of 2020
She weans her 1st calf in fall of 2020
Calf must still be finished and slaughtered before it truly adds to beef production

23. During expansion, we can expect
Short-term decreases in marketings as we start to expand, prices usually rise
Holding of heifers for breeding purposes leads to fewer weaned calves sold
Over time, larger breeding herd leads to more calves being sold – prices decrease in long-run

24. During liquidation, we can expect
Short-term increases in marketings, prices usually drop in short term
Hold fewer heifers for breeding – more weaned calves are sold
Over time, smaller breeding herd leads to fewer calves sold – prices rise in long-run

25. Why was expansion so slow to start in the current cattle cycle?

26. Prices vs. Profit Producers respond to profits, not prices
Historical prices are only a good indicator of expansion points if costs don’t change
Prices must increase by enough to offset rises in production costs

27. Data Source: USDA & LMIC, Compiled by LMIC
Livestock Marketing Information Center

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

29. Capital Investment Approach
Decisions are not just made year-to-year
Breeding stock is ~ 7-12 year investment
Current profit isn’t enough
Return expectations over time
How would you compare breeding stock to a CD or bond?
How have risk levels changed?
How have profit expectations changed?
How does this affect expansion?

30. A Capital Investment Approach
Breeding stock represents large up-front investment
That investment should yield positive return each year
Salvage value = value of cull cow
Return over costs each year must yield return to initial investment

31. Should I Retain/Buy Replacement Females? Yes if:
Market encourages that
Compare NPV of replacements females available to buy/retain
Objective of a cattleman is to maximize the present value of the stream of residual earnings from cows in the herd; prices and interest rates are important
(Melton, 1980; Melton and Colette, 1993)

32. Replacement Female Decision Resources
Iowa Beef Center | Ag Decision Maker
Raising versus Buying Heifers For Beef Cow Replacement
Fact sheet and video tutorial available online:
Tutorial -
Factsheet -
Net Present Value of Beef Replacement Females
Factsheet -

33. Stocker Operations
Purchase weaned calves in spring, add additional weight and sell feeder calves
Typically own calves for 5-8 months
Key impacts
Pasture growth / availability (weather)
Expected margin (feeder value minus calf cost)

34. Backgrounding Operations
Purchase weaned calves in fall, add additional weight and sell feeder calves
Typically own calves for 5-6 months
Key impacts
Feed costs
Expected margin (feeder value minus calf cost)

35. Feedlots Purchase feeder cattle, place on feed, sell slaughter cattle
Cattle usually on feed 5-7 months
Key Impacts
Expected margin (expected slaughter value minus feeder cattle cost)
Feed price

36. Number of Cattle and Calves Sold: 2012
CATTLE, ON FEED - OPERATIONS WITH SALES FOR SLAUGHTER, 2012
Rank
State
County
Value
Change
vs 2007 1 MN
STEARNS
494 NC 2 PA
LANCASTER
396 3 WI
GRANT
287 4 IA
SIOUX
272 +1 7
LYON
254 +8 16
PLYMOUTH
136
Number of Cattle and Calves Sold: 2012
CATTLE, ON FEED - SALES FOR SLAUGHTER, HEAD, 2012
Rank
State
County
Value
Change vs 2007 1 TX
DEAF SMITH
675,448 NC 2
PARMER
609,759 +2 3 CO
WELD
560,252 14 IA
SIOUX
352,485 -1 34
LYON
128,321
+11 57
PLYMOUTH
58,645 +6

37. Data Source: USDA/NASS, Census of Agriculture

38. 2,319, ,010,004 = -309,309 (-13%)
Head
Data Source: USDA/NASS, Census of Agriculture

39. Cattle Finishing in General
Very volatile industry
Risk vs. returns
Returns usually run in multi-month cycles
Profit typically higher for cattle sold in spring
Cheaper feeders in fall
Strong fed market Feb-Apr
Many feedlots purchase feeder and sell slaughter cattle themselves
Many others finish cattle on a custom basis
Why do feedlot returns sometimes look terrible for long periods?

41. Custom Feeding
Feedlots provide “finishing service” for those who own calves
Owner of calves incurs feed, vet, med, etc.
Feedlot typically is paid “yardage”
Yardage – charge to cover cost of facilities, management, etc.
Think of this as room and board

42. Typical Ownership of Custom Fed Cattle in Iowa
Only 11% of surveyed producers custom fed

43. Packing Plant / Slaughter/ Processors
Purchase slaughter cattle, harvest, and sell boxed beef
Cattle are purchased and harvested within a week or two
Some are contracted in advance
Much more concentrated, small # of large firms

44. 2013

45. Retailers / Restaurants
Purchase boxed beef and sell retail to consumers
Also concentrated, small number of large firms
Shelf-life
Sell beef, pork, poultry, etc
Collectively contribute to the bottom line
Respond to changing consumer preferences

46. Wholesale-Retail Share (56.9%), ‘15=62.1%, ‘16=60.0%, ‘17=58.9%
Farmers’ Share (29.5%), ‘15=22.7%, ‘16=21.4%, ‘17=23.1%
Farm-Wholesale Share (13.6%), ‘15=15.1%, ‘16=18.6%, ‘17=18.0%
Data Source: USDA/ERS

47. Basic Pork Definitions

48. Basic Pork Definitions

49. Farrow-to-Finish Operations
Example of vertical integration
Own sows for farrowing
Wean pigs and finish for slaughter around 6 months of age
Capital investment in facilities and breeding stock
Heavily dependent on slaughter hog market and feed prices

50. Other hog operations
Farrowing operations – sell small pigs at weaning time or after nursery
Finishing operations – specialize in feeding hogs – much like cattle feedlots

51. Data Source: USDA-NASS
Livestock Marketing Information Center

52. Data Source: USDA-NASS
Livestock Marketing Information Center

53. Data Source: USDA-NASS
Livestock Marketing Information Center

54. Data Source: USDA-NASS
Livestock Marketing Information Center

55. Data Source: USDA-NASS
Livestock Marketing Information Center

56. DECEMBER 1 BREEDING HOGS AND PIGS CHANGE 2007 - 2017 (1000 Head)
-120
-80
-60
-37
-30
-25
-20
-19
-18
-16
-15
-10 -8 -5 -3 -2 -1 1 3 5 7 16 20 30 35 50 60 65 75
-120 to -5
-5 to 0
0 to 5
5 to 76
WA& ID
DECEMBER 1 BREEDING HOGS AND PIGS CHANGE (1000 Head)
Livestock Marketing Information Center
Data Source: USDA-NASS

57. DECEMBER 1 BREEDING HOGS AND PIGS 2017 (1000 Head)1 2 3 4 5 6 10 17 22 23 25 32 35 45 48 51 80
110
120
140
150
165
190
215
260
430
450
460
530
570
900
1000
0 to 2
2 to 23
23 to 165
165 to 1001
DECEMBER 1 BREEDING HOGS AND PIGS 2017 (1000 Head)
Livestock Marketing Information Center
Data Source: USDA-NASS

58. DECEMBER 1 MARKET HOGS AND PIGS CHANGE 2007 - 2017 (1000 Head)
WA& ID
-1080
-230
-210
-167
-165
-135
-122
-110
-100
-91
-44
-33
-20
-15
-10 -8 -7 -6 -5 -3 -2 -1 1 3 30 50 65 90
130
175
185
209
235
360
830
950
1040
3480
-1100 to -33
-33 to 0
0 to 90
90 to 3481
DECEMBER 1 MARKET HOGS AND PIGS CHANGE (1000 Head)
Livestock Marketing Information Center
Data Source: USDA-NASS

59. DECEMBER 1 MARKET HOGS AND PIGS 2017 (1000 Head)1 2 3 4 6 8 11 12 21 42 47 58 83 91
112
143
154
175
212
230
255
360
460
519
600
890
1060
1130
1345
1740
1935
2710
2950
3170
3740
4820
7930
8100
21800
0 to 80
80 to 500
500 to 2500
2500 to 21801
Livestock Marketing Information Center
Data Source: USDA-NASS

61. Integrated Production
Both pork and poultry are primarily large scale vertically integrated sectors
Hogs and birds produced under contract for integrators
There are independents and small producers, but they comprise smaller share of market

63. Contract Arrangements
Producer – the individual who cares for hogs / birds
Integrator – company with contract who will market hogs / birds

64. Producer Responsibility
Operate like independent contractors
Facilities – land, builds, and maintains houses, equipment, etc.
Operating costs – utilities, supplies, labor
Monitoring and controlling health
Biosecurity – who gets in
Record keeping
Manure management (value)*

65. Integrator Role Own hogs / birds Purchase all feed
Provide technical health and nutrition consultation
Make marketing decisions
When to sell, etc.

66. Why is this Attractive? Producer? Integrator?
No market (price) risk, steady income, access to manure, etc.
Integrator?
No capital investment, guaranteed supply, etc.
Who bears the risk of rising feed prices?
Who bears the risk of decreasing output prices?

67. Trends in meat consumption
Less red meat, more poultry
Consumption is primarily a measure of production
Consumption is not demand
Demand – WTP
Consumption – heavily influenced by price

68. Data Source: USDA-NASS, Compiled & Analysis by LMIC
Livestock Marketing Information Center

70. Data Source: Bureau of Economic Analysis & USDA-ERS, Compiled by LMIC
Livestock Marketing Information Center

71. What is Demand? Critically Important, Yet Often Confused
Demand strength
Reflects consumer valuation of beef, pork, poultry, etc.
underlies total $ available for the industry
» drives prices and profitability for all

72. Example to Think About
When shopping for steak and you observe a buy-one-get-one free sale, do you ever buy more than just one steak?
The money in your wallet, the physical characteristics of the steak, etc. did not change
Yet, your “per capita consumption” of steak increased if you bought 2 rather than 1 steak
EXAMPLE OF DEMAND NOT CHANGING
» You bought more solely because of lower prices

73. What is Demand? Per Capita Consumption is NOT Demand
= (Domestic Production + Imports – Exports + Cold Storage Adjustments ) / Population
All quantity values; no prices in derivation

74. What is Beef Demand? Demand Quantity Demanded
Schedule of quantities consumers would purchase over a range of prices
Refers to the “demand curve” economist speak of
Quantity Demanded
Quantity consumers will purchase at a given price
Refers to a point on the demand curve

75. Standard Supply-Demand Diagram

76. What Does a Demand Index Tell Us?
Demand index indicates how a demand curve moves from one year to the next
Measures shifts in demand over time relative to a base year (i.e., 1990=100)
Provides no explanation for why demand may have changed
» Only indicates that changes have occurred

77. 2017: Per Capita Consumption = -0.004% (Year‐over‐Year)
Real Pork Prices = ‐1.1%
IF Real Pork Prices % = 0% Demand Change

78. Global demand growth critical for U.S. producers
2017: Exported 2.45 mil metric tons of pork & pork variety meat, $6.49 billion
2017: Equated to $53.47/head of each hog processed
2017: 26.6% of U.S. pork and variety meat production exported
2017: Exported 1.26 mil metric tons of beef & beef variety meat, $7.27 bil
2017: Equated to $286.38/hd of each steer & heifer processed
2017: 12.9% of U.S. beef & beef variety meat production exported
Data Source: USMEF

79. Data Source: USDA-ERS & USDA-FAS, Compiled and Forecasts by LMIC
Livestock Marketing Information Center

80. Data Source: USDA-ERS & USDA-FAS, Compiled and Forecasts by LMIC
Livestock Marketing Information Center

81. Data Source: USDA-ERS & USDA-FAS, Compiled and Forecasts by LMIC
Livestock Marketing Information Center

82. Data Source: USDA-ERS & USDA-FAS, Compiled and Forecasts by LMIC
Livestock Marketing Information Center

83. Data Source: USDA-ERS & USDA-FAS, Compiled and Forecasts by LMIC
Livestock Marketing Information Center

84. Data Source: USDA-ERS & USDA-FAS, Compiled and Forecasts by LMIC
Livestock Marketing Information Center

85. Data Source: USDA-ERS & USDA-FAS, Compiled and Forecasts by LMIC
Livestock Marketing Information Center

86. What types of things can affect trade?
Trade rules - regs, tariffs, subsidies, etc.
Production levels in importing and exporting countries
Demand differences between countries
Price levels
Value of the U.S. dollar

87. How Can Exchange Rates Impact Trade
A change in exchange rate works much like a change in price
Weakening U.S. dollar – price decrease for importing countries
Strengthening U.S. dollar – price increase for importing countries

88. Simple Trade Scenario Exchange rate: 1 U.S. Dollar: 5 foreign currency
Beef in U.S. costs $5 per pound
25 units foreign currency
Importing country import levels based on 25 unit price

89. Dollar Appreciates Exchange rate: 1 U.S. Dollar: 6 foreign currency
Beef in U.S. costs $5 per pound
30 units foreign currency
Importing country import levels decrease based on 30 unit price

90. Dollar Depreciates Exchange rate: 1 U.S. Dollar: 4 foreign currency
Beef in U.S. costs $5 per pound
20 units foreign currency
Importing country import levels increase based on 20 unit price

91. How do we classify industries by competition?
Perfect competition
Monopoly
Monopolistic Competition
Oligopoly

92. Competition and the Industries
Cow-calf and backgrounding are closest to perfect competition
Feedlots are still very competitive, but more concentrated than cow-calf
Packing and retailing probably closer to monopolistic competition or oligopoly

93. What do we know about Competitive Markets?
Large number of firms
Can’t affect price individually
No barriers to entry
Homogeneous products
What is profit in long-run?

94. In Competitive Markets…
Producers are price takers
Price is largely outside of their control
Economic profit is zero in long-run
Economic profit won’t persist
How do we spoil our own markets in commodity agriculture?

95. Class web site: