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

2. Livestock Marketing Decisions

3. Livestock Marketing Decisions
Where to sell
Type of market
Location
When to sell
Weight, grade, costs
What to sell
Live or carcass
Value-based

4. Where to Sell Important Market Functions
Assembly function – a large number of small farms
Feeder cattle
Cull cows
Sorting function
Various frame, grade, and condition
Various weight classes
Intended use/destination

5. Where to Sell Terminal markets Auction markets
Feeder cattle and fed cattle
Auction markets
Feeder cattle, cull cows, fed cattle in fringe areas
Direct sales (including private treaty)
Breeding stock, fed cattle and hogs, feeder pigs
Hybrid markets
Becoming more common for livestock in general

6. 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

8. 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

9. Auction Markets Sold by public bidding.
Also called local sale barns and community auctions.
Livestock collected at auction facility and presented to buyers
Popular due to their convenience for buyers and open competition.
Of the most value to the smaller producers.
Requires minimal marketing on part of producer.
Seller pays commission for this service.

10. 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

12. Direct (Private Treaty) Sales
Livestock producers negotiate sale with downstream customer.
i.e., cow-calf operator to backgrounder, feedlot to packer, seedstook to commercial cow-calf operator
Potential to save on commission.
Price discovery is more challenging and must be negotiated (private treaty).
Terms and pricing method determined ahead of marketing date (direct sales).
Allows for relationships to build.

13. Hybrid Markets Electronic (internet) markets Becoming more common
Livestock usually videoed at farm
Eliminates transport to auction location and exposure risks
Can be shipped directly to buyer
More uncertainty about weight, quality, etc.
Electronic (internet) markets
Centralized pricing
Decentralized product movement
Examples
Superior Livestock Auction
Showpig.com 13

14. 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? 14

15. Using Marginal Concepts
Profit-maximizing level of input can be found by examining marginal changes in costs and revenues.
Marginal cost is the additional cost of producing that additional unit of output.
Marginal revenue is the change in total revenue from selling one more unit of output.

16. Marginal Cost (MC)
What is often talked about: average cost of gain for the entire feeding period
Important for marketing decision: marginal cost as animal approaches market weight
The average cost of gain changes slowly, but the marginal cost of gain changes rapidly

17. Basic Fed Cattle Feed Efficiency (MC) Facts
Steers are more efficient than heifers, i.e., 6.5 vs. 7.5.
Holsteins are 8 – 10% less efficient than beef cattle.
Efficiency tends to decrease with time on feed.

18. Marginal Cost (stylized example)
700 to 1,200 lbs
Average F:G = 6.25
Last 50 lbs
Marginal F:G = 8.0
By 1,300 lbs
Marginal F:G = 10.0
F:G = 10.0
Ration = $100/ton ($0.05/lb)
$0.50/lb of gain
Ration = $200/ton ($0.10/lb)
$1.00/lb of gain
* Selling the last lb for $0.90 made sense with $100/ton rations, but not with $200/ton rations
Marginal cost changes with F:G and feed price

19. Additional pounds to sell
Marginal Revenue (MR)
Change in income from selling at a later date and it is also a moving target.
Additional pounds to sell
Carcass merit and value of the livestock change with weight

20. Should I Feed a Few More Days?
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

21. Other Factors
In addition to feed, interest and out-of-pocket yardage cost (cattle) should also be included.
For small delays in marketing, i.e., a week, interest is often insignificant
If pen space is not needed immediately or a daily yardage is not charged, the out-of-pocket yardage charge may be small.

22. The Decision Rule
MR = MC
The decision rule, MR = MC, leads to the profit- maximizing point .
When does it make sense for me to ‘stop’ feeding?
When it costs me more to add additional lbs than it generates in additional revenue.

23. Optimal selling weight for beef cattle (stylized example)

24. Fed Cattle Pricing Process
Feedlots will typically offer various groups for sale
Processors will have buyers who look at and bid on slaughter cattle
They are estimating quality as best as they can
How do you bid in this situation?

25. What to Sell Fed cattle are typically sold in one of 3 ways
Live weight – price agreed upon for slaughter steer live weight (on the hoof)
Carcass weight – price is agreed upon, but based on carcass weight
Grid Pricing – base price is agreed upon and premiums and discounts are taken at slaughter based on quality and yield grade

26. 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
Live weight x price = revenue

27. 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
Seller (feedlot) stands risk of low dressing percentage (e.g., genetics, trimming, and condemnation)
Buyer (packer) bears risk of poor quality
Price will reflect an estimation of quality by the buyer
Common for fed cattle in Midwest
Carcass weight x price = revenue
Weighing conditions not a factor for carcass weight sales. 27

28. Data Source: USDA-AMS
Livestock Marketing Information Center

29. Data Source: USDA-AMS
Livestock Marketing Information Center

30. Data Source: USDA-AMS
Livestock Marketing Information Center

31. Dressing Percentage Percent dressed weight of live weight
Dressed weight (hanging weight)
After removal of head, hide, etc.
Impacted by weighing conditions, shrink, fat thickness, genetics
Typically 60-64% for most cattle
Example: 1350 lb steer dresses 841 lbs
841 / 1350 = 62.3% dressing percentage
If live slaughter steers prices are $135 per cwt, what is the comparable carcass price?
Assume 62% dress

32. Price Conversions
$135 live price / 0.62 (expected dressing percentage = $ carcass equivalent
$225 carcass price X 0.62 (expected dressing percentage) = $ live equivalent

33. What is shrink? Shrink = weight loss
And typically refers to weight loss during transport and / or prior to sale
Cattle will weigh less after being transported to a sale or weighing location
Ie: from farm to stockyards
May help to think of this as actual shrink – the weight that is actually lost

34. What is a “pencil shrink”?
“Pencil shrink” – a percentage shrink applied to weight to account for this weight loss
For example – cattle purchased and weighed directly “on the farm” vs. cattle hauled, weighed, and sold at stockyards
Sometimes buyers may want a “pencil shrink” to adjust weight downward
Typically if cattle are weighed on farm
2% is very common

35. What to Sell Value-based (grid) 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

36. Cattle Marketing Method
Live
Carcass
Grid
Price Each Animal No
Yes
$ Animal
Variability
None
High
$ Packer Variability
Little
Moderate
Trucking Costs
Buyer
Seller

37. Cattle Marketing Method
Live
Carcass
Grid
Pricing Location
Feedlot + Shrink
Packing Plant
Meat Yield
Estimated
Carcass Weight
Yield Grade
Quality Grade
Actual
Base Price
Live Market
Dressed Market
Varies

38. Cattle Marketing Method
Live
Carcass
Grid
Large Discounts No
Some
Yes
Price Set Each Time
Seller’s Knowledge
Not Critical
Somewhat Critical
Very Critical

39. Grid Pricing Base price + / - premiums and discounts = grid price
Carcass weight x grid price = revenue
Removes the uncertainty of live weight pricing
Buyers can see under the skin

40. What is the Purpose of a Grid?
To shift quality risk from packer to producer
To allow for targeting of certain types of cattle
Different types of programs have different grids
Quality based grids, yield based grids
Laura’s lean has a very different grid

41. What determines price on a grid?
Four factors impact premiums
Hot carcass weight
Usually around 62% of live weight
Often discounts for large and small
2. Quality Grade Distribution (USDA Grader)
Prime, Choice, Select, Standard
Based on marbling, proxy for eating experience
3. Yield Grade Distribution (USDA Grader)
1, 2, 3, 4, 5
Based on lean meat yield
4. Other specs:
Product safety & quality assurance
Acceptable color
Youthfulness

43. Source:

44. Quality Grades Prime – most amount of marbling, highest quality Choice
Select
Standard – least amount of marbling, lowest quality

45. Which steak would you rather eat?B or

46. USDA Select
Select (Sl)

47. USDA Choice
Choice- (Sm)
Choice0 (Mt)
Choice+ (Md)

48. USDA Prime
Prime- (SlA)
Prime0 (MdA)

51. Yield Grades
YG 1 – highest expected yield of retail cuts, most desirable
YG 2
YG 3
YG 4
YG 5 – lowest expected yield of retail cuts, least desirable

52. Yield Grade 1
Source:

53. Yield Grade 4
Source:

54. Yield Grade 5
Source:

56. Common Ground for Targets
1. Carcass Weights lbs
2. Quality Grade > Se+ or < Ch0
3. Yield Grade 1’s and 2’s

57. Carcass Merit Grid and Premium Trends

58. More on grids Choice / select spread Select discount vs. YG 4 discount
CAB and other premiums
Other discounts
Heavy carcasses, age, etc.

59. 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):

61. Data Source: USDA-AMS, Compiled by LMIC
Livestock Marketing Information Center

65. Ex: Grid Premiums & Discounts
Base: Choice YG lbs
Quality Grade $/cwt
Prime: $12.00
Certified Angus: $6.00
Select -$9.00
Standard -$24.00
“Out” cattle -$30.00
Yield Grade $/cwt
1: $6.00
2: $3.00
3: Par
4: -$10.00
5: -$15.00
Carcass weights $/cwt Under 550 -$25.00
1000 & up -$24.00 65

66. Comparing Bids ($/carcass cwt)
Price in appropriate $/cwt A B
Base bid price
Prime 20%
CAB 70%
Select 15%
Yield 1 10%
Off weight, >1000 lbs 10%
Transportation
Net farm gate price
Bid A is a straight in the meat bid, Bid B is a valued-based bid. 66

67. 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

68. Value-based Hog Marketing
Purchase Type
Description
Negotiated Cash Trade
Carcass-based negotiated cash market trade
Swine or Pork Market Formula
Formula based on a USDA – quoted hog or pork price
Other Market Formula
Formula typically based off of lean-hog futures price
Other Purchase Agreement
Other agreements such as feed cost, breed programs, etc.

72. NATIONAL DAILY DIRECT HOG PRIOR DAY REPORT - SLAUGHTERED SWINE
Slaughter Data
Barrows and Gilts (Live and Carcass Basis): 339,933
NEGOTIATED
OTHER
MARKET
FORMULA
SWINE
OR PORK
PURCHASE
ARRGMENT
HEAD COUNT
14,019
25,262
132,552
57,406
CARCASS BASE PRICE
73.14
77.72
72.38
79.22
AVERAGE NET PRICE
75.41
82.13
75.57
81.35
AVERAGE CARCASS WT
201.94
211.25
210.91
203.51
AVERAGE SORT LOSS
-1.19
-1.51
-1.63
-0.69
AVERAGE LEAN PERCENT
53.45
55.97
55.56
55.43

73. NATIONAL DAILY DIRECT HOG PRIOR DAY HOG REPORT
Plant Delivered Purchase
CARCASS WEIGHT DIFFERENTIALS
145#
-32.00
-14.62
155#
-30.00
-9.00
165#
-15.00
-3.37
175#
-4.00
2.25
185#
-1.00
4.00
195#
0.00
4.50
205#
215#
4.25
225#
-1.33
1.00
Range of discounts reported by packers to USDA by carcass weight of hogs. For example, a 175# carcass received a $2.25 premium at one packer, but a $4.00 discount at another packer.
IOWA/MINNESOTA DAILY DIRECT NEGOTIATED HOG PURCHASE MATRIX
LM_HG204, USDA Market News Des Moines, Iowa

74. Hog Carcass Price by Backfat and Loin Eye Area
Hog Carcass Price by Loin Eye Area/Depth (inches)
Backfat
4.0/1.4
5.0/1.7
6.0/2.0
7.0/2.3
8.0/2.7
0.40
63.00
79.50
64.50
80.50
65.50
81.50
66.50
81.00
67.00
0.50
60.00
79.00
66.00
80.00
0.60
78.50
0.70
78.00
0.80
59.00
77.50
0.90
77.00
1.00
57.00
75.00
1.10
56.00
73.00
1.20
70.00
1.40
52.50
65.00
Range of prices reported by packers to USDA for a pound carcass but differing backfat thickness and Loin Eye area. For example, the range of packer bids for a hog with 0.8 inches of backfat and 6 square inch LEA was from $63.00 to $79.00, a $16.00/cwt price difference for the same hog at two different buyers.
National Daily Direct Prior Day Hog Report, Plant Delivered Purchase Data
LM_HG200, USDA Market News Des Moines, Iowa 74

75. NATIONAL WEEKLY DIRECT SWINE NON-CARCASS MERIT PREMIUM FOR WEEK
Value Range*
Average*
VOLUME
0.00
TRANSPORTATION
1.50
DELIVERY TIME
0.83
BREED
0.00 – 0.00
PORK QUALITY ASSURANCE
BETA AGONIST FREE
0.30 – 1.50
0.74
OTHER**
0.23 – 15.00
3.70
* Prices reported per hundred pounds carcass basis
** OTHER category includes: Animal Welfare, Antibiotic Free, Diet/Feed, Genetics, Meat Quality, Process Verified Program, Sow Housing

77. 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%

78. Comparing Bids Price in appropriate $/cwt A B
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

79. Class web site:
37/Spring2018/index.htm