1. Agricultural Marketing
ECON 337:
Agricultural Marketing
Chad Hart
Assistant Professor 1

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

3. 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 and feeder pigs

4. 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
Weighing conditions not a factor for carcass weight sales. 4

5. What to Sell Dressing percent DP impacted by:
DP = carcass weight / live weight
DP hogs approximately 73-76%
DP cattle approximately 61-64%
DP impacted by:
Weighing conditions
Shrink
Fat thickness
Genetics

6. 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
Increasingly popular for fed cattle

7. Hog Carcass Weight Discounts
Range
145#
-30.00
-12.90
155#
-6.02
165#
-15.00
-2.58
175#
-3.25
2.25
185#
-1.50
4.00
195#
0.00
4.50
205#
215#
4.25
225#
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 $3.25 discount at another packer.
IOWA/MINNESOTA DAILY DIRECT NEGOTIATED HOG PURCHASE MATRIX
LM_HG204, Fri, Feb. 17, 2012, USDA Market News Des Moines, Iowa 7

8. 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
79.00
89.75
80.50
90.75
81.50
92.25
82.50
93.75
83.00
94.75
0.50
76.00
88.75
91.50
82.00
93.00
94.25
0.60
88.00
0.70
87.50
0.80
75.00
87.00
0.90
86.50
1.00
73.00
84.50
1.10
72.00
82.75
1.20
82,75
1.40
68,50
70.02
72.14
73.71
75.27
Range of prices reported by packers to USDA for a 185 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 $79.00 to $88.75, a $9.75/cwt price difference for the same hog at two different buyers.
National Daily Direct Prior Day Hog Report, Plant Delivered Purchase Data
LM_HG200, Fri, Feb. 17, 2012, USDA Market News Des Moines, Iowa 8

9. 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%

10. 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

11. Value-Based Cattle Marketing
Three factor 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

14. Value-Based Cattle Marketing
Common Ground for Targets
1. Carcass Weights lbs
2. Quality Grade > Se+ or > Ch0
3. Yield Grade 1’s and 2’s

15. Carcass Merit Grid and Premium Trends

16. 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: -$15.00
5: -$20.00
Carcass weights $/cwt Under 550 -$19.00
900 & up -$19.00
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. 16

17. Comparing Bids ($/carcass cwt)
Price in appropriate $/cwt A B
Base bid price
Prime 3%
Top 2/3 Ch 45%
Select 30%
Yield 1&2 60%
Off weight 3%
Transportation
Net farm gate price
Bid A is a straight in the meat bid, Bid B is a valued-based bid.
The producer is deciding whether to accept bid A with certainty or bid B in which he is estimating the grading percent. His actual price will depend on the actual grade which won’t be known until after the cattle are slaughtered and graded. 17

18. When to Sell Classic production function
Optimal selling weight is where marginal costs=marginal revenue
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. 18

19. MC $ MR
Weight

20. Market Timing
Cycles
Seasonals
Marginal costs and returns

21. All Cattle & Calves, Jan. 1 Inventory21 21

22. All Cattle & Calves, By Cycle22 22

23. Hogs

24. Class web site:
Lab in Heady 68