1. Econ 337, Spring 2014 ECON 337: Agricultural Marketing Chad Hart Associate Professor chart@iastate.edu 515-294-9911 Lee Schulz Assistant Professor lschulz@iastate.edu 515-294-3356

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

3. 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

4. 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

5. 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

6. 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

7. 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

8. 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

9. 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

10. 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?

11. Econ 337, Spring 2014 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

12. Econ 337, Spring 2014 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

13. Econ 337, Spring 2014 Feed Efficiency Example A.Steers are more efficient than heifers, i.e., 6.5 vs. 7.5 B.Holsteins are 8 – 10% less efficient than beef cattle C.Efficiency tends to decrease with time on feed

14. Econ 337, Spring 2014 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 F:G = 10.0 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

15. Econ 337, Spring 2014 Marginal Revenue (MR) Change in income from selling at a later date and it is also a moving target 1.Additional pounds to sell 2.Carcass merit and value of the cattle change with weight

16. Econ 337, Spring 2014 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

17. Econ 337, Spring 2014 17 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

18. Econ 337, Spring 2014 Optimal selling weight for beef cattle (stylized example)

19. Econ 337, Spring 2014

21. Feed Efficiency and Marginal Cost Near Market Weight Examples

22. 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

23. 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

24. 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

25. 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

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

27. 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

28. 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

29. 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

30. 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

31. Econ 337, Spring 2014 NEGOTIATED OTHER MARKET FORMULA SWINE OR PORK MARKET FORMULA OTHER PURCHASE ARRGMENT HEAD COUNT14,01925,262132,55257,406 CARCASS BASE PRICE73.1477.7272.3879.22 AVERAGE NET PRICE75.4182.1375.5781.35 AVERAGE CARCASS WT201.94211.25210.91203.51 AVERAGE SORT LOSS-1.19-1.51-1.63-0.69 AVERAGE LEAN PERCENT53.4555.9755.5655.43 NATIONAL DAILY DIRECT HOG PRIOR DAY REPORT - SLAUGHTERED SWINE Slaughter Data Barrows and Gilts (Live and Carcass Basis): 339,933

32. Econ 337, Spring 2014 CARCASS WEIGHT DIFFERENTIALS 145#-32.00-14.62 155#-30.00-9.00 165#-15.00-3.37 175#-4.002.25 185#4.00 195#0.004.50 205#0.004.50 215#0.004.25 225#-1.331.00 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

33. Econ 337, Spring 2014 Hog Carcass Price by Backfat and Loin Eye Area Hog Carcass Price by Loin Eye Area/Depth (inches) Backfat4.0/1.45.0/1.76.0/2.07.0/2.38.0/2.7 0.40 63.0079.5064.5080.5065.5081.5066.5081.0067.0081.00 0.50 60.0079.0063.0079.5065.5081.5066.0080.0067.0080.00 0.60 60.0078.5063.0079.0064.5080.5065.5081.5066.5080.00 0.70 60.0078.0060.0078.5063.0079.5064.5081.5066.0080.00 0.80 59.0077.5060.0078.0063.0079.0064.5080.5066.0081.50 0.90 59.0077.0060.0077.5060.0078.5063.0079.5065.5081.50 1.00 57.0075.0059.0077.0060.0078.0063.0079.0064.5080.50 1.10 56.0073.0059.0075.0060.0077.5060.0078.5064.5079.50 1.20 56.0070.0057.0073.0059.0077.0060.0078.0063.0079.00 1.40 52.5065.0056.0070.0057.0073.0059.0077.0060.0078.00 National Daily Direct Prior Day Hog Report, Plant Delivered Purchase Data LM_HG200, USDA Market News Des Moines, Iowa

34. Econ 337, Spring 2014 Value Range*Average* VOLUME0.00 - 0.000.00 TRANSPORTATION0.55 - 3.001.40 DELIVERY TIME0.25 - 3.000.80 BREED6.50 - 19.5713.04 PORK QUALITY ASSURANCE0.00 - 0.000.00 NATIONAL WEEKLY DIRECT SWINE NON- CARCASS MERIT PREMIUM FOR WEEK * Prices reported per hundred pounds carcass basis

35. 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%

36. Econ 337, Spring 2014 Comparing Bids Price in appropriate $/cwt AB Bid Price (live)$65.00--- Bid Price (carcass)---$82.00 Lean premium---+1.25 Sort discount----0.75 Dressing percentage ---75.0 Adjusted to live65.0061.88 Transportation-0.35-0.35 Net farm gate price$64.65$61.53

37. 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

38. 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. 2012. “Value of Beef Steak Branding: Hedonic Analysis of Retail Scanner Data.” Agricultural and Resource Economics Review 41(2): 260-273.

39. Econ 337, Spring 2014 Projected Performance at Different Days on Feed

40. Econ 337, Spring 2014

42. Value-Based Cattle Marketing Common Ground for Targets 1. Carcass Weights550 - 1000 lbs 2. Quality Grade> Se + or < Ch 0 3. Yield Grade1’s and 2’s

43. 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 1 2 4 3

44. Econ 337, Spring 2014 Carcass Merit Grid and Premium Trends

45. Econ 337, Spring 2014 Grid Rewards & Discounts  Base: Choice YG3 550-1000 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 1000 & up-$19.00

46. Econ 337, Spring 2014 Comparing Bids ($/carcass cwt) Price in appropriate $/cwt AB Base bid price121.00121.00 Prime3%---+6.00 Top 2/3 Ch45%---+3.50 Select30%----8.00 Yield 1&260%---+2.50 Off weight3%----15.00 Transportation-0.65-0.65 Net farm gate price120.35120.76 Bid A is a straight in the meat bid, Bid B is a valued-based bid.

47. 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?

48. Econ 337, Spring 2014

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

50. Econ 337, Spring 2014

53. Class web site: http://www.econ.iastate.edu/~chart/Classes/econ337/ Spring2015/