1. Livestock Markets 2007 BillionPer CapPriceExpImp lbs 1 lbs 2 $/cwt% 3 % 3 Beef26.465.292.615.411.6 Pork21.950.846.9414.34.4 Broilers36.185.477.5316.00.2 Turkeys5.917.681.989.30.2 1 / Billion pounds of US production 2 / Pounds consumed per person per year 2 / As a percent of production

2. Remember: Consumption is not demand!

3. Measuring consumption u Balance sheet approach Beginning inventories + Production + Imports - Exports - Ending inventory = Disappearance u Per Capita consumption = Disappearance / Population u A measure of supply rather than demand

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

9. When to sell u Classic production function Optimal selling weight is where MC=MR The cost of the next pound = the price of the next pound u Cost per pound decrease then increase with weight Costs are a function of »Genetic potential »Cost of diet »Opportunity costs of future production u Price per pound increases then decreases Weight discounts outside optimal range Fatter carcasses are discounted Adding extra weight

10. MR MC Weight $

11. When to sell u Marginal Revenue Uncertain about price if you wait to sell (price trends) Typically animals increase the portion of fat relative to muscle produced as they get heavier. There is an optimal weight range by packers »Discounts if too light or too heavy Optimal degree of “finish” »Different for hogs versus cattle »Both can be too fat

13. When to sell u MC increases at an increasing rate as the animal nears the optimal market time Function of animal efficiency related to genetics Is impacted by feed prices »For the same efficiency the MC is higher if feed is 10 cents per pound than when feed is five cents per pound.

15. When to sell u Marginal Revenue MR increases then decreases due to premiums and discounts associated with grades Is also a function of seasonal price trends that could be higher or lower

16. Average of the reported range of price discount for carcass weights.

19. When to sell u Complicated decision based on Season Current leanness and efficiency Packer buying program u Also influenced by Production schedule Cost of replacement animal

25. While are there seasonal price patterns????? u Seasonal supply driven by Production cycle that impacts »Conception »Deathloss »Cost of gain u Seasonal demand driven by Weather Holidays

26. Where to sell u Terminal markets have declined u Auction markets important when assembly is needed Feeder cattle and cull cows Growing interest in fed cattle in fringe areas u Direct sales Slaughter cattle and hogs Feeder pigs Growing in feeder cattle where source verification is important

27. Slaughter Cattle and Hogs u Direct sales most common Animals are delivered directly to the packing plant u Spot or cash market Seller contacts buyer when ready to sell Negotiate price and terms on each group u Contract market May be for one group or an ongoing agreement between buyer and seller Terms and pricing method determined ahead of marketing date

28. Negotiated Other Market Formula Swine or Pork Market Formula Other Purchase Agreement Total Wt Avg HEAD COUNT37,08323,563156,55154,891272,088 CARCASS BASE PRICE71.1963.769.5866.9568.68 AVERAGE NET PRICE72.8767.0172.2968.5371.12 LOWEST NET LOT43.7754.3146.65554.48 HIGHEST NET LOT79.8676.980.9981.4179.32 AVERAGE LIVE WT251.66264.29261.79259.21260.38 AVERAGE CARCASS WT192.23201.61197.36198.97197.42 AVERAGE SORT LOSS-1.39-1.13-1.19-0.83-1.13 AVERAGE BACKFAT0.750.770.75 AVERAGE LOIN DEPTH (LD)2.272.522.472.282.41 LOINEYE AREA (LD Converted)6.817.587.436.857.26 AVERAGE LEAN PERCENT53.6154.2354.5853.8854.29 NATIONAL DAILY DIRECT HOG PRIOR DAY REPORT - SLAUGHTERED SWINE Slaughter Data for Wednesday, August 24, 2005

29. Mandatory Price Reporting Definitions u NEGOTIATED PURCHASES Cash or spot market purchase of swine by a packer from a producer where there is an agreement on base price and a delivery day not more than 14 days after the date on which the livestock are committed to the packer. OTHER MARKET FORMULA PURCHASES The pricing mechanism is a formula price based on any market other than the market for swine, pork, or a pork product. It does include formulas based on futures or options contracts. SWINE OR PORK MARKET FORMULA PURCHASES The formula price based on a market for swine, pork, or a pork product, other than any formula purchase with a floor, window, or ceiling price, or a futures or options contract for swine, pork, or pork product.

30. Mandatory Price Reporting Definitions u OTHER PURCHASE ARRANGEMENTS This would include long term contract agreements, fixed price contracts, cost of production formulas, formula purchases with a floor, window, or ceiling price. PACKER OWNED Swine that a packer, including a subsidiary or affiliate of the packer, owns for at least 14 days immediately before slaughter. PACKER SOLD Swine that are owned by a packer, including a subsidiary or affiliate of the packer, for more than 14 days immediately before sale for slaughter; and sold for slaughter to another packer.

32. Producer Sold Hogs: Price by Purchase Type Relative to the Average Price Negotiated Other Mkt Formula Swine/pork Mkt Formula Other Purchase Arrangement 2001100%95%100%98% 200296%103%96%112% 200398%102%97%105% 2004104%91%102%99% 2005104%95%101%98% 2001: May-Dec, 2005: Jan-Aug

33. Feeder cattle sales u Live weight sales Various weight classes In general, lower $/# and heavier weights u Auction is major market Assembly function important u Video auctions u Direct trade u Premium paid for Large uniform lots Certification/verification ??????

34. Feeder pig sales u Price/head or live weight 40-60 pound classes Weaned pigs (10-12 pounds) u Primarily direct trade Rapidly declining auctions Health and stress concerns u Premiums for Large uniform, single source Genetic history

36. Feeder pig sales u Spot market price Often through a broker USDA report u Formula pricing Based on observable price Spot market Hog futures maybe corn and SBM

39. What to sell u 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

40. What to sell u 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

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

42. What to sell u 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

43. Value-based Hog Marketing u Two factors impact premiums u Carcass weight and leanness Fixed premiums (known dollar amount) Relative premiums (percent adjustment) u Not USDA graded Packer employee measures Objective measures »Fat-O-Meter, ruler, ultra-sound

44. Hog Carcass Weight Discounts Carcass WeightRange 145#-27.70-8.16 155#-27.70-5.00 165#-10.39-0.67 175#-3.400.00 185#-1.360.00 195#-0.680.00 205#0.00 215#-3.001.36 225#-5.260.00 IOWA/MINNESOTA DAILY DIRECT NEGOTIATED HOG PURCHASE MATRIX LM_HG204, Fri, Aug 26, 2005, USDA Market News Des Moines, Iowa

45. 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 62.0075.0563.5075.0065.0075.0066.0076.0066.0076.00 0.50 59.5075.0562.0075.0565.0075.0566.0075.0066.0076.00 0.60 59.5075.6062.0075.6063.5075.6065.0075.6066.0075.60 0.70 59.5075.6059.5075.6062.0075.6065.0075.6066.0075.60 0.80 57.5075.6059.5075.6062.0075.6063.5075.6066.0075.60 0.90 57.5072.1059.5072.1059.5072.5562.0073.0565.0073.80 1.00 56.5072.1057.5072.1059.5072.1062.0072.1063.5073.05 1.10 55.5067.9057.5068.0559.5069.0559.5070.2763.5071.66 1.20 55.5067.9056.5067.9057.5067.9059.5068.8762.0070.96 1.40 52.0064.0055.3464.7055.3466.0956.8667.4856.8668.87 IOWA/MINNESOTA DAILY DIRECT NEGOTIATED HOG PURCHASE MATRIX LM_HG204, Fri, Aug 26, 2005, USDA Market News Des Moines, Iowa

46. Comparing bids Price in appropriate $/cwt AB Bid Price (live)$44.50--- Bid Price (carcass)---$59.50 Lean premium---+1.25 Sort discount----.70 Dressing percentage74.574.5 Adjusted to live44.5044.73 Transportation-.85-.35 Net farm gate price$43.65$44.38

47. 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

50. Value-Based Cattle Marketing Common Ground for Targets 1. Carcass Weights550 - 950 lbs 2. Quality Grade > Se + or > Ch 0 3. Yield Grade1’s and 2’s

51. Carcass Merit Grid and Premium Trends Carcass Merit Grid and Premium Trends

52. Where are the Grid Rewards & Discounts? Where are the Grid Rewards & Discounts? Iowa Quality Beef Grid 2005 u Base: NE Wted Avg 65-80% Choice u Par: Ch YG3 =Base + $2.00 or Plant clean up which ever is greater u Quality Grade$/cwt Prime:$6.00 Certified Angus:$3.50 SelectUSDA Standard-$15.00 Commercial-$30.00 Dark Cutters-$30.00 Other-$30.00 Yield Grade$/cwt 1:$4.00 2:$3.00 3:Par 4:-$20.00 5:-$25.00 Carcass weights$/cwt Under 500-$40.00 500-549-$15.00 950-999-$8.00 1000 & up-$35.00

53. Comparing Bids ($/carcass cwt) Price in appropriate $/cwt AB Base bid price122.00121.00 Prime3%---+6.00 Top 2/3 Ch45%---+3.50 Select30%----8.00 Yield 1&260%---+2.50 Off weight3%----15.00 Transportation-.65-1.25 Net farm gate price120.35120.16 Bid A is a straight in the meat bid, Bid B is a valued-based bid.

54. Summary u When to sell is complicated Perishable, non-storable Rising cost and changing value u What to sell is complicated Understanding shrink Know what is under the hide u Where to sell Transportation Buyer programs Number of bidders

55. Making Pricing Decisions u Regardless of what, when and where to sell the farmer must decide when to price. u Typically, animals priced at delivery u Can be priced before delivery with futures or forward contracts u How to decide if to price early?

56. Price Objectives u Express cost and profit in $/cwt terms Same units as price u Start with cost of production Variable cost Total costs u Set multiple objectives Return over variable cost Return over total cost Desired profit margin

57. Cost of Production u Raised livestock Farrow to finish, Cowherd to finish Accumulate cost from birth through finish Relatively stable cost over time Impacted by input prices and production »Feed is typically 60-70% of cost »Low productivity increases the cost of those that make it to finish because the fixed costs are divided by a smaller number.

58. Cost of Production u Purchased feeder livestock Derived demand for feeder animal Highly variable price Depends upon »Expected selling price for finished animal »Feed costs

59. Objective Based Pricing Strategy 550# steer calf fed to 1200 slaughter weight Cost/hd$/cwt

60. Objective Based Pricing u Compare price objectives to price offered Basis adjusted futures Basis adjusted options floor price Forward contract price from packer Price forecast of cash prices

61. How much to pay for feeder animal u Work back from total revenue 550# steer calf fed to 1200 slaughter weight Cost/hd $/cwt

62. Breakeven Purchase Price for 550# Steers Fed Cattle Price FCOG$81$83$85$87$89 24.72119123127131136 26.72117121125129133 28.72114119123127131 30.72112116120125129 32.72110114118122126 CornWDGShayintyardother $1.75$32.00$507%$0.30$30