ECON 337:
Agricultural Marketing
Chad Hart
Associate Professor
chart@iastate.edu
515-294-9911
Econ 337, Spring 2013
Lee Schulz
Assistant Professor
lschulz@iastate.edu
515-294-3356
Today’s Topic
Livestock Marketing
Decisions
Econ 337, Spring 2013
Livestock Marketing Decisions
• Where to sell
– Type of market
– Location
• When to sell
– Weight, grade, costs
• What to sell
– Live or carcass
– Value-based
Econ 337, Spring 2013
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
Econ 337, Spring 2013
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
Econ 337, Spring 2013
Terminal Markets
• Exist for both feeder cattle and slaughter cattle
• Today there are about 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
Econ 337, Spring 2013
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
Econ 337, Spring 2013
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
Econ 337, Spring 2013
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
Econ 337, Spring 2013
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
Econ 337, Spring 2013
$
MC
MR
Weight
Econ 337, Spring 2013
Cost
MC
ATC
AVC
Quantity
Econ 337, Spring 2013
Cost
MC
ATC
AVC
P1
Q1
Econ 337, Spring 2013
Quantity
Cost
MC
P2
ATC
P1
AVC
Q1 Q2
Econ 337, Spring 2013
Quantity
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
Econ 337, Spring 2013
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
Econ 337, Spring 2013
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
Econ 337, Spring 2013
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
Econ 337, Spring 2013
Cattle Pricing Method
Price Each
Animal
$ Animal
Variability
$ Packer
Variability
Trucking
Costs
Econ 337, Spring 2013
Live
Carcass
Grid
No
No
Yes
None
None
High
Little
Moderate
High
Buyer
Seller
Seller
Cattle Pricing Method
Pricing
Location
Meat Yield
Live
Carcass
Grid
Feedlot +
Shrink
Estimated
Packing
Plant
Carcass
Weight
Estimated
Packing
Plant
Yield
Grade
Actual
Dressed
Market
Varies
Quality
Estimated
Grade
Base Price
Live
Market
Econ 337, Spring 2013
Cattle Pricing Method
Live
Carcass
Grid
Large
Discounts
No
Some
Yes
Price Set
Each Time
Yes
Yes
No
Seller’s
Knowledge
Not
Critical
Somewhat
Critical
Very
Critical
Econ 337, Spring 2013
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
Econ 337, Spring 2013
Value-based Hog Marketing
Purchase Type
Negotiated Cash Trade
Description
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.
Econ 337, Spring 2013
NATIONAL DAILY DIRECT HOG PRIOR DAY REPORT - SLAUGHTERED
SWINE
Slaughter Data for Friday March 29, 2013 and Saturday, March 30, 2013
Barrows and Gilts (Live and Carcass Basis): 339,933
NEGOTIATED
OTHER
MARKET
FORMULA
SWINE
OR PORK
MARKET
FORMULA
OTHER
PURCHASE
ARRGMENT
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
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
HEAD COUNT
AVERAGE CARCASS WT
Econ 337, Spring 2013
NATIONAL DAILY DIRECT HOG PRIOR DAY HOG REPORT
Plant Delivered Purchase Data for Friday, March 29, 2013
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#
0.00
4.50
215#
0.00
4.25
225#
-1.33
1.00
IOWA/MINNESOTA DAILY DIRECT NEGOTIATED HOG PURCHASE MATRIX
LM_HG204, Friday, Mar. 29, 2013, USDA Market News Des Moines, Iowa
Econ 337, Spring 2013
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
81.00
0.50
60.00
79.00
63.00
79.50
65.50
81.50
66.00
80.00
67.00
80.00
0.60
60.00
78.50
63.00
79.00
64.50
80.50
65.50
81.50
66.50
80.00
0.70
60.00
78.00
60.00
78.50
63.00
79.50
64.50
81.50
66.00
80.00
0.80
59.00
77.50
60.00
78.00
63.00
79.00
64.50
80.50
66.00
81.50
0.90
59.00
77.00
60.00
77.50
60.00
78.50
63.00
79.50
65.50
81.50
1.00
57.00
75.00
59.00
77.00
60.00
78.00
63.00
79.00
64.50
80.50
1.10
56.00
73.00
59.00
75.00
60.00
77.50
60.00
78.50
64.50
79.50
1.20
56.00
70.00
57.00
73.00
59.00
77.00
60.00
78.00
63.00
79.00
1.40
52.50
65.00
56.00
70.00
57.00
73.00
59.00
77.00
60.00
78.00
National Daily Direct Prior Day Hog Report, Plant Delivered Purchase Data
LM_HG200, Fri, Mar. 29, 2013, USDA Market News Des Moines, Iowa
Econ 337, Spring 2013
NATIONAL WEEKLY DIRECT SWINE NONCARCASS MERIT PREMIUM FOR WEEK ENDING
Saturday, March 23, 2013
Value Range*
Average*
VOLUME
0.00 - 0.00
0.00
TRANSPORTATION
0.55 - 3.00
1.40
DELIVERY TIME
0.25 - 3.00
0.80
BREED
6.50 - 19.57
13.04
PORK QUALITY ASSURANCE
0.00 - 0.00
0.00
* Prices reported per hundred pounds carcass basis
Econ 337, Spring 2013
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%
Econ 337, Spring 2013
Comparing Bids
Price in appropriate $/cwt
Bid Price (live)
Bid Price (carcass)
Lean premium
Sort discount
Dressing percentage
Adjusted to live
Transportation
Net farm gate price
Econ 337, Spring 2013
A
$65.00
--------65.00
-0.35
$64.65
B
--$82.00
+1.25
-0.75
75.0
61.88
-0.35
$61.53
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
Econ 337, Spring 2013
Econ 337, Spring 2013
CHOICE MINUS SELECT BEEF PRICES
Carcass Cutout Value 600-900 Lbs., Weekly
$ Per Cwt.
25
Avg.
2007-11
20
15
2012
10
5
2013
0
JAN
APR
Livestock Marketing Information Center
Data Source: USDA-AMS, Compiled & Analysis by LMIC
Econ 337, Spring 2013
JUL
OCT
C-P-68
03/25/13
Econ 337, Spring 2013
Value-Based Cattle Marketing
Common Ground for Targets
1. Carcass Weights
550 - 1000 lbs
2. Quality Grade
> Se+ or < Ch0
3. Yield Grade
1’s and 2’s
Econ 337, Spring 2013
USDA Quality Grades
4
1
Marbling = Slight
Quality = Select
Marbling = Slightly Abundant
Quality = Prime-
2
Marbling = Modest
Quality = Choice0
Econ 337, Spring 2013
3
Marbling = Small
Quality = Choice-
Carcass Merit Grid and Premium Trends
Quality
Grade
Prime
Yield Grade
3
2
1
+$$$$$ +$$$$ +$$$
Choice+ and Choiceo +$$$
ChoiceSelect
Standard
Out Cattle
Econ 337, Spring 2013
+$$$
+$$
4&5
-$$
-$$
-$$$
Base
+$$
+$$$
-$$$ -$$$$
-$$
-$
-$$$$ -$$$$ -$$$$ -$$$$
-$$$$$ -$$$$$ -$$$$$ -$$$$$
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
Econ 337, Spring 2013
Yield Grade
1:
2:
3:
4:
5:
$/cwt
$2.00
$1.00
Par
-$15.00
-$20.00
Carcass weights $/cwt
Under 550
-$19.00
1000 & up
-$19.00
Comparing Bids ($/carcass cwt)
Price in appropriate $/cwt
Base bid price
Prime
Top 2/3 Ch
Select
Yield 1&2
Off weight
3%
45%
30%
60%
3%
Transportation
Net farm gate price
A
121.00
B
121.00
-----------
+6.00
+3.50
-8.00
+2.50
-15.00
-0.65
120.35
-0.65
120.76
Bid A is a straight in the meat bid, Bid B is a valued-based bid.
Econ 337, Spring 2013
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
Econ 337, Spring 2013
• Marginal costs
– Added cost of gain on
every animal held
Econ 337, Spring 2013
Econ 337, Spring 2013
Econ 337, Spring 2013
Estimated Steak Brand Premiums Compared to Unbranded Product,
January 1, 2004, through March 31, 2009
6.00
4.00
3.00
2.00
1.00
0.00
-1.00
-2.00
-0.34
-0.39
-0.41
-0.50
-0.85
-1.24
Dollars per Pound
5.00
5.77
5.68
5.08
5.02
4.95
4.69
4.47
4.19
4.19
4.12
4.06
4.03
3.77
3.72
3.62
3.54
3.54
3.52
3.47
3.41
3.41
3.36
3.34
3.31
2.91
2.86
2.86
2.82
2.76
2.72
2.67
2.49
2.39
2.21
2.19
2.18
2.13
2.08
1.98
1.74
1.52
1.44
1.34
1.28
1.27
1.12
0.98
0.81
0.79
0.74
0.39
0.27
0.26
0.20
0.10
7.00
-3.00
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.
Econ 337, Spring 2013
Class web site:
http://www.econ.iastate.edu/~chart/Classes/econ337/
Spring2013/
Econ 337, Spring 2013