ECON 337 Agricultural Marketing Chad Hart Associate Professor

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 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 P 1 Q 1 Econ 337, Spring 2013 Quantity

Cost MC P 2 ATC AVC P 1 Q 2 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 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) ØImportant to compare bids ØNot 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 High Little Moderate High Buyer Seller

Cattle Pricing Method Live Pricing Feedlot + Location Shrink Meat Yield Estimated Quality Estimated Grade Base Price Live Market Econ 337, Spring 2013 Carcass Grid Packing Plant Carcass Weight Estimated Packing Plant Yield Grade Actual Dressed Market Varies

Cattle Pricing Method Live Carcass Grid Large Discounts No Some Yes Price Set Each Time 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 based on a USDA – quoted hog or pork price Other Market 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_HG 204, 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_HG 200, 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 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 * 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

Livestock Marketing Information Center Data Source: USDA-AMS, Compiled & Analysis by LMIC Econ 337, Spring 2013

Econ 337, Spring 2013

Value-Based Cattle Marketing Common Ground for Targets 1. Carcass Weights 550 - 1000 lbs 2. Quality Grade > Se+ or < Ch 0 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 = Choice 0 Econ 337, Spring 2013 3 Marbling = Small Quality = Choice-

Carcass Merit Grid and Premium Trends Econ 337, Spring 2013

Grid Rewards & Discounts Ø Base: Choice YG 3 550 -1000 lbs Ø Quality Grade $/cwt Ø Prime: $6. 00 Ø Certified Angus: $1. 00 Ø Select -$9. 00 Ø Standard -$18. 00 Ø 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 Y 4 s (Y 3. 5) – Fewer Y 1 s + Y 2 s 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. 02 4. 95 4. 69 4. 47 4. 19 4. 12 4. 06 4. 03 3. 77 3. 72 3. 62 3. 54 3. 52 3. 47 3. 41 3. 36 3. 34 3. 31 2. 91 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/econ 337/ Spring 2013/ Econ 337, Spring 2013