ECON 337: Agricultural Marketing

1. 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. Livestock Marketing Decisions Today’s Topic

3. 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. 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. 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. 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

7. 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. 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. 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. 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. $ MC MR Weight

12. Cost MC ATC AVC Quantity

13. Cost MC ATC AVC P1 Q1 Quantity

14. Cost MC P2 ATC AVC P1 Q1 Q2 Quantity

15. 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

16. 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

17. 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

18. 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

19. Cattle Pricing Method

20. Cattle Pricing Method

21. Cattle Pricing Method

22. 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

23. Value-based Hog Marketing

24. 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

25. NATIONAL DAILY DIRECT HOG PRIOR DAY HOG REPORT Plant Delivered Purchase Data for Friday, March 29, 2013 IOWA/MINNESOTA DAILY DIRECT NEGOTIATED HOG PURCHASE MATRIX LM_HG204, Friday, Mar. 29, 2013, USDA Market News Des Moines, Iowa

26. Hog Carcass Price by Backfat and Loin Eye Area National Daily Direct Prior Day Hog Report, Plant Delivered Purchase Data LM_HG200, Fri, Mar. 29, 2013, USDA Market News Des Moines, Iowa

27. NATIONAL WEEKLY DIRECT SWINE NON-CARCASS MERIT PREMIUM FOR WEEK ENDING Saturday, March 23, 2013 * Prices reported per hundred pounds carcass basis

28. 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%

29. Comparing Bids Price in appropriate $/cwt A B Bid Price (live) $65.00 --- Bid Price (carcass) --- $82.00 Lean premium --- +1.25 Sort discount --- -0.75 Dressing percentage --- 75.0 Adjusted to live 65.00 61.88 Transportation -0.35 -0.35 Net farm gate price $64.65 $61.53

30. 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

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

34. 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

35. USDA Quality Grades 4 1 Marbling = Slight Quality = Select Marbling = Slightly Abundant Quality = Prime- 3 2 Marbling = Modest Quality = Choice0 Marbling = Small Quality = Choice-

36. Carcass Merit Grid and Premium Trends

37. 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

38. Comparing Bids ($/carcass cwt) Price in appropriate $/cwt A B Base bid price 121.00 121.00 Prime 3% --- +6.00 Top 2/3 Ch 45% --- +3.50 Select 30% --- -8.00 Yield 1&2 60% --- +2.50 Off weight 3% --- -15.00 Transportation -0.65 -0.65 Net farm gate price 120.35 120.76 Bid A is a straight in the meat bid, Bid B is a valued-based bid.

39. 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 • Marginal costs • Added cost of gain on every animal held

43. 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.

44. Class web site: http://www.econ.iastate.edu/~chart/Classes/econ337/Spring2013/