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 < 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. 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 Using Marginal Concepts

12. 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 Marginal Cost (MC)

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

14. 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. Change in income from selling at a later date and it is also a moving target Additional pounds to sell Carcass merit and value of the cattle change with weight Marginal Revenue (MR)

16. 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 Other Factors

17. 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 The Decision Rule

18. Optimal selling weight for beef cattle(stylized example)

21. Feed Efficiency and Marginal Cost Near Market WeightExamples

22. 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. 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. 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. 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. Cattle Pricing Method

27. Cattle Pricing Method

28. Cattle Pricing Method

29. 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. Value-based Hog Marketing

31. NATIONAL DAILY DIRECT HOG PRIOR DAY REPORT - SLAUGHTERED SWINE Slaughter Data Barrows and Gilts (Live and Carcass Basis): 339,933

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

34. NATIONAL WEEKLY DIRECT SWINE NON-CARCASS MERIT PREMIUM FOR WEEK * Prices reported per hundred pounds carcass basis

35. 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. 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

37. 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. 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. Projected Performance at Different Days on Feed

42. 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

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

44. Carcass Merit Grid and Premium Trends

45. 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. 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.

47. 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

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