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For Updated Livestock Marketing Information Visit the K-State Livestock & Meat Marketing Web Site www.agecon.ksu.edu/livestock.

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Presentation on theme: "For Updated Livestock Marketing Information Visit the K-State Livestock & Meat Marketing Web Site www.agecon.ksu.edu/livestock."— Presentation transcript:

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2 For Updated Livestock Marketing Information Visit the K-State Livestock & Meat Marketing Web Site

3 K-State Research & Extension Dealing With Market Consolidation James Mintert, Ph.D. Professor & Extension Ag. Economist, Livestock Marketing Dept. of Agricultural Economics Kansas State University

4 K-State Research & Extension “This squall between the packers and the producers of this country ought to have blown over forty years ago, but we still have it on our hands…” Senator John B. Kendrick of Wyoming (1919)

5 K-State Research & Extension Concentration Has Increased Dramatically steer and heifer slaughter plants with capacity greater than 50,000 head Slaughtered a total of 22.4 million head 5 plants slaughtering more than 500,000 head, accounted for 15% of slaughter

6 K-State Research & Extension Concentration Has Increased Dramatically steer and heifer slaughter plants with capacity greater than 50,000 head Slaughtered a total of 26.7 million head 14 plants slaughtering more than 1,000,000 head, accounted for 67% of slaughter Average slaughter in large plants nearly doubled from 1976 to 1998

7 K-State Research & Extension Concentration Has Increased Dramatically 1976 Steer & slaughter of four largest firms equivalent to 25% of total 1998 Steer & slaughter of four largest firms equivalent to 80% of total

8 K-State Research & Extension Concentration Driven By Cost Considerations Historically, gross profit margins have been about the same for all major meat packers Differences in profitability across firms was attributable to differences in costs Low cost firms came out on top Economies of size in slaughtering and fabrication were very large (Sersland, Duewer & Nelson; McDonald; Paul)

9 K-State Research & Extension While concentration was increasing, beef demand was declining

10 K-State Research & Extension Plotting Inflation Adjusted Price vs. Per Capita Consumption Provides A Picture of Beef Demand

11 K-State Research & Extension Declining Demand Has Plagued The Beef Industry For 20 Years Beef Demand Declined Precipitously During The 1980’s

12 K-State Research & Extension Declining Demand Has Plagued The Beef Industry For 20 Years Demand Continued To Decline During the 1990’s

13 K-State Research & Extension Best News In Beef Industry In 20 Years

14 K-State Research & Extension Demand Showed Signs of Strengthening In 1999, 2000 & Again In 2001

15 K-State Research & Extension Another Look At Demand Compute a demand index The index accounts for changes in beef quantity The index relates current beef prices to prices expected if demand was held constant at some prior year’s level

16 K-State Research & Extension Beef Demand Is Improving Retail Choice Beef Demand Increased 5.3% during 2002

17 K-State Research & Extension Changing Marketing Methods Increase in plant size Increase in firm size & desire to deliver products consumers want Led to change in marketing methods –Declining share of cash sales –Increasing share of contract sales

18 K-State Research & Extension Concentration Among Food Retailers Is Also Taking Place 26.5%

19 K-State Research & Extension Big Supermarkets Dominate The Retail Food Landscape

20 K-State Research & Extension Where Are We Headed? Lower costs encouraged growth of large plants Lower costs, procurement, marketing and food safety advantages have all encouraged growth of large firms Procurement requirements & desire to market more consistent products are encouraging vertical integration

21 K-State Research & Extension Vertically Coordinated Supply Chains Cattle feeders need to consider how to fit in to a supply chain with more vertical coordination Alliances offer the opportunity to reap some of the benefits of a vertically coordinated supply chain Consider how you market your cattle –How desirable are your cattle? –Will they be in demand in the future?

22 K-State Research & Extension Cattle Valuation Methods Live Weight Pricing 1.Start with est’d. boxed beef price 2.Adjust for est’d. quality of cattle in pen 3.Convert to live weight: multiply by est’d. dress. % 4.Add est’d. by-product value 5.Subtract processing costs & profit target 6.Result: Live weight bid price

23 K-State Research & Extension Cattle Valuation Methods Dressed Weight Pricing 1.Start with est’d. boxed beef price 2.Adjust for est’d. quality of cattle in pen 3.No Need To Est. Dressing % Since Paying On Dressed Wt. 4.Add est’d. by-product value 5.Subtract processing costs & profit target 6.Result: Dressed weight bid price

24 K-State Research & Extension Live Weight vs. Dressed Weight Pricing Dressed weight pricing reduces buyer uncertainty Buyer’s risk reduction leads to modest increase in prices paid for cattle priced on dressed weight vs. live weight (Feuz, Fausti, & Wagner, 1993)

25 K-State Research & Extension Grid Pricing Another evolution in cattle pricing –Matrix of price discounts and premiums –Each animal fits within a particular “grid” Instead of estimating cattle quality prior to slaughter, cattle are valued based on actual cattle quality after slaughter Result –Higher quality cattle receive higher prices –Lower quality cattle receive lower prices

26 K-State Research & Extension Why Is A More Accurate Pricing System Desirable? Beef demand declined during 1980s and most of 1990s Industry needs to do a better job of providing consumers what they want Pricing cattle individually based on actual carcass characteristics is a step toward providing industry with price signals to provide customers what they want

27 K-State Research & Extension ($/cwt carcass weight) yield grade Quality Grade Prime Certified Angus Beef Choice Select Standard Dark Cutters, Stags, Hardbones Carcass Weights Greater than 950 lbs Less than 550 lbs Example Grid

28 K-State Research & Extension ($/cwt carcass weight) yield grade Quality Grade Prime Certified Angus Beef Choice Select Standard Dark Cutters, Stags, Hardbones Carcass Weights Greater than 950 lbs Less than 550 lbs Example Grid

29 How Does A Grid Work? Start With BASE PRICE Choice, YG-3 price $118.00/cwt AttributeUSDA GridPercent Prime +$7.00 x 6.2 =+ $0.43/cwt CAB +$3.00 x $0.75/cwt Choice +$0.00 x $0.00/cwt Select -$8.50 x $1.79/cwt Standard -$17.00 x 0.7- $0.12/cwt Outs -$20.00 x 0.7- $0.14/cwt YG 1 +$2.00 x $0.03/cwt YG 2 +$1.00 x $0.33/cwt YG 3 +$0.00 x $0.00/cwt YG 4 -$14.00 x 3.6- $0.50/cwt YG 5 -$24.00 x 0.5- $0.12/cwt <550 lbs. -$20.00 x 0- $0.00/cwt >950 lbs. -$20.00 x $1.46/cwt =$115.42/cwt carcass weight

30 Value of Managing Cattle Attributes AttributeUSDA GridPercent Prime +$ CAB +$ Choice +$ Select -$ Standard -$ Outs -$ YG 1 +$ YG 2 +$ YG 3 +$ YG 4 -$ YG 5 -$ <550 lbs. -$ >950 lbs. -$ PRICE $115.42/cwt carcass weight 186 steers on feed 147 days, ADG=3.8, Conversion=6.9, Live wt=1419lbs, 883 lb carcass, Choice, YG-3 price = $118.00/cwt

31 Value of Managing Cattle Attributes AttributeUSDA GridPercentPercent Prime +$ CAB +$ Choice +$ Select -$ Standard -$ Outs -$ YG 1 +$ YG 2 +$ YG 3 +$ YG 4 -$ YG 5 -$ <550 lbs. -$ >950 lbs. -$ PRICE $115.42/cwt $116.88/cwt $2,397 pen revenue 186 steers on feed 147 days, ADG=3.8, Conversion=6.9, 883 lb carcass, Choice, YG-3 price = $118.00/cwt

32 Value of Managing Cattle Attributes AttributeUSDA GridPercentPercent Prime +$ CAB +$ Choice +$ Select -$ Standard -$ Outs -$ YG 1 +$ YG 2 +$ YG 3 +$ YG 4 -$ YG 5 -$ <550 lbs. -$ >950 lbs. -$ PRICE $115.42/cwt $117.50/cwt $3,421 pen revenue 186 steers on feed 147 days, ADG=3.8, Conversion=6.9, 883 lb carcass, Choice, YG-3 price = $118.00/cwt

33 Value of Managing Cattle Attributes AttributeUSDA GridPercentPercent Prime +$ CAB +$ Choice +$ Select -$ Standard -$ Outs -$ YG 1 +$ YG 2 +$ YG 3 +$ YG 4 -$ YG 5 -$ <550 lbs. -$ >950 lbs. -$ PRICE $115.42/cwt $118.69/cwt $5,381 pen revenue 186 steers on feed 147 days, ADG=3.8, Conversion=6.9, 883 lb carcass, Choice, YG-3 price = $118.00/cwt Value of Managing Attributes $3.27/cwt or $28.87/head

34 K-State Research & Extension A Grid Pricing Example Grid Data AnalyzedGrid Data Analyzed steers from one herd - Carcass data collected - Valued based upon a recent grid

35 K-State Research & Extension Yield Grade Quality Grade Prime$130.80$129.20$128.40$127.00$115.00$ Choice$123.80$122.20$121.40$120.00$108.00$ Select$114.30$112.70$111.90$110.50$98.50$91.50 Standard$110.80$109.20$108.40$107.00$95.00$88.00 <550 lbs.-$15.00 >950 lbs.-$15.00 A Grid Pricing Example

36 K-State Research & Extension Unsorted Steer Carcass Data IDCARC. WT.Qual. GradeYld GrdPriceRevenue 1761CHOICE- 3.5$120.00$ SELECT 2.9$111.90$ CHOICE- 1.8$123.80$ SELECT 3.3$110.50$ CHOICE- 3.2$120.00$ SELECT 3.0$111.90$821.35

37 K-State Research & Extension Sorted Steer Carcass Data IDCARC WTQual GradeYld GradePriceRevenue 62553STANDARD1.4$110.80$ STANDARD1.4$110.80$ SELECT2.3$112.70$ SELECT1.9$114.30$ SELECT2.6$111.90$ SELECT3.4$110.50$ CHOICE-2.8$121.40$1, CHOICE-3.7$120.00$1, CHOICE-2.8$121.40$1, CHOICE-2.9$121.40$1, CHOICE2.8$121.40$1, CHOICE3.2$120.00$1, CHOICE3.2$120.00$1, worst best

38 K-State Research & Extension Large Revenue Variability Avg.=$877/head

39 K-State Research & Extension 1. Carcass Weight Problems?

40 K-State Research & Extension 2. Quality Grade Issues?

41 K-State Research & Extension 3. Yield Grade Concerns?

42 K-State Research & Extension Yield Grade Quality Grade Prime00000 Choice Select Standard20000 <550 lbs.0 >950 lbs.0 Yield Grade Quality Grade Prime$130.80$129.20$128.40$127.00$115.00$ Choice$123.80$122.20$121.40$120.00$108.00$ Select$114.30$112.70$111.90$110.50$98.50$91.50 Standard$110.80$109.20$108.40$107.00$95.00$88.00 <550 lbs.-$15.00 >950 lbs.-$15.00 A Grid Pricing Example Cattle Distribution

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47 Grid Variability Over Time Premiums and Discounts vary over time as market conditions change

48 K-State Research & Extension

49 Choice-Select Spread Follows A Seasonal Pattern

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53 Conclusions Grid pricing increases risk for producers –Increase in risk, on average, leads to increase in returns (Feuz, Fausti & Wagner) Grid pricing leads to greater price variability –Grid price variation about double live-weight price variation (Schroeder & Graff)

54 K-State Research & Extension Conclusions Grid pricing yields higher prices for cattle with –high quality grades –better yield grades & – few heavy or light carcasses Comparisons among live weight, dressed weight and grid pricing indicate that only about half of cattle receive highest price under a grid So, cattle need to be managed aggressively to “target a grid”

55 K-State Research & Extension Conclusions Factors that affect revenue per head 1.Carcass weight variability 2.Choice-Select price spread 3.Yield grade variability less important But avoid YG 4’s & 5’s So, important to manage weight & quality grade Emphasis on quality grade should depend on Choice-Select spread

56 K-State Research & Extension Conclusions Method to establish base price is important Use of plant average base prices can result in cattle sold at same time to different plants receiving different base prices Ward & Lee found base price variation resulted in $16/head revenue variation on a single day Base prices tied to plant averages are problematic

57 K-State Research & Extension Conclusions Discounts for undesirable qualities exceed premiums for desirable characteristics Example Heavy & light weight discounts YG 4’ and 5’s Hardbones & dark cutters Must manage cattle to avoid these discounts

58 K-State Research & Extension Conclusions Target Cattle With Specific Attributes to the Right Grid at the Right Time Manage cattle aggressively Market cattle before they are Y4-Y5 and have heavy carcasses Sell high quality cattle on a “Quality Grid” Sell high yielding cattle on a “Yield Grid”

59 K-State Research & Extension Essential Data For Cow-Calf Producer 1.Carcass I.D. matched with carcass weight yield grade quality grade price revenue Traced to cow and bull 2. Calf birth date, weight, sex, weaning weight, unique circumstances

60 K-State Research & Extension Questions to ask 1. Can “worst” calves be eliminated? Growing/finishing management - quick Genetics – slow 2. Can distributions of quality grade, yield grade etc. be improved? Genetics 3. Should I sort and/or target different grids? high yield grade, lower quality to a yield grid high quality, lower yield to quality grid Keep in mind long run goals

61 For Updated Livestock Marketing Information Visit the K-State Livestock & Meat Marketing Web Site


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