1. Intro to Livestock Marketing
Price discovery and reporting
Marketing decisions
Cost of production
Price objectives

2. Price Determination and Discovery
is the broad forces of supply and demand establishing a market clearing price for a commodity.
Price Discovery
is the process by which buyers and sellers arrive a a specific price for a given lot of produce at a given location for a specific time period.
Reading Assignment
Understanding Livestock Pricing Issues

3. Price Determination
and Price Discovery S P Pe D Q Qe

4. Price Discovery
A human process, subject to relative bargaining power of the buyer and seller.
Two stage process
Evaluate S&D and Pe
Estimate the price for the specific trade.
Price reporting is important

5. Information and markets
Price reporting
Role of the government (public good)
Collection and dissemination and timely reporting of prices that were discovered.
Other private treaty buyers and sellers incorporate new information into their negotiation.
Facilitates formula pricing
USDA Agricultural Marketing Service

6. Types of Price Discovery
Centralized pricing
Decentralized pricing
Hybrid markets
Formula pricing
Performance Issues
“Least cost” method of price discovery
Effect of the mechanism on price behavior
Marketing v. pricing efficiency

7. Livestock Marketing Decisions
What to sell
Live, carcass, grid
Where to sell
Type of market
Location
When to sell
Weight, grade, costs

8. What to sell Live weight Carcass weight (“in-the-meat”)
One average price for all live pounds
Carcass weight (“in-the-meat”)
One average price for all carcass pounds
Value-based or Grid marketing
Each carcass evaluated and priced individually
What are the risks and who stands them???

9. What to sell Dressing percent Grade DP = carcass weight / live weight
Hogs 73-76%, Cattle 61-64%
Impacted by: weighing conditions, shrink, fat thickness, genetics
Grade
Determined after slaughter
Impacted by: genetics, nutrition, weight, management

10. Livestock and Carcass Grades
Provide description efficiently
Economically important traits
Live animal grades: conformation
Carcass grades: meat yield and eating
Yield grade or percent lean are estimates of retail meat yield
Quality is proxy for eating experience
Cattle v. hogs

11. Carcass Merit Grid and Premium Trends

12. Where are the Grid Rewards & Discounts? Iowa Quality Beef Grid 2005
Base: NE Wted Avg 65-80% Choice
Par: Ch YG3 =Base + $2.00 or Plant clean up which ever is greater
Quality Grade $/cwt
Prime: $6.00
Certified Angus: $3.50
Select USDA
Standard -$15.00
Commercial -$30.00
Dark Cutters -$30.00
Other -$30.00
Yield Grade $/cwt
1: $4.00
2: $3.00
3: Par
4: -$20.00
5: -$25.00
Carcass weights $/cwt Under 500 -$40.00
$15.00
$8.00
1000 & up -$35.00
Grids are more complicated than cash or in the meat pricing, but get closer to the true value of the animal. Different grids have different premiums and discounts to try to attract a particular type of cattle.

13. Carcass Merit Grid and Premium Trends
Percent Lean
Weight
>56
54-55
52-53
<51 #
-$$$
-$$$$
-$$$$$ # -$
-$$ #
+$$$$
+$$$
Base # +$
Over 215#

14. Where to sell Terminal markets have declined
Auction markets important when assembly is needed
Feeder cattle and cull cows
Growing interest in fed cattle in fringe areas
Direct sales
Slaughter cattle and hogs
Feeder pigs
Growing in feeder cattle where source verification is important
Terminal markets were located in the population centers and animals were moved to the city. Packing plants were located by the stockyards. It was better to move live animals than meat. After WWII with better roads, refrigeration, and communication the packing plants located near the production of livestock. It become more efficient to move meat to the people rather than move livestock.
Animal health is important in choosing a market for feeder animals. Auctions or centralized pricing method are rarely used for feeder pigs.

15. Where to sell Transportation cost Law of one price Truck size
Freight rate
Constant on short hauls
Based on loaded mile on longer distance
Law of one price

16. When to sell Classic production function
Optimal selling weight is where MC=MR
The cost of the next pound = the price of the next pound
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
Livestock marketing is complicated because livestock are not storable like grain. As a result cost of production changes daily as does the value of the animal.

17. MC $ MR
Weight

18. Most livestock prices follow a strong seasonal price pattern
Most livestock prices follow a strong seasonal price pattern. There are times of the year when there is a high probability of higher prices in a week or two weeks. Other times of the year there is a high probability of lower prices in a week or two.

19. Optimal marketing weigh example

20. Demand considerations
Demand for meat by consumers
Derived demand for animal by packers
Derived demand for feeder livestock by feedlots and finishers

21. Derived Demand S Px Pretail Pwholesale Pfarm Dretail Dwholesale Dfarm
Vertical distance is the difference in price at 3 levels
There is cost associated with moving from one level to the next S Px
Pretail
Pwholesale
Pfarm
Dretail
Cuts of meat
Carcasses
Animals
Dwholesale
Dfarm Q Qx

22. Derived Demand for Pork
Average retail price $/lb $2.50
Value of trim and scrap $/lb $0.10
Costs from whlse -retail $/lb -$1.00
The most retail will pay $/lb $1.60
Retail pounds per carcass 100
The most retail will pay $/head $160

23. Derived Demand for Hogs
Wholesale carcass value $/hd $160
Value hide and offal $/hd $25
Costs to slaughter and fab $/hd -$20
The most packer will pay $/hd $165
Wholesale pounds per carcass 200
The most packer will pay $/lb $.825

24. Derived Demand for Feeder Pig
Slaughter value $/hd $165
Feed cost per $/hd -$85
Non-feed variable cost $/hd -$25
Fixed cost $/hd -$20
Most finisher will pay $/hd $35

25. Cost of Production Quantity of inputs Price of inputs
Production efficiency
Influenced by management
Relatively stable
Price of inputs
Market prices
Highly variable

26. Cost of Production Raised livestock Purchased feeder livestock
Accumulate cost from birth
Relatively stable cost over time
Impacted by input prices and production
Purchased feeder livestock
Start with purchase cost of feeder animal
Highly variable

27. Cost of Production Budgets Accumulate costs
Planning tool
Estimate input quantities and price
How to price inputs???
Accumulate costs
Divide by selling weight to put cost in the same units as selling price

28. Budgeting

29. Objective Based Pricing Strategy
Cost/hd
$/cwt
If the farmer offered $80/cwt it would pay for the animal and market prices for feed and operating costs, but not labor and fixed cost. At $84/cwt he would know that it would cover all his cost up through total fixed cost, but not leave much profit. Any price over $86/cwt would meet his profit objective of $25/head.
550# steer calf fed to 1200 slaughter weight

30. How much to pay for feeder animal
Work back from total revenue
$/cwt
Cost/hd
This is a exercise to do before buying the feeder animal to determine how much to pay given the current market conditions. Interest cost on the feeder animal depends on the price of the feeder animal, but can be estimated. Each category of animals that have different weight and efficiency will need their own caculation.
550# steer calf fed to 1200 slaughter weight

31. Breakeven Purchase Price for 550# Steers
Fed Cattle Price
FCOG
$81
$83
$85
$87
$89
24.72
119
123
127
131
136
26.72
117
121
125
129
133
28.72
114
30.72
112
116
120
32.72
110
118
122
126
Corn
WDGS
hay
int
yard
other
$1.75
$32.00
$50 7%
$0.30
$30
A simple price grid with breakeven purchase price as a function of feed cost of gain (FCOG) and fed cattle selling price.

32. Summary Marketing decisions: what, when, where Derived demand
Cost of production
Budgeting and estimates
Marginal costs at marketing time
Next time
Homework on cost of production
Prepare for futures, options and insurance