Transcript Livestock Marketing

Livestock Markets 2007
Beef
Pork
Broilers
Turkeys
Billion Per Cap
lbs1
lbs2
26.4
65.2
21.9
50.8
36.1
85.4
5.9
17.6
Price
$/cwt
92.61
46.94
77.53
81.98
1/
Billion pounds of US production
2/
Pounds consumed per person per year
2/ As
a percent of production
Exp Imp
%3 %3
5.4 11.6
14.3 4.4
16.0 0.2
9.3 0.2
Retail Per Capita Meat Consumption,
Retail Pounds/year
Beef
Pork
Chicken
Turkey
Remember: Consumption is not demand!
06
20
04
20
02
20
00
20
98
19
96
19
94
19
92
19
90
19
88
19
86
19
84
19
82
19
19
80
100
90
80
70
60
50
40
30
20
10
0
Measuring consumption
 Balance
sheet approach
Beginning inventories
+ Production
+ Imports
- Exports
- Ending inventory
= Disappearance
 Per
Capita consumption = Disappearance /
Population
 A measure of supply rather than demand
US Meat Exports, Carcass Weight (Billion Lbs)
7.0
6.0
5.0
4.0
3.0
2.0
1.0
Beef
Pork
Chicken
Turkey
07
20
05
20
03
20
01
20
99
19
97
19
95
19
93
19
91
19
89
19
19
87
0.0
US Beef Trade Balance, Billion Lbs
5.0
4.0
3.0
2.0
1.0
Beef Exp
Beef Imp
07
20
05
20
03
20
01
20
99
19
97
19
95
19
93
19
91
19
89
19
19
87
0.0
Beef Imp + Net Cattle
US Pork Trade Balance, Billion Lbs.
4.0
3.0
2.0
1.0
Pork Exp
Pork Imp
Pork Imp + Net Hogs
07
20
05
20
03
20
01
20
99
19
97
19
95
19
93
19
91
19
89
19
19
87
0.0
Average Carcass Weight for US Cattle and Hogs
205
790
770
750
2007 v. 1987
Beef +17.4%
Pork +13.9%
200
195
730
190
710
185
690
Beef
Pork
07
20
05
20
03
20
01
20
99
19
97
19
95
19
19
19
19
19
93
175
91
650
89
180
87
670
Livestock Marketing Decisions
 When
to sell
• Weight, grade, costs
 What
to sell
• Live, carcass, grid
 Where
to sell
• Type of market
• Location
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
$
MC
MR
Weight
When to sell
 Marginal
Revenue
• Uncertain about price if you wait to sell (price
trends)
• Typically animals increase the portion of fat
relative to muscle produced as they get heavier.
• There is an optimal weight range by packers
» Discounts if too light or too heavy
• Optimal degree of “finish”
» Different for hogs versus cattle
» Both can be too fat
Estimated Lean Meat Yield for Pork Carcasses
by Carcass Weight
110
108
106
104
102
100
98
96
94
92
90
88
170
180
190
200
210
220
When to sell
 MC
increases at an increasing rate as the
animal nears the optimal market time
• Function of animal efficiency related to
genetics
• Is impacted by feed prices
» For the same efficiency the MC is higher if feed is 10
cents per pound than when feed is five cents per
pound.
Marginal and Average Feed to Gain Ratio by Slaughter
Weight for Market Hogs
6
5
4
3
2
1
0
230
240
250
260
Average Feed to Gain
270
280
Marginal Feed to Gain
290
When to sell
 Marginal
Revenue
• MR increases then decreases due to
premiums and discounts associated with
grades
• Is also a function of seasonal price trends
that could be higher or lower
Hog Carcass Weight Discounts ($/cwt)
$0.00
-$2.00
-$4.00
-$6.00
-$8.00
-$10.00
Average of the reported
range of price discount
for carcass weights.
-$12.00
-$14.00
-$16.00
-$18.00
-$20.00
145# 155# 165# 175# 185# 195# 205# 215# 225#
Hog Carcass Upper and Lower Price by Backfat Thickness
in Inches for 7.0 sq in Loin Eye, ISM, Aug 26, 2005
$80
$75
$70
$65
$60
$55
$50
0.40
0.50
0.60
0.70
0.80
0.90
1.00
1.10
1.20
1.40
5-Day Rolling Average Market Hog: 193.50 lb carcass, 0.75 inch back-fat, 6.90
square inch loin/2.30 inch loin depth, FFLI: 51.28%
Hog Carcass Upper and Lower Prices by Loin Eye Area for
0.7 Inches of Backfat, ISM August 26, 2005
$80
$75
$70
$65
$60
$55
$50
4
5
6
7
8
5-Day Rolling Average Market Hog: 193.50 lb carcass, 0.75 inch back-fat, 6.90
square inch loin/2.30 inch loin depth, FFLI: 51.28%
When to sell
 Complicated
decision based on
• Season
• Current leanness and efficiency
• Packer buying program
 Also
influenced by
• Production schedule
• Cost of replacement animal
SEASONAL PRICE INDEX -- UTILITY COWS
Southern Plains, 1997-2006
Index
1.15
1.10
Max.
Index
1.05
1.00
Avg.
Index
0.95
0.90
0.85
Min.
Index
0.80
Jan
Mar
May
Jul
Sep
Nov
C-P-51
07/12/07
SEASONAL PRICE INDEX -- FED STEERS
Southern Plains, 1997-2006
Index
1.20
1.15
Max.
Index
1.10
1.05
Avg.
Index
1.00
0.95
0.90
Min.
Index
0.85
Jan
Mar
May
Jul
Sep
Nov
C-P-51A
07/12/07
SEASONAL PRICE INDEX -- FEEDER STEERS
700-800 Pounds, Southern Plains, 1997-2006
Index
1.15
Max.
Index
1.10
1.05
1.00
Avg.
Index
0.95
0.90
Min.
Index
0.85
Jan
Mar
May
Jul
Sep
Nov
C-P-51B
07/12/07
SEASONAL PRICE INDEX -- STEER CALVES
500-600 Pounds, Southern Plains, 1997-2006
Index
1.15
Max.
Index
1.10
1.05
1.00
Avg.
Index
0.95
0.90
Min.
Index
0.85
Jan
Mar
May
Jul
Sep
Nov
C-P-51C
07/12/07
SEASONAL PRICE INDEX
-- SLAUGHTER HOGS
Iowa - Southern Minnesota, 1997-2006
Index
1.40
1.30
Max.
Index
1.20
1.10
1.00
0.90
Avg.
Index
0.80
0.70
0.60
Min.
Index
0.50
Jan
Mar
May
Jul
Sep
Nov
H-P-03
07/12/07
While are there seasonal price
patterns?????
 Seasonal
supply driven by
• Production cycle that impacts
» Conception
» Deathloss
» Cost of gain
 Seasonal
demand driven by
• Weather
• Holidays
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
Slaughter Cattle and Hogs
 Direct
sales most common
• Animals are delivered directly to the packing plant

Spot or cash market
• Seller contacts buyer when ready to sell
• Negotiate price and terms on each group

Contract market
• May be for one group or an ongoing agreement
between buyer and seller
• Terms and pricing method determined ahead of
marketing date
NATIONAL DAILY DIRECT HOG PRIOR DAY REPORT - SLAUGHTERED SWINE
Slaughter Data for Wednesday, August 24, 2005
Negotiated
HEAD COUNT
Other
Market
Formula
Swine or
Pork
Market
Formula
Other
Purchase
Agreement
Total Wt
Avg
37,083
23,563
156,551
54,891
272,088
CARCASS BASE PRICE
71.19
63.7
69.58
66.95
68.68
AVERAGE NET PRICE
72.87
67.01
72.29
68.53
71.12
LOWEST NET LOT
43.77
54.31
46.6
55
54.48
HIGHEST NET LOT
79.86
76.9
80.99
81.41
79.32
AVERAGE LIVE WT
251.66
264.29
261.79
259.21
260.38
AVERAGE CARCASS WT
192.23
201.61
197.36
198.97
197.42
-1.39
-1.13
-1.19
-0.83
-1.13
AVERAGE BACKFAT
0.75
0.77
0.75
0.75
0.75
AVERAGE LOIN DEPTH (LD)
2.27
2.52
2.47
2.28
2.41
LOINEYE AREA (LD Converted)
6.81
7.58
7.43
6.85
7.26
53.61
54.23
54.58
53.88
54.29
AVERAGE SORT LOSS
AVERAGE LEAN PERCENT
Mandatory Price Reporting
Definitions

NEGOTIATED PURCHASES
Cash or spot market purchase of swine by a packer from a
producer where there is an agreement on base price and a
delivery day not more than 14 days after the date on which the
livestock are committed to the packer.
OTHER MARKET FORMULA PURCHASES
The pricing mechanism is a formula price based on any market
other than the market for swine, pork, or a pork product. It does
include formulas based on futures or options contracts.
SWINE OR PORK MARKET FORMULA PURCHASES
The formula price based on a market for swine, pork, or a pork
product, other than any formula purchase with a floor, window,
or ceiling price, or a futures or options contract for swine, pork,
or pork product.
Mandatory Price Reporting
Definitions

OTHER PURCHASE ARRANGEMENTS
This would include long term contract agreements, fixed price
contracts, cost of production formulas, formula purchases with
a floor, window, or ceiling price.
PACKER OWNED
Swine that a packer, including a subsidiary or affiliate of the
packer, owns for at least 14 days immediately before slaughter.
PACKER SOLD
Swine that are owned by a packer, including a subsidiary or
affiliate of the packer, for more than 14 days immediately
before sale for slaughter; and sold for slaughter to another
packer.
Percent of U.S. Hogs Sold Through Various Pricing Arrangements, January 1999-2007*
1999 2000 2001 2002 2003 2004 2005 2006
2007
Hog or meat market
formula
Other market
formula
Other purchase
arrangement
44.2
47.2
54
44.5
41.4
41.4
39.9
41.8
38.3
3.4
8.5
5.7
11.8
5.7
7.2
10.3
8.8
8.5
14.4
16.9
22.8
8.6
19.2
20.6
15.4
16.6
15.2
2.1
2.2
2.1
2.4
2.6
6.7
16.4
18.1
17.1
21.4
20
22.7
16.7
13.5
11.6
10.6
10.2
8.6
Packer-sold
Packer-owned
Negotiated - spot
35.8
25.7
17.3
Producer Sold Hogs: Price by Purchase Type
Relative to the Average Price
Negotiated
Other Mkt
Formula
Swine/pork
Mkt Formula
Other
Purchase
Arrangement
2001
100%
95%
100%
98%
2002
96%
103%
96%
112%
2003
98%
102%
97%
105%
2004
104%
91%
102%
99%
2005
104%
95%
101%
98%
2001: May-Dec, 2005: Jan-Aug
Feeder cattle sales
 Live
weight sales
• Various weight classes
• In general, lower $/# and heavier weights
 Auction
is major market
• Assembly function important
 Video
auctions
 Direct trade
 Premium paid for
• Large uniform lots
• Certification/verification ??????
Feeder pig sales
 Price/head
or live weight
• 40-60 pound classes
• Weaned pigs (10-12 pounds)
 Primarily
direct trade
• Rapidly declining auctions
• Health and stress concerns
 Premiums
for
• Large uniform, single source
• Genetic history
Share of Reported Pig Sales by Weight
70%
60%
50%
40%
30%
20%
10%
0%
2000
2001
2002
EW
40
2003
50
2004
Feeder pig sales
 Spot
market price
• Often through a broker
• USDA report
 Formula
pricing
• Based on observable price
• Spot market
• Hog futures maybe corn and SBM
USDA Reported Pig Sales by Formula or Cash Prices
100%
90%
80%
70%
60%
50%
40%
30%
20%
10%
0%
EW10
40
45
Formula
50
Cash
55
All
USDA Reported Cash and Formula Prices for 40# Pigs
$90
$80
$70
$60
$50
$40
$30
$20
$10
Formula
Cash
Apr-05
Feb-05
Dec-04
Oct-04
Aug-04
Jun-04
Apr-04
Feb-04
Dec-03
Oct-03
$-
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 and feeder pigs
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
What to sell
 Dressing
percent
• DP = carcass weight / live weight
• DP hogs approximately 73-76%
• DP cattle approximately 61-64%
 DP impacted
•
•
•
•
by:
Weighing conditions
Shrink
Fat thickness
Genetics
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
Increasingly popular for fed cattle
Value-based Hog Marketing
 Two
factors impact premiums
 Carcass weight and leanness
• Fixed premiums (known dollar amount)
• Relative premiums (percent adjustment)
 Not
USDA graded
• Packer employee measures
• Objective measures
» Fat-O-Meter, ruler, ultra-sound
Hog Carcass Weight Discounts
Carcass Weight
145#
155#
165#
175#
185#
195#
205#
215#
225#
Range
-27.70
-27.70
-10.39
-3.40
-1.36
-0.68
0.00
-3.00
-5.26
-8.16
-5.00
-0.67
0.00
0.00
0.00
0.00
1.36
0.00
IOWA/MINNESOTA DAILY DIRECT NEGOTIATED HOG PURCHASE MATRIX
LM_HG204, Fri, Aug 26, 2005, USDA Market News Des Moines, Iowa
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
62.00
75.05
63.50
75.00
65.00
75.00
66.00
76.00
66.00
76.00
0.50
59.50
75.05
62.00
75.05
65.00
75.05
66.00
75.00
66.00
76.00
0.60
59.50
75.60
62.00
75.60
63.50
75.60
65.00
75.60
66.00
75.60
0.70
59.50
75.60
59.50
75.60
62.00
75.60
65.00
75.60
66.00
75.60
0.80
57.50
75.60
59.50
75.60
62.00
75.60
63.50
75.60
66.00
75.60
0.90
57.50
72.10
59.50
72.10
59.50
72.55
62.00
73.05
65.00
73.80
1.00
56.50
72.10
57.50
72.10
59.50
72.10
62.00
72.10
63.50
73.05
1.10
55.50
67.90
57.50
68.05
59.50
69.05
59.50
70.27
63.50
71.66
1.20
55.50
67.90
56.50
67.90
57.50
67.90
59.50
68.87
62.00
70.96
1.40
52.00
64.00
55.34
64.70
55.34
66.09
56.86
67.48
56.86
68.87
IOWA/MINNESOTA DAILY DIRECT NEGOTIATED HOG PURCHASE MATRIX
LM_HG204, Fri, Aug 26, 2005, USDA Market News Des Moines, Iowa
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
A
$44.50
------74.5
44.50
-.85
$43.65
B
--$59.50
+1.25
-.70
74.5
44.73
-.35
$44.38
Value-Based Cattle Marketing
Three factor 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
Percent of Beef Grading Prime, Choice, or Select
80%
70%
60%
50%
40%
30%
20%
10%
Prime
Choice
Select
J-05
J-04
J-03
J-02
J-01
J-00
J-99
J-98
J-97
J-96
J-95
0%
Beef Yield Grade Percentages
60%
50%
40%
30%
20%
10%
YG 1
YG 2
YG 3
YG 4+5
J-05
J-04
J-03
J-02
J-01
J-00
J-99
J-98
J-97
J-96
J-95
0%
Value-Based Cattle Marketing
Common Ground for Targets
1. Carcass Weights
550 - 950 lbs
2. Quality Grade
> Se+ or > Ch0
3. Yield Grade
1’s and 2’s
Carcass Merit Grid and Premium Trends
Quality
Grade
Prime
+
Yield Grade
1
2
3
+$$$$$ +$$$$ +$$$
o
Choice and Choice
ChoiceSelect
Standard
Out Cattle
+$$$
+$$$
+$$
+$$$ +$$ Base
-$
-$$
-$$$
-$$$$ -$$$$ -$$$$
-$$$$$ -$$$$$ -$$$$$
4&5
-$$
-$$
-$$$
-$$$$
-$$$$
-$$$$$
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
• Prime:
• Certified Angus:
• Select
• Standard
• Commercial
• Dark Cutters
• Other
$/cwt
$6.00
$3.50
USDA
-$15.00
-$30.00
-$30.00
-$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
500-549
-$15.00
950-999
-$8.00
1000 & up -$35.00
Comparing Bids ($/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
122.00
B
121.00
-----------
+6.00
+3.50
-8.00
+2.50
-15.00
-.65
120.35
-1.25
120.16
Bid A is a straight in the meat bid, Bid B is a valued-based bid.
Summary

When to sell is complicated
• Perishable, non-storable
• Rising cost and changing value

What to sell is complicated
• Understanding shrink
• Know what is under the hide

Where to sell
• Transportation
• Buyer programs
• Number of bidders
Making Pricing Decisions
 Regardless
of what, when and where to
sell the farmer must decide when to price.
 Typically, animals priced at delivery
 Can be priced before delivery with futures
or forward contracts
 How to decide if to price early?
Price Objectives
 Express
cost and profit in $/cwt terms
• Same units as price
 Start
with cost of production
• Variable cost
• Total costs
 Set
multiple objectives
• Return over variable cost
• Return over total cost
• Desired profit margin
Cost of Production
 Raised
•
•
•
•
livestock
Farrow to finish, Cowherd to finish
Accumulate cost from birth through finish
Relatively stable cost over time
Impacted by input prices and production
» Feed is typically 60-70% of cost
» Low productivity increases the cost of those that
make it to finish because the fixed costs are
divided by a smaller number.
Cost of Production
 Purchased
feeder livestock
• Derived demand for feeder animal
• Highly variable price
• Depends upon
» Expected selling price for finished animal
» Feed costs
Objective Based Pricing Strategy
Feeder & Financing
+ Feed Costs
+ Operating Costs
+ Labor Costs
+ Fixed Costs
+ Desired Return
Cost/hd
$/cwt
729.24
186.71
30.46
36.55
24.63
25.00
60.77
76.33
78.87
81.91
83.96
86.05
550# steer calf fed to 1200 slaughter weight
Objective Based Pricing
 Compare
•
•
•
•
price objectives to price offered
Basis adjusted futures
Basis adjusted options floor price
Forward contract price from packer
Price forecast of cash prices
How much to pay for feeder animal
 Work
back from total revenue
Cost/hd
Expected revenue
- Interest Costs
- Feed Costs
- Operating Costs
- Labor Costs
- Fixed Costs
- Desired Return
1020.00
41.74
186.71
30.46
36.55
24.63
25.00
550# steer calf fed to 1200 slaughter weight
$/cwt
185.45
177.87
143.92
138.38
131.74
127.26
122.71
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
119
123
127
131
30.72
112
116
120
125
129
32.72
110
114
118
122
126
Corn
WDGS
hay
int
yard
other
$1.75
$32.00
$50
7%
$0.30
$30