Livestock Marketing Decisions

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Livestock Marketing Decisions

• Where to sell
• Type of market
• Location
• What to sell
• Live, carcass, grid
• When to sell
• Weight, grade, costs

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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

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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

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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

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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

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Hog Carcass Weight Discounts
Carcass Weight Range Range
145 -27.70 -8.16
155 -27.70 -5.00
165 -10.39 -0.67
175 -3.40 0.00
185 -1.36 0.00
195 -0.68 0.00
205 0.00 0.00
215 -3.00 1.36
225 -5.26 0.00
IOWA/MINNESOTA DAILY DIRECT NEGOTIATED HOG
PURCHASE MATRIX LM_HG204, Fri, Aug 26, 2005, USDA
Market News Des Moines, Iowa
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Hog Carcass Price by Backfat and Loin Eye Area
Hog Carcass Price by Loin Eye Area/depth (inches) Hog Carcass Price by Loin Eye Area/depth (inches) Hog Carcass Price by Loin Eye Area/depth (inches) Hog Carcass Price by Loin Eye Area/depth (inches) Hog Carcass Price by Loin Eye Area/depth (inches) Hog Carcass Price by Loin Eye Area/depth (inches) Hog Carcass Price by Loin Eye Area/depth (inches) Hog Carcass Price by Loin Eye Area/depth (inches) Hog Carcass Price by Loin Eye Area/depth (inches) Hog Carcass Price by Loin Eye Area/depth (inches)
Backfat 4.0/1.4 4.0/1.4 5.0/1.7 5.0/1.7 6.0/2.0 6.0/2.0 7.0/2.3 7.0/2.3 8.0/2.7 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
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Comparing bids

• Price in appropriate /cwt A B
• Bid Price (live) 44.50 ---
• Bid Price (carcass) --- 59.50
• Lean premium --- 1.25
• Sort discount --- -.70
• Dressing percentage 74.5 74.5
• Adjusted to live 44.50 44.73
• Transportation -.85 -.35
• Net farm gate price 43.65 44.38

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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

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Value-Based Cattle Marketing

• Common Ground for Targets
• 1. Carcass Weights 550 - 950 lbs
• 2. Quality Grade gt Se or gt Ch0
• 3. Yield Grade 1s and 2s

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Carcass Merit Grid and Premium Trends
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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 -40.00 500-549 -15.00 950-999 -8.00 1000
up -35.00
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Comparing Bids (/carcass cwt)

• Price in appropriate /cwt A B
• Base bid price 122.00 121.00
• Prime 3 --- 6.00
• Top 2/3 Ch 45 --- 3.50
• Select 30 --- -8.00
• Yield 12 60 --- 2.50
• Off weight 3 --- -15.00
• Transportation -.65 -1.25
• Net farm gate price 120.35 120.16
• Bid A is a straight in the meat bid, Bid B is a
  valued-based bid.

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When to sell

• Classic production function
• Optimal selling weight is where MCMR
• 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

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Market timing

• Cycles
• Seasonals
• Marginal costs and returns

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Biological and price cycles

• Cycle is a pattern that repeats itself over a
  period longer than a year in a relatively
  predictable pattern

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Livestock Marketing Information Center Data
Source USDA/NASS
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What causes cycles

• Response to economic signals
• Time lag
• Psychology
• Biology
• Investment
• Livestock
• Tree crops
• Land development

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Cattle Cycle and Timing

• Prices are cyclical
• Heifer cost impact profitability
• Calf prices impact annual income
• Two alternatives
• Steady Size Same number of heifers
• Dollar Cost Averaging Same value of heifers

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Seasonal price patterns

• Patterns that repeat themselves with some degree
  of predictability within a years time frame.
• Driven by supply and demand factors that are
  impacted by time of year
• Weather
• Holidays
• Input prices

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How to calculate seasonal index

• Pick time period (number of years)
• Pick season period (month, quarter)
• Calculate average price for season
• Calculate average price over time
• Divide season average by over time average price
  x 100

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Sioux Falls Cull Cow Prices Sioux Falls Cull Cow Prices Sioux Falls Cull Cow Prices Sioux Falls Cull Cow Prices
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec Annual
2000 41.70 41.19 42.38 46.40 48.25 47.63 47.50 43.50 41.70 38.18 39.00 41.55 43.25
2001 41.56 43.75 45.15 46.25 47.75 49.20 47.63 47.38 45.45 42.87 37.50 38.37 44.41
2002 39.10 41.88 44.06 42.88 42.45 41.50 37.67 37.50 37.88 35.80 35.38 35.83 39.33
2003 39.20 40.25 42.50 45.13 47.75 46.06 49.96 49.13 50.50 48.85 51.83 49.67 46.74
2004 47.10 46.00 49.88 53.40 56.38 60.00 59.50 59.75 58.00 54.75 55.50 52.50 54.40
2005 54.25 55.25 60.30 61.25 62.75 61.50 58.25 54.90 55.63 52.75 50.90 52.13 56.66
2006 47.13 49.75 49.80 47.63 47.80 47.94 47.75 49.85 50.25 48.31 43.06 41.50 47.56
2007 48.50 52.63 52.00 52.13 55.50 54.25 54.08 55.25 52.88 53.20 46.25 48.75 52.12
2008 50.00 55.94 55.69 54.40 59.38 58.13 63.35 63.00 59.00 53.60 44.75 41.75 54.92
2009 45.63 46.75 46.88 49.33 53.17 45.88 48.63 47.06 46.90 44.94 43.08 45.83 47.01

Average 45.42 47.34 48.86 49.88 52.12 51.21 51.43 50.73 49.82 47.33 44.73 44.79 48.64
Mon/Yr 93 97 100 103 107 105 106 104 102 97 92 92 100
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Using Seasonal Index to Forecast

• Observe price in time t1 P1
• Forecast price in time t2 P2
• Start with P1/ I1 P2 / I2
• Then P1 x I2 / I1 P2
• Assume that cows are selling at 50/cwt in
  November. What is the forecast of February?

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MC

MR
Weight
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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.

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Cost of Production

• Purchased feeder livestock
• Derived demand for feeder animal
• Highly variable price
• Depends upon
• Expected selling price for finished animal
• Feed costs

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Cost of production budgets

• Starts with production function
• Incorporates input prices
• Project cost per unit sold
• Variable /unit
• Total /unit
• http//www.extension.iastate.edu/agdm/livestock/ht
  ml/b1-21.html

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Using budgets in planning

• Project a breakeven point estimate
• Sensitivity analysis for key variables
• Back calculate from revenue to what you can
  afford to pay for feeder animal
• Economic v. Financial costs

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Objective Based Pricing Strategy
Cost/hd
/cwt
550 steer calf fed to 1200 slaughter weight
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How much to pay for feeder animal

• Work back from total revenue

/cwt
Cost/hd
550 steer calf fed to 1200 slaughter weight
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Breakeven Purchase Price for 550 Steers Breakeven Purchase Price for 550 Steers Breakeven Purchase Price for 550 Steers Breakeven Purchase Price for 550 Steers Breakeven Purchase Price for 550 Steers Breakeven Purchase Price for 550 Steers
Fed Cattle Price Fed Cattle Price Fed Cattle Price Fed Cattle Price 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