Intro to Livestock Marketing

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Intro to Livestock Marketing

• Price discovery and reporting
• Marketing decisions
• Cost of production
• Price objectives

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Price Determination and Discovery

• Price Determination
• 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.

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Price Determination and Price Discovery

S
P

Pe
D
Q
Qe
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Price Discovery

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

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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
• http//www.ams.usda.gov/AMSv1.0

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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

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Livestock Marketing Decisions

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

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What to sell

• Live weight
• 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???

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What to sell

• Dressing percent
• 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

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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

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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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Carcass Merit Grid and Premium Trends
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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

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Where to sell

• Transportation cost
• Truck size
• Freight rate
• Constant on short hauls
• Based on loaded mile on longer distance
• Law of one price

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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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MC

MR
Weight
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Optimal marketing weigh example
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Demand considerations

• Demand for meat by consumers
• Derived demand for animal by packers
• Derived demand for feeder livestock by feedlots
  and finishers

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Derived Demand
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
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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

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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

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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

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Cost of Production

• Quantity of inputs
• Production efficiency
• Influenced by management
• Relatively stable
• Price of inputs
• Market prices
• Highly variable

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Cost of Production

• Raised 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

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Cost of Production

• Budgets
• 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

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Budgeting
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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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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