Optimal Hog Marketing Weights by kellena96

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									Optimal Hog Marketing Weights

        James Mintert, Ph.D.
              Professor
 Department of Agricultural Economics
       Kansas State University


                        K-State Research & Extension
                    Hogs Have Been Getting Heavier
                           for A Long Time

                                Commercial Hog Live Weights .
         280
                              Carcass Weights

         270                  Trend



         260
Pounds




         250


         240


         230
               70   72   74   76   78   80   82   84   86    88 90    92   94   96   98   00   02   04
                                                            Year
Source: USDA

                                                                     K-State Research & Extension
 Why Have Weights Gotten Heavier?

1. Technology

  – Genetics

  – Feeding regimens

2. BECAUSE IT’S PROFITABLE




                       K-State Research & Extension
  How Does Weight Impact Returns?

• Three keys to examining impact of weight


  – More pounds


  – Sort Loss


  – Lean Premiums

                          K-State Research & Extension
    Sort Loss Is Highly Correlated With Weight
                                       Hog Sort Loss
                                       By Weight ($/pig)

         1
          -
         (1)
         (2)
         (3)
         (4)
         (5)
         (6)
$/pig




         (7)
         (8)
         (9)
        (10)
        (11)
        (12)
        (13)
                           Sort Loss = -0.0053weight sq'd + 2.6393weight - 332.1
        (14)
                                               R2 = 0.6576
        (15)
              200   210   220    230     240     250       260   270     280       290   300

                                        Live Weight (Lbs.)



                                                           K-State Research & Extension
Lean Premiums Are Also Correlated With Weight
                                                Hog Lean Premiums
                                                     By Weight ($/pig)
                        12
                        11
                        10
                         9
                         8
 Lean Premium ($/pig)




                         7
                         6
                         5
                         4
                         3
                         2
                         1
                         0
                        (1)
                        (2)
                        (3)
                        (4)
                        (5)
                                      Lean Prem. = -0.0046weight sq'd. + 2.344weight - 289.52
                        (6)
                                                           R2 = 0.3163
                        (7)
                          200   210   220     230     240     250        260   270    280       290   300

                                                      Live Weight (Lbs.)


                                                                         K-State Research & Extension
        Adding Model Results for Lean & Sort
                          Hog Lean Premiums Plus Sort Discounts
                                      By Weight ($/pig)
         6

         4

         2

         0

         -2

         -4
$/pig




         -6
         -8

        -10

        -12

        -14

        -16

        -18

        -20
              210   220      230    240      250     260       270   280     290    300

                                          Live Weight (Lbs.)


                                                          K-State Research & Extension
          Expected Net Prices At Various Weights
                     Net Hog Price, Carcass Base Price = $65/cwt.
                                         By Weight
         $75



         $70



         $65
$/cwt.




         $60



         $55



         $50
               210    220   230    240      250      260   270    280    290    300

                                     Live Weight (Lbs.)


                                                       K-State Research & Extension
        Premium/Discount Schedules Vary By Firm

                          Hog Lean Premiums Plus Sort Discounts
                                      By Weight ($/pig)
          6
          5
          4
          3
          2
          1
          0
         -1
         -2
$/pig




         -3
         -4
         -5
         -6
         -7
         -8
         -9
        -10
        -11
        -12
              210   220       230   240       250     260      270    280     290

                                          Live Weight (Lbs.)


                                                          K-State Research & Extension
Which Changes Weight-Net Price Relationship

                                     Net Hog Price, Carcass Base Price = $65/cwt.
                                                            By Weight
                         $75




                         $70
$/cwt., carcass weight




                         $65




                         $60




                         $55




                         $50
                               210 215 220 225 230 235 240 245 250 255 260 265 270 275 280 285 290 295 300

                                                           Live Weight (Lbs.)


                                                                         K-State Research & Extension
              Expected Net Prices Vary Across Firms
                                     Net Hog Price, Carcass Base Price = $65/cwt.
                                                              By Weight
                         $71
                         $70
                         $69
                         $68
$/cwt., carcass weight




                         $67
                         $66
                         $65
                         $64
                         $63
                         $62
                         $61
                         $60
                         $59
                         $58
                                            Processor A   Processor B     Processor C
                         $57
                         $56
                         $55
                               210 215 220 225 230 235 240 245 250 255 260 265 270 275 280 285 290 295 300
                                                             Live Weight (Lbs.)


                                                                               K-State Research & Extension
            Economic Principles

              Goal is to maximize profits

• Determine marginal revenue for a weight change

• Determine marginal costs for a weight change

• Maximize profit when

    Marginal revenue = marginal cost



                                 K-State Research & Extension
      Compute Marginal Revenue

At each weight
• Estimate base carcass value
• Estimate expected sort loss
• Estimate expected lean premium
• Base + sort + premium =
                    Exp. Net Carcass Value
Calculate revenue gain for additional pound
  of gain
                          K-State Research & Extension
         Compute Marginal Cost

• Pounds of feed per lb. of gain

  – Increases as weight rises

• Feed cost per lb.

• # of feed X cost/lb = marginal cost



                                K-State Research & Extension
           Profit Is Maximized
When Marginal Revenue Equals Marginal Cost
                                             Marginal Revenue vs. Marginal Cost
                                         Carcass Base Price = $65/cwt., Feed Cost = $100/ton
                         $0.80


                         $0.70
$/cwt., carcass weight




                         $0.60


                         $0.50


                         $0.40


                         $0.30


                         $0.20


                         $0.10
                                 241   246   251   256   261     266   271   276    281   286   291   296

                                                               Live Weight (Lbs.)


                                                                             K-State Research & Extension
Optimal Weight Declines When Base Price Falls

                                             Marginal Revenue vs. Marginal Cost
                                         Carcass Base Price = $55/cwt., Feed Cost = $100/ton
                         $0.70



                         $0.60
$/cwt., carcass weight




                         $0.50



                         $0.40



                         $0.30



                         $0.20



                         $0.10
                                 241   246   251   256   261     266   271   276    281   286   291   296

                                                               Live Weight (Lbs.)


                                                                             K-State Research & Extension
                   Higher Feed Prices Reduce Optimal Weight

                                             Marginal Revenue vs. Marginal Cost
                                         Carcass Base Price = $65/cwt., Feed Cost = $130/ton
                         $0.80


                         $0.70
$/cwt., carcass weight




                         $0.60


                         $0.50


                         $0.40


                         $0.30


                         $0.20


                         $0.10
                                 241   246   251   256   261     266   271   276    281   286   291   296

                                                               Live Weight (Lbs.)


                                                                             K-State Research & Extension
    Estimating Your Optimal Weight
• Use your kill sheet data to estimate
  relationship between weight and
  – Sort loss

  – Lean premium

• Use models to predict sort loss and lean
  premium at each weight

• Calculate expected marginal revenue for a
  one lb. weight gain
                            K-State Research & Extension
    Estimating Your Optimal Weight
• Estimate your marginal costs
• Know your costs
• Key is feed costs
  – Pounds of feed per lb. of gain
  – Cost per lb. of feed
• Other variable costs per lb. of gain
• Compare your expected marginal costs to
  your expected marginal returns
• Profit Max occurs when MR = MC
                               K-State Research & Extension
               Next Step

• Development of a downloadable spread
  sheet tool




                         K-State Research & Extension
Thank You

								
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