HOMEWORK MATERIAL FOR THE FED CATTLE MARKET SIMULATOR

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HOMEWORK MATERIAL FOR THE FED CATTLE MARKET SIMULATOR Powered By Docstoc
					                     Fed Cattle Market Simulator – Feedlot Economics
                            Clement Ward, Derrell Peel, and Kellie Raper

                                  Department of Agricultural Economics
                                       Oklahoma State University
                                              August 2008

Participants role playing as feedlot marketing managers sell cattle from the "show list" of their team's
feedlot. The computer software for the packer-feeder game controls the placement of cattle on feed by all
feedlots and monitors the progress of cattle in each feedlot. The aggregate placement of cattle by all
feedlots follows a cyclical pattern of increases and decreases. During periods of small (large) feeder cattle
numbers, relatively high (low) prices are paid for these animals. Feedlots receive a mix of the three genetic
types of cattle; low (higher yielding, lower quality grade), medium (average yielding, average quality
grade), and high (lower yielding, higher quality grade). The feed price also exhibits some variability due
to seasonal supplies. All cattle in the game are bought and sold in pen sizes of 100 head. After the
appropriate number of weeks on feed, cattle are ready to be marketed and emerge on each feedlot's show
list. Feedlot marketing managers then sell the cattle to meatpacking cattle buyers with the objective of
earning a profit. Feedlots have some flexibility in the timing of marketings, as cattle remain of marketable
quality for five weeks after reaching show list weight.

Feedlot Information Sheet – Feedlot teams are given a feedlot information sheet (Table 1). This contains
important economic information related to cattle placed on feed and breakeven prices. With this table you
can estimate breakeven prices for different weights of cattle on the show list.

First we will discuss the left half of the table. Column 1 shows the Trading round. We refer to the trading
round frequently as the trading week since time is kept in numbered weeks, not specific dates. Adjacent to
it is the corresponding Round pen placed. Feeder cattle are placed on feed at 700 lbs and gain 25 lbs per
week. So in trading round #1, fed cattle weighing 1250 lbs, were placed on feed in round #-21.

The next column, Placement price, is the price 700-lb feeders were in the Round pen placed week.
Scanning down the Placement price column, one can see the cyclic nature of feeder cattle prices which
mirror the cyclic nature of feeder cattle placements. The next column is the Average cost of gain. This is
the average cost of gain computed by the computer for the 22 weeks the cattle have been on feed.

The next two columns – Current placement price and Current cost of gain – are important in themselves
but differ importantly from the adjacent columns just described. The Current placement price is the price
for feeder cattle being placed in the current week (as shown in the first column, Trading round). Similarly,
the Current cost of gain is the cost of gain for the current trading round week. When computing breakeven
prices for cattle on the show list currently, one needs to use the Placement price for the cattle and the
Average cost of gain for the time cattle have been on feed.

The Feedlot Information Sheet shows a column titled Feeder breakeven price. This breakeven price is only
an ESTIMATE for 1250-lb, medium quality cattle. Due to market dynamics during the trading session, the
exact breakeven price cannot be calculated in advance and given to feedlot teams. Thus, this breakeven
price is intended to be used by feedlot teams as an ESTIMATE when negotiating with packers. It can be
adjusted by experience based on trading results from the financial statements, and by cattle weight and
market conditions.

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Table 1. Feedlot Information Sheet

Feedlot Breakeven Prices                                                         Breakeven Prices by Weight Groups
Medium quality, 1250 lb. cattle

Trading   Round    Placement      Average     Current     Current     Feeder     Feeder prices constant           Slaughter weight
 round     pen        price        cost of   placement    cost of   breakeven                    1200     1225       1250       1275   1300
          placed                    gain        price      gain        price     Feeder
     1       -21       99.09          0.45       106.79      0.45        75.29   breakeven      81.88     81.17     80.48     81.52    83.10
     2       -20       98.39          0.45       103.40      0.45        74.90   price
     3       -19       98.39          0.45       100.59      0.45        74.90   Change          -1.40    -0.69      0.00      1.04     2.62
     4       -18       99.79          0.45        98.84      0.46        75.68
     5       -17      102.25          0.45        98.01      0.46        77.06   Feeder prices rising             Slaughter weight
     6       -16      105.41          0.45        97.76      0.46        78.83                    1200    1225       1250       1275   1300
     7       -15      109.27          0.45        98.91      0.47        80.99   Feeder
     8       -14      113.49          0.46       101.12      0.47        83.79   breakeven       78.26    79.23     80.48     83.77    87.50
     9       -13      117.70          0.46       104.03      0.47        86.15   price
    10       -12      121.92          0.46       107.64      0.47        88.52   Change            2.22    1.25      0.00      3.29     7.02
    11       -11      125.78          0.46       111.60      0.48        90.68
    12       -10      128.94          0.46       115.56      0.48        92.45   Feeder prices falling            Slaughter weight
    13        -9      131.40          0.46       119.65      0.48        93.82                    1200    1225       1250       1275   1300
    14        -8      132.80          0.46       123.39      0.48        94.61   Feeder
    15        -7      132.68          0.46       126.43      0.48        94.54   breakeven       86.65    83.50     80.48     79.66    79.76
    16        -6      131.85          0.46       128.76      0.48        94.08   price
    17        -5      129.97          0.47       130.16      0.48        93.46   Change          -6.17    -3.02      0.00      -0.82   -0.72
    18        -4      127.03          0.47       130.16      0.48        91.82
    19        -3      123.40          0.47       129.46      0.48        89.78
    20        -2      119.18          0.47       127.71      0.48        87.42
    21        -1      114.97          0.47       125.02      0.48        85.06
    22         0      110.88          0.47       121.64      0.47        82.77
    23         1      106.79          0.47       117.55      0.47        80.48
    24         2      103.40          0.47       113.46      0.47        78.58


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25    3   100.59   0.47   109.37   0.47   77.01
26    4    98.84   0.47   105.28   0.47   76.03
27    5    98.01   0.47   101.89   0.47   75.57
28    6    97.76   0.47    99.08   0.47   75.43
29    7    98.91   0.47    97.33   0.47   76.07
30    8   101.12   0.47    96.75   0.47   77.31
31    9   104.03   0.47    96.88   0.46   78.94
32   10   107.64   0.47    98.41   0.46   80.96
33   11   111.60   0.47   100.99   0.46   83.18
34   12   115.56   0.47   104.28   0.46   85.39
35   13   119.65   0.47   108.27   0.46   87.68
36   14   123.39   0.47   112.61   0.46   89.78
37   15   126.43   0.47   116.82   0.46   91.48
38   16   128.76   0.47   121.16   0.46   92.79
39   17   130.16   0.47   125.15   0.45   93.57
40   18   130.16   0.47   128.44   0.45   93.57
41   19   129.46   0.47   131.02   0.45   93.18
42   20   127.71   0.46   132.55   0.45   91.76
43   21   125.02   0.46   132.68   0.45   90.25
44   22   121.64   0.46   132.10   0.45   88.36
45   23   117.55   0.46   130.35   0.45   86.07
46   24   113.46   0.46   127.54   0.45   83.78
47   25   109.37   0.46   124.42   0.45   81.49
48   26   105.28   0.46   119.81   0.45   79.20
49   27   101.89   0.46   115.59   0.45   77.30
50   28    99.08   0.46   111.38   0.45   75.72




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Projected Breakeven Price – Breakeven prices are calculated in the simulator just as in the real
marketplace but with several simplifications. The basic calculations are as follows. For example, assume
cattle are sold at 1250 lbs in Trading round #1 and that the cost of gain has remained constant at the
Current cost of gain ($0.45/lb). For Trading round #1 in the Feedlot Information Sheet, the placement
price of feeder cattle in Round pen placed #-21 was $99.09/cwt. Therefore, the projected breakeven price
is as follows:

        Purchase Cost (7 cwt. x $99.09/cwt.)                        = $693.63
        Feed Cost (1250 lb. - 700 lb.) x $0.45/lb.                  = $247.50
        Total Cost                                                  = $941.13

        Breakeven price (Total Cost / 12.5 cwt.)                    = $75.29/cwt.

Scanning down the column Current cost of gain, one can see cost of gain changes periodically. As a result,
the cost of gain in the column Average cost of gain also changes. To calculate the exact cost of gain for
cattle on feed a specific number of weeks, one would have to know how many weeks the cattle were on
feed at each of the Current cost of gain amounts.

Breakeven prices can be calculated for the same pen of cattle if the cattle were sold at higher weights.
Cattle weighing 1275 pounds during Trading round #2 were placed on the show list in Round pen placed
#-21. The purchase price of the feeder cattle remains the same as in the above example for 1250-lb cattle.
However, now the feed cost is for one additional week at whatever the Average cost of gain is. Further, we
impose a penalty in the simulator to reflect the inefficiency cattle experience as they gain weight. In
reality, this inefficiency does not occur as abruptly as in the simulator, but it nevertheless occurs.
Therefore, the entire cost of gain for the 23 weeks on feed (for 1275-lb cattle) is multiplied by an 8%
penalty. And total cost is divided by 1275 lbs to calculate the breakeven price. The projected breakeven
price for 1275-lb cattle is shown below.

        Purchase Cost (7 cwt. x $99.09/cwt.)                        = $693.63
        Feed Cost [(1275 lb. - 700 lb.) x $0.45/lb.] x 1.08         = $279.45
        Total Cost                                                  = $973.08

        Breakeven price (Total Cost / 12.75 cwt.)                   = $76.32/cwt.

Note again the cost of gain penalty for holding cattle to 1175 pounds. Feeders need to recognize this
when they hold cattle to heavier weights and negotiate with packers. Similarly, they need to recognize the
added cost if cattle are forward contracted for delivery at heavier weights. An added penalty is imposed
when cattle are held and marketed at 1300 pounds. This penalty is 18%. Note again the cost of gain
penalty for holding cattle to 1300 pounds.

Breakeven Prices for Cattle of Different Weights and Varying Market Conditions – Each feedlot
team can keep track of market information as the game evolves and update breakeven price calculations for
future pens of cattle. In reality, substantial differences exist between the cost of gain for different pens of
cattle. These result from differences in performance due to genetics, breed characteristics, preconditioning,
weather, and other factors. Much of the production component of operating a feedlot has to do with
managing these differences. However, this complication is ignored in the game to simplify the
presentation and learning phases of the game, and to focus the game on marketing and pricing decisions of
feedlot operations.

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The calculations made above examine the breakeven prices for all weight groups of cattle on the show list
during a given week. Note the breakeven price across weight groups can change substantially, and it is in
part due to changes in the feeder cattle price. Changes in feed costs are less important because grain prices
are not as variable as feeder cattle prices. However, the decreases in feeding efficiency (and increases in
cost of gain) between 1250 and 1275 pound cattle and between 1275 and 1300 pound cattle are very
important.

To illustrate this importance, the right half of the Feedlot Information Sheet shows breakeven prices across
weight groups for three sets of market conditions for feeder cattle. Feedlot managers need to be aware of
what is happening with feeder cattle prices – when the cattle were placed into the feeding program – in
order to determine the best weight to sell cattle and how much higher or lower bids should or could be for
different weights of fed cattle and still break even.

For example, when feeder cattle prices are constant, if the cattle are not sold at 1200 lbs, the breakeven
price declines for 1225 and 1250 lb cattle. The marginal gain in weight is greater than the marginal
increase in feed costs for cattle held to 1225 from 1200 lbs and for cattle held to 1250 from 1225 lbs.
However, if cattle are held to weights greater than 1250 lbs, the marginal feeding efficiency declines faster
than the marginal increases in weight. Then, the breakeven price for 1275-lb cattle increases. And for
1300-lb cattle, the breakeven price increases even more. All other factors being the same, feedlots within
the game will make more money marketing 1250-pound cattle than lighter or heavier cattle. Feedlots have
to receive higher prices for 1275 and 1300-lb cattle than for 1250 pound cattle in order to offset the higher
feed costs and feeding inefficiency. Note when estimating breakeven price differences for an individual
pen of heavier or lighter cattle, the purchase cost of that pen is fixed, thus best matches the part of Table 1
labeled Feeder prices constant.




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