Livestock Marketing

Document Sample
Livestock Marketing Powered By Docstoc
					Livestock Marketing Decisions
  Where to sell
    • Type of market
    • Location
  What to sell
    • Live, carcass, grid
  When to sell
    • Weight, grade, costs
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
Hog Carcass Weight Discounts
  Carcass Weight                          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
  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        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
 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
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                    Yield Grade
Grade                 1      2      3      4&5
Prime               +$$$$$ +$$$$ +$$$       -$$
      +         o
Choice and Choice   +$$$   +$$$    +$$      -$$
Choice-              +$$$ +$$ Base           -$$$
Select                 -$    -$$   -$$$     -$$$$
Standard             -$$$$ -$$$$ -$$$$      -$$$$
Out Cattle          -$$$$$ -$$$$$ -$$$$$   -$$$$$
Where are the Grid Rewards & Discounts?
Iowa Quality Beef Grid 2005
  Base: NE Wted Avg 65-80%
   Choice                            Yield Grade $/cwt
  Par: Ch YG3 =Base + $2.00 or      1:           $4.00
   Plant clean up which ever is      2:           $3.00
   greater                           3:            Par
  Quality Grade             $/cwt   4:         -$20.00
   • Prime:                  $6.00   5:         -$25.00
   • Certified Angus:        $3.50
                                     Carcass weights$/cwt
   • Select                 USDA     Under 500 -$40.00
   • Standard              -$15.00   500-549      -$15.00
   • Commercial            -$30.00   950-999       -$8.00
   • Dark Cutters          -$30.00   1000 & up -$35.00
   • Other                 -$30.00
Comparing Bids ($/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 1&2          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.
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
Market timing
  Cycles
  Seasonals
  Marginal costs and returns
Biological and price cycles
Cycle is a pattern that repeats itself
 over a period longer than a year in a
 relatively predictable pattern
                JANUARY 1 TOTAL CATTLE INVENTORY
                           U.S., Annual
Mil. Head
140
130
120
110
100
 90
 80                                        2009 = 94.5 Million Head
                                                 -1.6 Percent

 70
   49
   54
   59
   64
   69
   74
   79
   84
   89
   94
   99
   04
   09
19
19
19
19
19
19
19
19
19
19
19
20
20
  Livestock Marketing Information Center
  Data Source: USDA/NASS
        TOTAL CATTLE INVENTORY BY CYCLE
                  U.S., January 1
Mil. Head
135                                       1938-
125                                       49
                                          1949-
115                                       58
105                                       1958-
                                          67
 95                                       1967-
 85                                       79
                                          1979-
 75                                       90
 65                                       1990-
                                          04
     0 1 2 3 4 5 6 7 8 9 10 11 12 13 14   2004-
                                          09
          US December Market Hog Inventory (1,000) head
65,000


60,000


55,000


50,000


45,000


40,000
     77
          79
               81
                    83
                         85
                              87
                                   89
                                        91
                                             93
                                                  95
                                                       97
                                                            99
                                                                 01
                                                                      03
                                                                           05
                                                                                07
                                                                                     09
   19
         19
              19
                   19
                        19
                             19
                                  19
                                       19
                                            19
                                                 19
                                                      19
                                                           19
                                                                20
                                                                     20
                                                                          20
                                                                               20
                                                                                    20
              US December Hog Breeding Herd (1,000 Head)
10,000
 9,500
 9,000
 8,500
 8,000
 7,500
 7,000
 6,500
 6,000
 5,500
 5,000
     77
          79
               81
                    83
                         85
                              87
                                   89
                                        91
                                             93
                                                  95
                                                       97
                                                            99
                                                                 01
                                                                      03
                                                                           05
                                                                                07
                                                                                     09
   19
         19
              19
                   19
                        19
                             19
                                  19
                                       19
                                            19
                                                 19
                                                      19
                                                           19
                                                                20
                                                                     20
                                                                          20
                                                                               20
                                                                                    20
What causes cycles
  Response to economic signals
  Time lag
    • Psychology
    • Biology
    • Investment
  Livestock
  Tree crops
  Land development
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
                                             Heifer Prices 1970-2008
                         140
                                Heifer and Offspring Price Comparison
                         120
                                               1970's         1980's     1990's      2000's
Heifer Prices ($/cwt.)




                         100                    1975          1985       1995        2005

                          80 Heifer             27.32         58.64      55.58       114.43
                             Offspring 1        36.34         76.73      72.86       93.39
                          60 Offspring 2        64.55         82.44      69.04       108.5
                          40 Offspring 3        77.33         82.76      80.41       95.38
                             Offspring 4        66.65         90.63      90.35
                          20
                             Offspring 5        57.76         82.89      83.72
                           0
                               1970   1975   1980      1985    1990    1995   2000    2005
       Number of Cows and Heifers Calving
140

120

100

 80

 60
                           Average
 40               DCA        104

 20               Steady Size 100

  0
 70


       75


             80


                   85


                          90


                                    95


                                          00


                                                05
19


      19


            19


                  19


                         19


                                19


                                         20


                                               20
       Average Value Per Head by Strategy
$800
$750
$700
$650
$600
$550
$500
$450
$400
$350
$300
         Steers         Heifers           Cows

                  SS                DCA
                    Return Over Cash Cost
$70,000
$60,000
$50,000
$40,000
$30,000
$20,000
$10,000
    $-
$(10,000)
$(20,000)
                            DCA        Steady Size
$(30,000)
         70


               75


                      80


                            85


                                   90


                                            95


                                                      00


                                                            05
     19


              19


                     19


                           19


                                  19


                                           19


                                                     20


                                                           20
                      Herd Net Worth
$2,000,000
$1,800,000
$1,600,000
$1,400,000
$1,200,000
$1,000,000
 $800,000
 $600,000
 $400,000
 $200,000                               DCA       Steady Size
     $-
          70


                75


                      80


                            85


                                  90


                                        95


                                              00


                                                      05
       19


               19


                     19


                           19


                                 19


                                       19


                                             20


                                                    20
Seasonal price patterns
  Patterns that repeat themselves with
   some degree of predictability within
   a year’s time frame.
  Driven by supply and demand
   factors that are impacted by time of
   year
    • Weather
    • Holidays
    • Input prices
          Seasonal Price Index for Iowa Fed Cattle and Hogs
115%


110%


105%


100%


95%


90%
                   Cattle   Hogs
85%
                               .




                               .

                               .




                               .
                            ne

                             ly
     n.




                            ay




                              .

                              .
                     .
            b.



                            pr




                           ug




                            ec
                            ct
                            pt



                           ov
                  ar




                          Ju
   Ja

          Fe




                          M




                          O
                         Ju




                         Se
                          A
                 M




                          D
                         A




                         N
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
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
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?
$   MC



      MR




     Weight
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
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/agd
   m/livestock/html/b1-21.html
Swine Production - Finishing Weaned 12 lb Pigs, Total Confinement - One Pig
Ag Decision Maker -- Iowa State University Extension
For more information see Information File B1-21 Livestock Enterprise Budgets.

Place the cursor over cells with red triangles to read comments.
Enter input values in yellow grid-lined cells.



Income                                             Price    Unit           Quantity Unit         Total
  Market Hogs                                         $0.00 per lb     x         260 lbs     =     $0.00

Variable Costs                                     Price    Unit           Quantity  Unit
 Weaned Feeder pig                                  $32.00 per head    x           1 head    =    $32.00
 Interest                                                9%                     4.9 months   =     $1.18

  Feed Costs
  Corn                                                $3.80   per bu   x        9.8    bu    =    $37.24
  Soybean meal                                        $0.15   per lb   x       119.0   lbs   =     17.85
  Dried distiller grain                               $0.06   per lb   x        32.0   lbs   =      1.92
  Vitamin & minerals                                  $0.45   per lb   x        14.4   lbs   =      6.48
  Pre-nursery diet                                                                                  3.00
  Feed Additives                                                                                    3.00
  Feed processing & delivery                                                                        6.75
  Other                                                                                             0.00
  Total Feed Costs                                                                                $76.24
 Veterinary and medical                                                                 $5.00
 Fuel, repairs, utilities                                                                4.20
 Marketing, miscellaneous                                                                4.00
 Other                                                                                   0.00
 Manure application cost                       $0.01 per gal     220    gal      =       2.20
 Interest on variable costs                      9%                 3   months   =       1.03
 Death loss                                                     0.05    head     =       1.60
 Labor                                        $14.00 per hour     0.7   hours    =       9.80
 Total Variable Costs                                                                $137.25

 Income over Variable Costs                                                          ($137.25)

Fixed Costs
  Facilities & equipment                                                              $11.28

Total All Costs                                                                      $148.53

Income over All Costs                                                                ($148.53)

Break-even selling price for variable costs                                           $52.79 per cwt
Break-even selling price for all costs                                                $57.13 per cwt
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
Objective Based Pricing Strategy
                                 Cost/hd        $/cwt
Feeder & Financing               729.24         60.77
+ Feed Costs                     186.71         76.33
+ Operating Costs                 30.46         78.87
+ Labor Costs                     36.55         81.91
+ Fixed Costs                     24.63         83.96
+ Desired Return                  25.00         86.05
 550# steer calf fed to 1200 slaughter weight
How much to pay for feeder animal
  Work back from total revenue
                                Cost/hd        $/cwt
Expected revenue               1020.00         185.45
- Interest Costs                 41.74         177.87
- Feed Costs                    186.71         143.92
- Operating Costs                30.46         138.38
- Labor Costs                    36.55         131.74
- Fixed Costs                    24.63         127.26
- Desired Return                 25.00         122.71
550# steer calf fed to 1200 slaughter weight
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

				
DOCUMENT INFO