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					Livestock Marketing
  Price discovery
  Pricing methods
  Marketing decisions
  Supply and demand
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.
Price Discovery

A human process, subject to relative
 bargaining power of the buyer and
 seller.
Two stage process
  • Evaluate S&D and Pe
  • Estimate the price for the specific trade.
     Price Determination
     and Price Discovery
 P                 S




Pe




                       D


            Qe             Q
Centralized pricing
 All buyers and sellers in one place at
  one time.
   + Full and immediate information
   + Competitive bidding
   + Equalizes market power
   - Transaction cost
   - Physical movement of product
Decentralized Pricing
  One-to-one negotiations
    + Reduced transportation cost
    + Reduced transaction cost
    - Depends on skills and information
    - Higher search cost
Hybrid markets
  Electronic markets
    • Centralized pricing
    • Decentralized product movement
  Examples
    •   Satellite auctions
    •   Electronic auctions
    •   Tel-o-auction
    •   E-commerce
Formula pricing
Price discovery from elsewhere
Formula contracts
  • Spot market
  • Cutout price
  • Futures
Do you trust the underlying market for
 price discovery?
Performance issues
  “Least cost” method of price
   discovery
  Effect of the mechanism on price
   behavior
  Marketing v. pricing efficiency
Information and markets

Price reporting
  • Role of the government
  • 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
Livestock Marketing Decisions
  What to sell
    • Live, carcass, grid
  Where to sell
    • Type of market
    • Location
  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
             Percent of Beef Grading Prime, Choice, or Select

80%
70%
60%
50%
40%
30%
20%
10%
0%
      J-95

              J-96

                     J-97

                            J-98

                                   J-99

                                          J-00

                                                 J-01

                                                          J-02

                                                                 J-03

                                                                        J-04

                                                                               J-05
                              Prime       Choice        Select
                           Beef Yield Grade Percentages
60%

50%

40%

30%

20%

10%

0%
      J-95

             J-96

                    J-97

                             J-98

                                    J-99

                                           J-00

                                                   J-01

                                                          J-02

                                                                 J-03

                                                                        J-04

                                                                               J-05
                            YG 1       YG 2       YG 3      YG 4+5
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.
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
Feeder cattle sales
  Live weight sales
    • Various weight classes
    • In general, lower $/# and heavier weights
  Auction is major market
    • Assembly function important
  Video auctions
  Direct trade
  Premium paid for
    • Large uniform lots
    • Certification/verification ??????
Important market functions
Slaughter Cattle and Hogs
 Direct sales most common
   • Animals are delivered directly to the packing
     plant
 Spot or cash market
   • Seller contacts buyer when ready to sell
   • Negotiate price and terms on each group
 Contract market
   • May be for one group or an ongoing agreement
     between buyer and seller
   • Terms and pricing method determined ahead of
     marketing date
Overview
  Define contractual relationship
  Evolution and status of hog industry
  Describe marketing contracts
  Motivation and concerns
  Role for economists
Contractual Relationship
  Focus today is not on internal transfer
  Only relationship is the marketing
   contract
  Typically 3-10 years in length or
   evergreen
  Defines delivery schedules, carcass
   specifications, pricing, and in some cases
   production practices
  Small portion of contracts have risk
   sharing provisions
    USDA MPR Definitions
   Negotiated: Purchased in the cash market for delivery
    within 7 days.
   Swine or pork market formula: A formula tied to the
    cash market for hogs or pork cutout., i.e., weekly
    average price, 3-day rolling average, percentage of the
    cutout.
   Other market formula: A formula tied to something
    other than the hog market or pork cutout, i.e., feed
    prices.
   Other purchase agreement: Currently this includes
    window contracts.
Percent of U.S. Hogs Sold Through Various Pricing Arrangements, January 1999-2009*

Year             99     00      01      02      03      04      05       06      07      08     09
Hog or meat
market
formula         44.2   47.2     54     44.5    41.4     41.4    39.9    41.8    38.3    37.1    41.2
Other market
formula         3.4     8.5     5.7    11.8     5.7     7.2     10.3    8.8     8.5     11.0    7.9
Other
purchase
arrangement     14.4   16.9    22.8     8.6    19.2     20.6    15.4    16.6    15.2    13.4    11.6

Packer-sold                             2.1     2.2     2.1     2.4     2.6     6.7     6.1     5.6
Packer-
owned                                  16.4    18.1     17.1    21.4     20     22.7    23.1    25.7
Negotiated -
spot            35.8   25.7    17.3    16.7    13.5     11.6    10.6    10.2    8.6     9.2     8.1
Source; Grimes and Plain, University of Missouri http://agebb.missouri.edu/mkt/vertstud09.htm
Contract Specs

  Product specifications
    • PQA, Right to approve inputs
  Method of pricing
    • Which markets and formula
  Delivery scheduling
    • Short and long term
  Exemptions
Types of Contracts
Formula
  •   Most common contract
  •   Price tied to another market, typically spot
  •   No risk share
  •   Examples:
       » 3-Day rolling average of ISM weighted average
         +$1.50
       » Last week’s average excluding the high and low
       » 92% of the previous day pork cutout value
Packer does not share risk
Types of Contracts
Fixed window
  •   Formula tied to cash price
  •   Predetermined upper and lower bounds
  •   Share pain and gain outside window
  •   Example: $50-60 and split 50/50 above and
      below
Floating window
  • Formula tied to cash price
  • Boundaries move with feed prices
  • Do not share outside of window
Packer shares risk
       Weekly Hogs Prices, Cost of Production and Window

$70

$60

$50

$40

$30

$20

$10
              Cash         COP           Floating Window              Fixed Window
$-
      J-90

             J-91

                    J-92



                                  J-94



                                                 J-96



                                                               J-98

                                                                      J-99



                                                                                    J-01
                                                        J-97




                                                                             J-00
                           J-93



                                          J-95
Types of Contracts

 Cost-Plus
   • Price direct function of feed prices
   • Fixed amount for non-feed costs + known margin
   • Packer assumes all price risk
 Ledger
   • Floor price is fixed or based on feed prices
   • Producer is “loaned” the difference between floor
     and lower cash prices
   • Loan is repaid at higher cash prices
   • Packer provides line of credit but not risk share
      Weekly Hogs Prices, Cost of Production and Contract

$70

$60

$50

$40

$30

$20

$10
                    Cash           Cost +              COP           Ledger
$-
      J-90

             J-91




                                                              J-98

                                                                     J-99



                                                                                   J-01
                    J-92

                           J-93

                                  J-94

                                         J-95

                                                J-96

                                                       J-97




                                                                            J-00
Motivations for Vertical Linkages
Consumer satisfaction
 Moisture enhanced pork
 Preference for attributes
 Growing interest in safety and
  production
Spot market not sufficient
 Premiums and discounts
 Market access and risk
Motivations for Vertical Linkages

Traditional IO theory
 Avoid market power, reduce price
   volatility, technology complements,
   minimize transaction costs
Agency theory
 Integrate rather than contract to
   avoid opportunism and shirking by
   contract partners
 Motivations for Vertical Linkages

Asset specificity
 Firms with more significant relationship-
   specific investments (RSI) benefit from
   predictable throughput and prices
 As assets become more specialized, the
   costs of using the spot market increases
 Costs are particularly high when food safety
   and product quality problems occur
   encouraging greater process control
               Accumulated Net Estimated Returns
                   One Hog Sold per Month
400

300                                       $564 drop in
                                          28 months
200

100

   0
     J-   J-   J-   J-    J-   J-    J-     J-     J-    J-   J-
-100 93   94   95   96    97   98    99     00     01    02   03

-200
Attitude Toward Marketing Contracts by
Pork Producers with and without Marketing
Contracts
1 = strongly disagree, 6 = strongly agree

                                                         With Without
 Coordinate slaughter to better meet Industry needs      3.7    2.9
 Have caused lower cash market prices                    4.2    4.2
 Producers with contracts have received higher prices    3.9    3.5
 Packers show preference in who was offered a contract   3.5    3.5
 Contracts should be made illegal by Congress            2.7    3.1
 Contracts should be more closely monitored by USDA      4.0    4.0
 Prefer to market all my hogs on the cash market         3.0    4.1
          Role for Economists
The information and characteristics that
 consumers are demanding may require
 tighter vertical linkages.
   Can the spot market provide the non-
    measurable process control for
    consumers?
   If so, at what cost?
   Who will pay the added costs?
   Will greater control speed consolidation?
         Role for Economists

The great success of formula pricing
contracts is likely to lead to its demise.
 Producers want an agreement, but
  fear thin markets.
 How much volume is needed for
  satisfactory price discovery?
 Where should it take place?
 Who should be involved?
      Role for Economists
Concerns about contract linkages
 negatively affecting prices
 Research is inconclusive on price
  impacts.
 Thin market implications.
 Arguments have been greater in the
  industry where there is less
  contracting.
 Politically charged debate.
Contract Examples
Iowa Attorney General
  • http://www.state.ia.us/government/ag/ag_contracts/


Contract concerns
  • Will discuss more in market controversy
    section
             Share of Reported Pig Sales by Weight
                                                                                    Feeder Pig Trade
70%
                                                                           Price/head or live weight
60%
                                                                             40-60 pound classes
50%
                                                                             Weaned pigs (10-12 pounds)
40%
                                                                           Primarily direct trade
30%
                                                                             Rapidly declining auctions
20%
                                                                             Health and stress concerns
10%
                                                                           Premiums for
0%
      2000          2001         2002        2003    2004                    Large uniform, single source
                            EW     40   50                                   Genetic history
                                                                Weaned Pig Weekly Volume by Formula and Spot Pricing
                                                       100000
                                                        90000
  Spot market price                                     80000
                                                                                     Formula                        Spot

     Often through a broker                             70000
     USDA report                                        60000
                                                        50000
  Formula pricing
                                                        40000
     Based on observable price                          30000
     Spot market                                        20000
     Hog futures maybe corn & SBM                       10000
                                                            0
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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%
                               .




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     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
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
Supply
Derived from cost function
  • Production function
  • Input - output relationship
Assume that firms seek to
  • Maximize profits
  • Minimize costs
Supply starts will individual firm
Market supply curves

                 S1          Move from A to B is a
Px                    S2
             A               change in quantity
                             supplied due to a price
                             decline.

        B
                  C
                           Move from B to C is a
                           shift in supply.


                                    Qx
Supply Shifts from Change
in input prices
in returns for competing enterprises
in price of joint products
in technology on yields or costs
in yield and/or price risk
institutional constraints
SUPPLY DOES NOT CHANGE DUE TO A
 CHANGE IN PRICE OF THE OUTPUT
Demand considerations
  Demand for meat by consumers
  Derived demand for animal by
   packers
  Derived demand for feeder livestock
   by feedlots and finishers
Law of Demand
All else equal consumers will by more
 of a item at lower prices and buy less at
 higher prices.
Demand begins with individual
 consumer
Inverse relationship between quantity
 and price
  • Two dimensional, Price and Quantity
Downward Sloping
Demand Curve
Px
          A
PA




PB             B

                   D

     QA       QB       Qx
        BEEF PRICE-QUANTITY RELATIONSHIP
$/lb Annual, Retail Weight, Deflated Choice Retail Price
4.40
4.20             04
               05                                                 83
4.00    08   03                                                   84
              07
                06 91 90 89
3.80         93 01                             88
                  92                                 87             85
3.60                94
                       02                                          86
                     9500
3.40                    96
                   97      99
3.20                    98

3.00
       62          67                      72                77

                    Livestock Marketing Information Center
Factors that Cause a Shift in Demand
 Price of substitutes
 Price of complements
 Consumer income
 Taste and preferences
 Population and exports
 Government intervention
 IS NOT FUNCTION OF THE GOOD’S OWN
  PRICE
   Derived Demand
                        Vertical distance is the difference
                    S   is price at 3 levels
                        There is cost associated with
                        moving from one level to the next
   Px

Pretail


Pwholesale
Pfarm                   Dretail        Cuts of meat


                        Dwholesale     Carcasses


                        Dfarm          Animals
             Q                       Qx
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
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   $82.50

				
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