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Livestock Marketing Information
Visit the
K-State Livestock & Meat Marketing
Web Site
www.agecon.ksu.edu/livestock
K-State Research & Extension
Dealing With Market Consolidation
James Mintert, Ph.D.
Professor &
Extension Ag. Economist, Livestock Marketing
Dept. of Agricultural Economics
Kansas State University
K-State Research & Extension
“This squall between the packers and the producers of this country ought to have blown over forty years ago, but we still have it on our hands…”
Senator John B. Kendrick of Wyoming
(1919)
K-State Research & Extension
Concentration Has Increased Dramatically
1976
• 145 steer and heifer slaughter plants with capacity greater than 50,000 head
• Slaughtered a total of 22.4 million head
• 5 plants slaughtering more than 500,000 head, accounted for 15% of slaughter
K-State Research & Extension
Concentration Has Increased Dramatically
1998
• 38 steer and heifer slaughter plants with capacity greater than 50,000 head
• Slaughtered a total of 26.7 million head
• 14 plants slaughtering more than 1,000,000 head, accounted for 67% of slaughter
• Average slaughter in large plants nearly doubled from 1976 to 1998
K-State Research & Extension
Concentration Has Increased Dramatically
1976Steer & slaughter of four largest firms equivalent to 25% of total
1998Steer & slaughter of four largest firms equivalent to 80% of total
K-State Research & Extension
Concentration Driven By Cost Considerations
• Historically, gross profit margins have been about the same for all major meat packers
• Differences in profitability across firms was attributable to differences in costs
• Low cost firms came out on top
• Economies of size in slaughtering and fabrication were very large(Sersland, Duewer & Nelson; McDonald; Paul)
K-State Research & Extension
While concentration was increasing, beef demand was declining
K-State Research & Extension
Plotting Inflation Adjusted Price vs. Per Capita Consumption Provides A Picture of Beef Demand
Beef Price Quantity Relationships
Annual, 1980-2000.
80
81
82
83
84
85
86
8788
00
89
275
300
325
350
375
400
425
450
64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80
Per Capita Consumption - Retail Weight .
Deflated Beef Price - Cents per Lb
Source: USDA & Commerce Dept.
Price Deflated by GDP Implicit Price Deflator 1999=100
94
95
93
90
92
91
96
99
98
97
K-State Research & Extension
Beef Price Quantity Relationships
Annual, 1980-2000.
80
81
82
83
84
85
86
8788
00
89
275
300
325
350
375
400
425
450
64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80
Per Capita Consumption - Retail Weight .
Deflated Beef Price - Cents per Lb
Source: USDA & Commerce Dept.
Price Deflated by GDP Implicit Price Deflator 1999=100
94
95
93
90
92
91
96
99
98
97
Declining Demand Has Plagued The Beef Industry For 20 Years
Beef Demand Declined Precipitously During The 1980’s
K-State Research & Extension
Beef Price Quantity Relationships
Annual, 1980-2000.
80
81
82
83
84
85
86
8788
00
89
275
300
325
350
375
400
425
450
64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80
Per Capita Consumption - Retail Weight .
Deflated Beef Price - Cents per Lb
Source: USDA & Commerce Dept.
Price Deflated by GDP Implicit Price Deflator 1999=100
94
95
93
90
92
91
96
99
98
97
Declining Demand Has Plagued The Beef Industry For 20 Years
Demand Continued To Decline During the 1990’s
K-State Research & Extension
Best News In
Beef Industry
In 20 Years
K-State Research & Extension
Demand Showed Signs of Strengthening In 1999, 2000 & Again In 2001
Beef Price Quantity RelationshipsAnnual, 1980-2001
80
81
82
83
8485
86878801
00
89
275
300
325
350
375
400
425
450
64 65 66 67 68 69 70 71 72 73 74 75 76 77 78 79 80Per Capita Consumption - Retail Weight .
Deflated Beef Price - Cents per
Lb
Source: USDA & Commerce Dept. Price Deflated by GDP Implicit Price Deflator 1999=100
94 95
93
90
92
91
9699
9897
K-State Research & Extension
Another Look At Demand
Compute a demand index
The index accounts for changes in beef quantity
The index relates current beef prices to prices expected if demand was held constant at some prior year’s level
K-State Research & Extension
Beef Demand Is Improving
Retail Choice Beef Demand Index88 86
8379 76
70 6966 65 63 60 59 57 56 54 52
58
51
94
5553
0
10
20
30
40
50
60
70
80
90
100
81 82 83 84 85 86 87 88 89 90 91 92 93 94 95 96 97 98 99 00 01
Year
Index Value
Source: USDA, Dept. of Commerce & K-State Research & Extension Price Deflated By CPI, 1980 =100 for Beef Demand Index
Retail Choice Beef Demand Increased 5.3% during 2002
K-State Research & Extension
Changing Marketing Methods
• Increase in plant size
• Increase in firm size
• & desire to deliver products consumers want
Led to change in marketing methods
– Declining share of cash sales
– Increasing share of contract sales
K-State Research & Extension
Concentration Among Food Retailers Is Also Taking Place
26.5%
K-State Research & Extension
Big Supermarkets Dominate The Retail Food Landscape
K-State Research & Extension
Where Are We Headed?
• Lower costs encouraged growth of large plants
• Lower costs, procurement, marketing and food safety advantages have all encouraged growth of large firms
• Procurement requirements & desire to market more consistent products are encouraging vertical integration
K-State Research & Extension
Vertically Coordinated Supply Chains
• Cattle feeders need to consider how to fit in to a supply chain with more vertical coordination
• Alliances offer the opportunity to reap some of the benefits of a vertically coordinated supply chain
• Consider how you market your cattle
– How desirable are your cattle?
– Will they be in demand in the future?
K-State Research & Extension
Cattle Valuation Methods
Live Weight Pricing
1. Start with est’d. boxed beef price
2. Adjust for est’d. quality of cattle in pen
3. Convert to live weight: multiply by est’d. dress. %
4. Add est’d. by-product value
5. Subtract processing costs & profit target
6. Result: Live weight bid price
K-State Research & Extension
Cattle Valuation Methods
Dressed Weight Pricing
1. Start with est’d. boxed beef price
2. Adjust for est’d. quality of cattle in pen
3. No Need To Est. Dressing % Since Paying On Dressed Wt.
4. Add est’d. by-product value
5. Subtract processing costs & profit target
6. Result: Dressed weight bid price
K-State Research & Extension
Live Weight vs. Dressed Weight Pricing
• Dressed weight pricing reduces buyer uncertainty
• Buyer’s risk reduction leads to modest increase in prices paid for cattle priced on dressed weight vs. live weight (Feuz, Fausti, & Wagner, 1993)
K-State Research & Extension
Grid Pricing• Another evolution in cattle pricing
– Matrix of price discounts and premiums
– Each animal fits within a particular “grid”
• Instead of estimating cattle quality prior to slaughter, cattle are valued based on actual cattle quality after slaughter
• Result
– Higher quality cattle receive higher prices
– Lower quality cattle receive lower prices
K-State Research & Extension
Why Is A More Accurate Pricing System Desirable?
• Beef demand declined during 1980s and most of 1990s
• Industry needs to do a better job of providing consumers what they want
• Pricing cattle individually based on actual carcass characteristics is a step toward providing industry with price signals to provide customers what they want
K-State Research & Extension
($/cwt carcass weight) - - - - - - - - yield grade - - - - - - - -
Quality Grade 1 2 3 4 5 Prime 8.00 7.00 6.00 -14.00 -19.00Certified Angus Beef 3.00 2.00 1.00Choice 2.00 1.00 0.00 -20.00 -25.00Select -10.25 -11.25 -12.25 -32.25 -37.25Standard -20.25 -21.25 -22.25 -42.25 -47.25
Dark Cutters, Stags, Hardbones -20.00
Carcass WeightsGreater than 950 lbs. -25.00Less than 550 lbs. -25.00
Example GridExample Grid
K-State Research & Extension
($/cwt carcass weight) - - - - - - - - yield grade - - - - - - - -
Quality Grade 1 2 3 4 5 Prime 8.00 7.00 6.00 -14.00 -19.00Certified Angus Beef 3.00 2.00 1.00Choice 2.00 1.00 0.00 -20.00 -25.00Select -10.25 -11.25 -12.25 -32.25 -37.25Standard -20.25 -21.25 -22.25 -42.25 -47.25
Dark Cutters, Stags, Hardbones -20.00
Carcass WeightsGreater than 950 lbs. -25.00Less than 550 lbs. -25.00
Example GridExample Grid
How Does A Grid Work?How Does A Grid Work?
Start With BASE PRICE Choice, YG-3 price $118.00/cwt
Attribute USDA Grid PercentPrime +$7.00 x 6.2 = + $0.43/cwtCAB +$3.00 x 24.9 + $0.75/cwtChoice +$0.00 x 46.5 + $0.00/cwtSelect -$8.50 x 21.0 - $1.79/cwtStandard -$17.00 x 0.7 - $0.12/cwtOuts -$20.00 x 0.7 - $0.14/cwtYG 1 +$2.00 x 1.5 + $0.03/cwtYG 2 +$1.00 x 33.2 + $0.33/cwtYG 3 +$0.00 x 61.2 + $0.00/cwtYG 4 -$14.00 x 3.6 - $0.50/cwtYG 5 -$24.00 x 0.5 - $0.12/cwt <550 lbs. -$20.00 x 0 - $0.00/cwt>950 lbs. -$20.00 x 7.3 - $1.46/cwt
= $115.42/cwt carcass weight
Value of Managing Cattle AttributesValue of Managing Cattle Attributes
Attribute USDA Grid PercentPrime +$7.00 6.2CAB +$3.00 24.9 Choice +$0.00 46.5Select -$8.50 21.0Standard -$17.00 0.7Outs -$20.00 0.7YG 1 +$2.00 1.5YG 2 +$1.00 33.2YG 3 +$0.00 61.2YG 4 -$14.00 3.6YG 5 -$24.00 0.5 <550 lbs. -$20.00 0>950 lbs. -$20.00 7.3 PRICE $115.42/cwt carcass weight
186 steers on feed 147 days, ADG=3.8, Conversion=6.9, Live wt=1419lbs, 883 lb carcass, Choice, YG-3 price = $118.00/cwt
Value of Managing Cattle AttributesValue of Managing Cattle Attributes
Attribute USDA Grid Percent PercentPrime +$7.00 6.2 6.2CAB +$3.00 24.9 24.9Choice +$0.00 46.5 46.5Select -$8.50 21.0 21.0Standard -$17.00 0.7 0.7Outs -$20.00 0.7 0.7YG 1 +$2.00 1.5 1.5YG 2 +$1.00 33.2 33.2YG 3 +$0.00 61.2 61.2YG 4 -$14.00 3.6 3.6YG 5 -$24.00 0.5 0.5<550 lbs. -$20.00 0 0>950 lbs. -$20.00 7.3 0.00PRICE $115.42/cwt $116.88/cwt
$2,397 pen revenue186 steers on feed 147 days, ADG=3.8, Conversion=6.9, 883 lb carcass, Choice, YG-3 price = $118.00/cwt
Value of Managing Cattle AttributesValue of Managing Cattle Attributes
Attribute USDA Grid Percent PercentPrime +$7.00 6.2 6.2CAB +$3.00 24.9 24.9Choice +$0.00 46.5 46.5Select -$8.50 21.0 21.0Standard -$17.00 0.7 0.7Outs -$20.00 0.7 0.7YG 1 +$2.00 1.5 1.5YG 2 +$1.00 33.2 33.2YG 3 +$0.00 61.2 65.3YG 4 -$14.00 3.6 0.0YG 5 -$24.00 0.5 0.0<550 lbs. -$20.00 0 0>950 lbs. -$20.00 7.3 0.0PRICE $115.42/cwt $117.50/cwt
$3,421 pen revenue186 steers on feed 147 days, ADG=3.8, Conversion=6.9, 883 lb carcass, Choice, YG-3 price = $118.00/cwt
Value of Managing Cattle Attributes Value of Managing Cattle Attributes
Attribute USDA Grid Percent PercentPrime +$7.00 6.2 6.2CAB +$3.00 24.9 24.9Choice +$0.00 46.5 57.9Select -$8.50 21.0 10.0Standard -$17.00 0.7 0.0Outs -$20.00 0.7 0.0YG 1 +$2.00 1.5 1.5YG 2 +$1.00 33.2 33.2YG 3 +$0.00 61.2 65.3YG 4 -$14.00 3.6 0.0YG 5 -$24.00 0.5 0.0<550 lbs. -$20.00 0 0>950 lbs. -$20.00 7.3 0.0PRICE $115.42/cwt $118.69/cwt
$5,381 pen revenue186 steers on feed 147 days, ADG=3.8, Conversion=6.9, 883 lb carcass, Choice, YG-3 price = $118.00/cwt
Value ofManagingAttributes$3.27/cwtor$28.87/head
K-State Research & Extension
A Grid Pricing ExampleA Grid Pricing Example
• Grid Data AnalyzedGrid Data Analyzed
• - 183 steers from one herd
• - Carcass data collected
• - Valued based upon a recent grid
K-State Research & Extension
Yield Grade
Quality Grade 1 2-2.49 2.5-2.99 3 4 5
Prime $130.80 $129.20 $128.40 $127.00 $115.00 $108.00
Choice $123.80 $122.20 $121.40 $120.00 $108.00 $101.00
Select $114.30 $112.70 $111.90 $110.50 $98.50 $91.50
Standard $110.80 $109.20 $108.40 $107.00 $95.00 $88.00
<550 lbs. -$15.00
>950 lbs. -$15.00
A Grid Pricing Example
K-State Research & Extension
Unsorted Steer Carcass Data
ID CARC. WT. Qual. Grade Yld Grd Price Revenue
1 761 CHOICE- 3.5 $120.00 $913.20
2 686 SELECT 2.9 $111.90 $767.63
3 659 CHOICE- 1.8 $123.80 $815.84
4 841 SELECT 3.3 $110.50 $929.31
5 774 CHOICE- 3.2 $120.00 $928.80
6 734 SELECT 3.0 $111.90 $821.35
K-State Research & Extension
Sorted Steer Carcass DataID CARC WT Qual Grade Yld Grade Price Revenue
62 553 STANDARD 1.4 $110.80 $612.72
40 582 STANDARD 1.4 $110.80 $644.86
144 626 SELECT 2.3 $112.70 $705.50
145 633 SELECT 1.9 $114.30 $723.52
88 660 SELECT 2.6 $111.90 $738.54
17 672 SELECT 3.4 $110.50 $742.56
33 831 CHOICE- 2.8 $121.40 $1,008.83
146 858 CHOICE- 3.7 $120.00 $1,029.60
84 849 CHOICE- 2.8 $121.40 $1,030.69
15 865 CHOICE- 2.9 $121.40 $1,050.11
8 874 CHOICE 2.8 $121.40 $1,061.04
129 895 CHOICE 3.2 $120.00 $1,074.00
127 921 CHOICE 3.2 $120.00 $1,105.20
worst
best
K-State Research & Extension
Large Revenue Variability
Avg.=$877/head
K-State Research & Extension
1. Carcass Weight Problems?
K-State Research & Extension
2. Quality Grade Issues?
K-State Research & Extension
3. Yield Grade Concerns?
K-State Research & Extension
Yield Grade
Quality Grade 1 2-2.49 2.5-2.99 3 4 5
Prime 0 0 0 0 0
Choice 1 11 32 53 0 0
Select 3 25 32 23 1 0
Standard 2 0 0 0 0
<550 lbs. 0
>950 lbs. 0
Yield Grade
Quality Grade 1 2-2.49 2.5-2.99 3 4 5
Prime $130.80 $129.20 $128.40 $127.00 $115.00 $108.00
Choice $123.80 $122.20 $121.40 $120.00 $108.00 $101.00
Select $114.30 $112.70 $111.90 $110.50 $98.50 $91.50
Standard $110.80 $109.20 $108.40 $107.00 $95.00 $88.00
<550 lbs. -$15.00
>950 lbs. -$15.00
A Grid Pricing Example
Cattle Distribution
K-State Research & Extension
K-State Research & Extension
K-State Research & Extension
Grid Variability Over TimeGrid Variability Over Time
Premiums and Discounts vary over
time as market conditions change
K-State Research & Extension
Weekly USDA Packer Survey Quality Grade Grid Premiums/Discounts, 1998 - January 2002
-30
-25
-20
-15
-10
-5
0
5
10
1/5/98 7/5/98 1/5/99 7/5/99 1/5/00 7/5/00 1/5/01 7/5/01 1/5/02
Date
Premium ($/cwt carcass)Standard
Select
CAB
Prime
Source: USDA
K-State Research & Extension
Choice-Select Spread Follows A Seasonal Pattern
Choice Minus Select Box Beef . Price Spread, Seasonal Index .
405060708090
100110120130140150160170180
Jan Feb Mar Apr May June July Aug Sep Oct Nov Dec
Month
Index Value
.
(% of Annual Average)
.
.
1991-2000 Choice-Select Index
1996-2000 Choice-Select Index
Source: USDA & K-State Research & Extension
K-State Research & Extension
Weekly USDA Packer Survey Yield Grade Grid Premiums/Discounts, 1998 - January 2002
-25
-20
-15
-10
-5
0
5
1/5/98 7/5/98 1/5/99 7/5/99 1/5/00 7/5/00 1/5/01 7/5/01 1/5/02
Date
Premium ($/cwt carcass)
YG 3-4
YG 4-5
YG 5
YG 1-2 YG 2-3
Source: USDA
K-State Research & Extension
Weekly USDA Packer Survey "Out" Carcass Grid Premiums/Discounts, 1998 - January 2002
-40.00
-35.00
-30.00
-25.00
-20.00
-15.00
-10.00
-5.00
0.00
1/5/98 1/5/99 1/5/00 1/5/01 1/5/02
Date
Discount ($/cwt carcass)
Dairy Type
Dark Cutter
Bullock/Stag
Source: USDA
Heiferrette
K-State Research & Extension
Weekly USDA Packer Survey Weight Discounts,1998 - January 2002
-30.00
-25.00
-20.00
-15.00
-10.00
-5.00
1/5/98 7/5/98 1/5/99 7/5/99 1/5/00 7/5/00 1/5/01 7/5/01 1/5/02
Date
Discount ($/cwt carcass)
400-500 lbs.
1,000 up lbs.
500-550 lbs.
950-1,000 lbs.
Source: USDA
K-State Research & Extension
Conclusions
• Grid pricing increases risk for producers
– Increase in risk, on average, leads to increase in returns (Feuz, Fausti & Wagner)
• Grid pricing leads to greater price variability
– Grid price variation about double live-weight price variation (Schroeder & Graff)
K-State Research & Extension
Conclusions
• Grid pricing yields higher prices for cattle with
– high quality grades
– better yield grades &
– few heavy or light carcasses
• Comparisons among live weight, dressed weight and grid pricing indicate that only about half of cattle receive highest price under a grid
• So, cattle need to be managed aggressively to “target a grid”
K-State Research & Extension
Conclusions• Factors that affect revenue per head
1. Carcass weight variability
2. Choice-Select price spread
3. Yield grade variability less important
• But avoid YG 4’s & 5’s
• So, important to manage weight & quality grade
• Emphasis on quality grade should depend on Choice-Select spread
K-State Research & Extension
Conclusions
• Method to establish base price is important
• Use of plant average base prices can result in cattle sold at same time to different plants receiving different base prices
• Ward & Lee found base price variation resulted in $16/head revenue variation on a single day
• Base prices tied to plant averages are problematic
K-State Research & Extension
Conclusions
• Discounts for undesirable qualities exceed premiums for desirable characteristics
• Example
• Heavy & light weight discounts
• YG 4’ and 5’s
• Hardbones & dark cutters
• Must manage cattle to avoid these discounts
K-State Research & Extension
Conclusions
• Target Cattle With Specific Attributes to the Right
Grid at the Right Time
• Manage cattle aggressively
Market cattle before
• they are Y4-Y5 and have heavy carcasses
Sell high quality cattle on a “Quality Grid”
Sell high yielding cattle on a “Yield Grid”
K-State Research & Extension
Essential Data For Cow-Calf ProducerEssential Data For Cow-Calf Producer
1.Carcass I.D. matched withcarcass weightyield gradequality grade
pricerevenue
Traced to cow and bull
2. Calf birth date, weight, sex, weaning weight, unique circumstances
K-State Research & Extension
Questions to askQuestions to ask
1. Can “worst” calves be eliminated?Growing/finishing management - quick Genetics – slow
2. Can distributions of quality grade, yield grade etc. be improved?
Genetics
3. Should I sort and/or target different grids?high yield grade, lower quality to a yield
gridhigh quality, lower yield to quality grid
Keep in mind long run goals
For Updated
Livestock Marketing Information
Visit the
K-State Livestock & Meat Marketing
Web Site
www.agecon.ksu.edu/livestock