Livestock Markets 2007Billion Per Cap Price Exp Imp

lbs1 lbs2 $/cwt %3 %3

Beef 26.4 65.2 92.61 5.4 11.6

Pork 21.9 50.8 46.94 14.3 4.4

Broilers 36.1 85.4 77.53 16.0 0.2

Turkeys 5.9 17.6 81.98 9.3 0.2

1/ Billion pounds of US production

2/ Pounds consumed per person per year

2/ As a percent of production

Retail Per Capita Meat Consumption, Retail Pounds/year

0102030405060708090

100

1980

1982

1984

1986

1988

1990

1992

1994

1996

1998

2000

2002

2004

2006

Beef Pork Chicken Turkey

Remember: Consumption is not demand!

Measuring consumption Balance sheet approach

Beginning inventories+ Production+ Imports- Exports- Ending inventory= Disappearance

Per Capita consumption = Disappearance / Population

A measure of supply rather than demand

US Meat Exports, Carcass Weight (Billion Lbs)

0.0

1.0

2.0

3.0

4.0

5.0

6.0

7.0

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

Beef Pork Chicken Turkey

US Beef Trade Balance, Billion Lbs

0.0

1.0

2.0

3.0

4.0

5.0

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

Beef Exp Beef Imp Beef Imp + Net Cattle

US Pork Trade Balance, Billion Lbs.

0.0

1.0

2.0

3.0

4.0

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

Pork Exp Pork Imp Pork Imp + Net Hogs

Average Carcass Weight for US Cattle and Hogs

650

670

690

710

730

750

770

790

1987

1989

1991

1993

1995

1997

1999

2001

2003

2005

2007

175

180

185

190

195

200

205

Beef Pork

2007 v. 1987Beef +17.4%Pork +13.9%

Livestock Marketing Decisions

When to sell• Weight, grade, costs

What to sell• Live, carcass, grid

Where to sell• Type of market• Location

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

MR

MC

Weight

$

When to sell Marginal Revenue

• Uncertain about price if you wait to sell (price trends)

• Typically animals increase the portion of fat relative to muscle produced as they get heavier.

• There is an optimal weight range by packers» Discounts if too light or too heavy

• Optimal degree of “finish”» Different for hogs versus cattle

» Both can be too fat

Estimated Lean Meat Yield for Pork Carcasses by Carcass Weight

88

90

92

94

96

98

100

102

104

106

108

110

170 180 190 200 210 220

When to sell

MC increases at an increasing rate as the animal nears the optimal market time• Function of animal efficiency related to

genetics• Is impacted by feed prices

» For the same efficiency the MC is higher if feed is 10 cents per pound than when feed is five cents per pound.

Marginal and Average Feed to Gain Ratio by Slaughter Weight for Market Hogs

0

1

2

3

4

5

6

230 240 250 260 270 280 290

Average Feed to Gain Marginal Feed to Gain

When to sell

Marginal Revenue • MR increases then decreases due to

premiums and discounts associated with grades

• Is also a function of seasonal price trends that could be higher or lower

Hog Carcass Weight Discounts ($/cwt)

-$20.00

-$18.00

-$16.00

-$14.00

-$12.00

-$10.00

-$8.00

-$6.00

-$4.00

-$2.00

$0.00

145# 155# 165# 175# 185# 195# 205# 215# 225#

Average of the reported range of price discount for carcass weights.

Hog Carcass Upper and Lower Price by Backfat Thickness in Inches for 7.0 sq in Loin Eye, ISM, Aug 26, 2005

$50

$55

$60

$65

$70

$75

$80

0.40 0.50 0.60 0.70 0.80 0.90 1.00 1.10 1.20 1.405-Day Rolling Average Market Hog: 193.50 lb carcass, 0.75 inch back-fat, 6.90 square inch loin/2.30 inch loin depth, FFLI: 51.28%

Hog Carcass Upper and Lower Prices by Loin Eye Area for 0.7 Inches of Backfat, ISM August 26, 2005

$50

$55

$60

$65

$70

$75

$80

4 5 6 7 85-Day Rolling Average Market Hog: 193.50 lb carcass, 0.75 inch back-fat, 6.90 square inch loin/2.30 inch loin depth, FFLI: 51.28%

When to sell

Complicated decision based on• Season• Current leanness and efficiency• Packer buying program

Also influenced by• Production schedule• Cost of replacement animal

SEASONAL PRICE INDEX -- UTILITY COWSSouthern Plains, 1997-2006

0.80

0.85

0.90

0.95

1.00

1.05

1.10

1.15

Jan Mar May Jul Sep Nov

Index

Max.Index

Avg.Index

Min.Index

C-P-5107/12/07

SEASONAL PRICE INDEX -- FED STEERSSouthern Plains, 1997-2006

0.85

0.90

0.95

1.00

1.05

1.10

1.15

1.20

Jan Mar May Jul Sep Nov

Index

Max.Index

Avg.Index

Min.Index

C-P-51A07/12/07

SEASONAL PRICE INDEX -- FEEDER STEERS700-800 Pounds, Southern Plains, 1997-2006

0.85

0.90

0.95

1.00

1.05

1.10

1.15

Jan Mar May Jul Sep Nov

Index

Max.Index

Avg.Index

Min.Index

C-P-51B07/12/07

SEASONAL PRICE INDEX -- STEER CALVES500-600 Pounds, Southern Plains, 1997-2006

0.85

0.90

0.95

1.00

1.05

1.10

1.15

Jan Mar May Jul Sep Nov

Index

Max.Index

Avg.Index

Min.Index

C-P-51C07/12/07

SEASONAL PRICE INDEX-- SLAUGHTER HOGS

Iowa - Southern Minnesota, 1997-2006

0.50

0.60

0.70

0.80

0.90

1.00

1.10

1.20

1.30

1.40

Jan Mar May Jul Sep Nov

Index

Max.Index

Avg.Index

Min.Index

H-P-0307/12/07

While are there seasonal price patterns?????

Seasonal supply driven by• Production cycle that impacts

» Conception

» Deathloss

» Cost of gain

Seasonal demand driven by• Weather• Holidays

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

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

Negotiated

Other Market

Formula

Swine or Pork

Market Formula

Other Purchase

AgreementTotal Wt

Avg

HEAD COUNT 37,083 23,563 156,551 54,891 272,088

CARCASS BASE PRICE 71.19 63.7 69.58 66.95 68.68

AVERAGE NET PRICE 72.87 67.01 72.29 68.53 71.12

LOWEST NET LOT 43.77 54.31 46.6 55 54.48

HIGHEST NET LOT 79.86 76.9 80.99 81.41 79.32

AVERAGE LIVE WT 251.66 264.29 261.79 259.21 260.38

AVERAGE CARCASS WT 192.23 201.61 197.36 198.97 197.42

AVERAGE SORT LOSS -1.39 -1.13 -1.19 -0.83 -1.13

AVERAGE BACKFAT 0.75 0.77 0.75 0.75 0.75

AVERAGE LOIN DEPTH (LD) 2.27 2.52 2.47 2.28 2.41

LOINEYE AREA (LD Converted) 6.81 7.58 7.43 6.85 7.26

AVERAGE LEAN PERCENT 53.61 54.23 54.58 53.88 54.29

NATIONAL DAILY DIRECT HOG PRIOR DAY REPORT - SLAUGHTERED SWINE Slaughter Data for Wednesday, August 24, 2005

Mandatory Price Reporting Definitions NEGOTIATED PURCHASES

Cash or spot market purchase of swine by a packer from a producer where there is an agreement on base price and a delivery day not more than 14 days after the date on which the livestock are committed to the packer.

OTHER MARKET FORMULA PURCHASES The pricing mechanism is a formula price based on any market other than the market for swine, pork, or a pork product. It does include formulas based on futures or options contracts.

SWINE OR PORK MARKET FORMULA PURCHASES The formula price based on a market for swine, pork, or a pork product, other than any formula purchase with a floor, window, or ceiling price, or a futures or options contract for swine, pork, or pork product.

Mandatory Price Reporting Definitions OTHER PURCHASE ARRANGEMENTS

This would include long term contract agreements, fixed price contracts, cost of production formulas, formula purchases with a floor, window, or ceiling price.

PACKER OWNED Swine that a packer, including a subsidiary or affiliate of the packer, owns for at least 14 days immediately before slaughter.

PACKER SOLD Swine that are owned by a packer, including a subsidiary or affiliate of the packer, for more than 14 days immediately before sale for slaughter; and sold for slaughter to another packer.

Percent of U.S. Hogs Sold Through Various Pricing Arrangements, January 1999-2007*1999 2000 2001 2002 2003 2004 2005 2006 2007

Hog or meat market formula 44.2 47.2 54 44.5 41.4 41.4 39.9 41.8 38.3

Other market formula 3.4 8.5 5.7 11.8 5.7 7.2 10.3 8.8 8.5

Other purchase arrangement 14.4 16.9 22.8 8.6 19.2 20.6 15.4 16.6 15.2

Packer-sold 2.1 2.2 2.1 2.4 2.6 6.7

Packer-owned 16.4 18.1 17.1 21.4 20 22.7

Negotiated - spot 35.8 25.7 17.3 16.7 13.5 11.6 10.6 10.2 8.6

Producer Sold Hogs: Price by Purchase Type Relative to the Average Price

NegotiatedOther Mkt Formula

Swine/pork Mkt Formula

Other Purchase

Arrangement

2001 100% 95% 100% 98%

2002 96% 103% 96% 112%

2003 98% 102% 97% 105%

2004 104% 91% 102% 99%

2005 104% 95% 101% 98%

2001: May-Dec, 2005: Jan-Aug

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 ??????

Feeder pig sales

Price/head or live weight• 40-60 pound classes• Weaned pigs (10-12 pounds)

Primarily direct trade• Rapidly declining auctions• Health and stress concerns

Premiums for• Large uniform, single source• Genetic history

Share of Reported Pig Sales by Weight

0%

10%

20%

30%

40%

50%

60%

70%

2000 2001 2002 2003 2004

EW 40 50

Feeder pig sales

Spot market price• Often through a broker• USDA report

Formula pricing• Based on observable price• Spot market• Hog futures maybe corn and SBM

USDA Reported Pig Sales by Formula or Cash Prices

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

EW10 40 45 50 55 All

Formula Cash

$-

$10

$20

$30

$40

$50

$60

$70

$80

$90O

ct-0

3

Dec

-03

Feb

-04

Ap

r-0

4

Jun

-04

Au

g-0

4

Oct

-04

Dec

-04

Feb

-05

Ap

r-0

5

Formula Cash

USDA Reported Cash and Formula Prices for 40# Pigs

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

Value-based Hog Marketing

Two factors impact premiums Carcass weight and leanness

• Fixed premiums (known dollar amount)• Relative premiums (percent adjustment)

Not USDA graded• Packer employee measures• Objective measures

» Fat-O-Meter, ruler, ultra-sound

Hog Carcass Weight DiscountsCarcass 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 0.00IOWA/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 MATRIXLM_HG204, Fri, Aug 26, 2005, USDA Market News Des Moines, Iowa

Comparing bidsPrice in appropriate $/cwt A BBid Price (live) $44.50 ---Bid Price (carcass) --- $59.50Lean premium --- +1.25Sort discount --- -.70Dressing percentage 74.5 74.5Adjusted to live 44.50 44.73Transportation -.85 -.35Net farm gate price $43.65 $44.38

Value-Based Cattle MarketingValue-Based Cattle MarketingThree 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

0%

10%

20%

30%

40%

50%

60%

70%

80%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

0%

10%

20%

30%

40%

50%

60%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 MarketingValue-Based Cattle Marketing

Common Ground for Targets1. Carcass Weights 550 - 950 lbs

2. Quality Grade > Se+ or > Ch0

3. Yield Grade 1’s and 2’s

Quality Yield Grade

Grade 1 2 3 4 & 5Prime +$$$$$ +$$$$ +$$$ -$$

Choice+ and Choiceo +$$$ +$$$ +$$ -$$

Choice- +$$$ +$$ Base -$$$Select -$ -$$ -$$$ -$$$$Standard -$$$$ -$$$$ -$$$$ -$$$$Out Cattle -$$$$$ -$$$$$ -$$$$$ -$$$$$

Carcass Merit Grid and Premium TrendsCarcass Merit Grid and Premium Trends

Where are the Grid Rewards & Discounts? Where are the Grid Rewards & Discounts?

Iowa Quality Beef Grid 2005 Base: NE Wted Avg 65-80% Choice Par: Ch YG3 =Base + $2.00 or Plant clean

up which ever is greater

Quality Grade $/cwt• Prime: $6.00• Certified Angus: $3.50• Select USDA• Standard -$15.00• Commercial -$30.00• Dark Cutters -$30.00• Other -$30.00

Yield Grade$/cwt

1:$4.00

2:$3.00

3:Par4:

-$20.005:

-$25.00

Carcass weights$/cwt

Under 500-$40.00

500-549-$15.00

950-999-$8.00

1000 & up-$35.00

Comparing Bids ($/carcass cwt)Price in appropriate $/cwt A BBase bid price 122.00 121.00

Prime 3% --- +6.00Top 2/3 Ch 45% --- +3.50Select 30% --- -8.00Yield 1&2 60% --- +2.50Off weight 3% --- -15.00

Transportation -.65 -1.25Net farm gate price 120.35 120.16Bid A is a straight in the meat bid, Bid B is a valued-based bid.

Summary When to sell is complicated

• Perishable, non-storable

• Rising cost and changing value

What to sell is complicated• Understanding shrink

• Know what is under the hide

Where to sell• Transportation

• Buyer programs

• Number of bidders

Making Pricing Decisions

Regardless of what, when and where to sell the farmer must decide when to price.

Typically, animals priced at delivery Can be priced before delivery with

futures or forward contracts How to decide if to price early?

Price Objectives

Express cost and profit in $/cwt terms• Same units as price

Start with cost of production• Variable cost• Total costs

Set multiple objectives• Return over variable cost• Return over total cost• Desired profit margin

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

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

Objective Based Pricing Strategy

550# steer calf fed to 1200 slaughter weight

Cost/hd $/cwt

Objective Based Pricing

Compare price objectives to price offered• Basis adjusted futures• Basis adjusted options floor price• Forward contract price from packer• Price forecast of cash prices

How much to pay for feeder animal

Work back from total revenue

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 25.00 122.71550# steer calf fed to 1200 slaughter weight

Cost/hd $/cwt

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