For Updated Livestock Marketing Information Visit the K-State Livestock & Meat Marketing Web Site .

For Updated

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


“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)


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



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



1976Steer & slaughter of four largest firms equivalent to 25% of total

1998Steer & slaughter of four largest firms equivalent to 80% of total


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)


While concentration was increasing, beef demand was declining


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



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





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



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





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


Best News In

Beef Industry

In 20 Years


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


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


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


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


Concentration Among Food Retailers Is Also Taking Place

26.5%


Big Supermarkets Dominate The Retail Food Landscape


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


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?


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


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


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)


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


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


($/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


($/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


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 Attributes Value of Managing Cattle Attributes



Value ofManagingAttributes$3.27/cwtor$28.87/head


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


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


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


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


Large Revenue Variability

Avg.=$877/head


1. Carcass Weight Problems?


2. Quality Grade Issues?


3. Yield Grade Concerns?


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




Grid Variability Over TimeGrid Variability Over Time

Premiums and Discounts vary over

time as market conditions change


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


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


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


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


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


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)


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”


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


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


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


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”


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


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

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