Academic journal article Journal of Agricultural and Applied Economics

Fed Cattle Profit Determinants under Grid Pricing

Academic journal article Journal of Agricultural and Applied Economics

Fed Cattle Profit Determinants under Grid Pricing

Article excerpt

This study determines the relative effects of price, cattle quality, and feeding performance factors on profit per head for fed cattle marketed via a grid structure. Two different data sets of cattle that were marketed in two different grid pricing systems are used in the analysis with comparisons of results made between grids. Grid base price and feeder cattle price are the most important determinants of profit over time in both grids. However, considering only nonprice variables, the cumulative quality of cattle in a pen is also an important profit determinant.

Key Words: cattle feeding profit, grid pricing, robust regression

JEL Classifications: L15, Q12, Q13

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The beef industry faced 20 years of declining consumer demand and loss of market share relative to pork and poultry from 1980 through the late 1990s (Purcell). The decline in consumer demand occurred for a number of reasons,1 but inconsistency in beef quality related to pricing fed cattle on averages was a contributing factor (Schroeder et al. 1998; Smith et al.). Recently, the beef industry has responded by attempting to increase vertical coordination throughout the sector and ultimately change the way cattle are produced and marketed. One of the more dramatic changes is the rapid adoption of grid pricing. Results of a recent cattle feeder survey indicated 16% of fed cattle were sold using a grid in 1996 and 45% in 2001, and this was expected to increase to 62% by 2006 (Schroeder et al. 2002).2 In a grid pricing system, each animal potentially receives a different price reflecting its individual carcass merit so producers that market higher quality animals receive premiums and producers who market lower quality cattle receive discounts. Such changes in pricing methods can markedly affect cattle sales revenue and therefore feeding profit.

Previous research estimated that fed and feeder cattle price variability explained about 50% and 25%, respectively, of the variation in cattle feeding profit over time (Langemeier, Schroeder, and Mintert; Mark, Schroeder, and Jones). Corn prices, feed conversion, and average daily gain were also important profit determinants. With adoption of grid pricing, producers face an expanded set of factors that potentially affect cattle feeding profit and profit variability across pens and over time (Feuz; Feuz, Fausti, and Wagner 1993, 1995; Ward, Feuz, and Schroeder). In particular, premiums and discounts for individual carcasses that vary over time potentially increase variability in selling price both temporally and across pens of cattle. To better manage this increased risk, cattle feeders need to understand the relative importance of grid pricing components and other cattle feeding profit determinants.

The objective of this paper is to determine the relative effects of prices, cattle quality, and feeding performance factors on profit per head for fed cattle marketed using price grids. The analysis is conducted for cattle marketed using two distinctly different grid structures to establish whether relative importance of profit determinants change from one grid structure to another. This study extends earlier work by Feuz, Fausti, and Wagner (1993) by considering profit variability over time as prices and other factors fluctuate. With grid pricing adoption increasing, there is a strong need to quantify profit variability determinants for fed cattle sold under grids. Results provide cattle feeders with an increased understanding of the relative importance of grid pricing components and feeding cost variability so they can develop appropriate marketing, production, and risk management strategies.

Grid Structures

Grid pricing mechanisms are set up differently under different agreements and vary across packers (Ward, Feuz, and Schroeder). The two grids (grid A and grid B) used in this analysis are outlined here.3

As with all grids, a base price is the starting point from which premiums and discounts for carcass characteristics are applied. …

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