Grid MarketingGrid MarketingSorting out the numbersSorting out the numbers

Cattle-FaxCattle-FaxMike MillerMike Miller

Bill ChandlerBill Chandler

A Balancing ActA Balancing Act

Grid Marketing Grid Marketing

General OverviewGeneral Overview Grids: How they workGrids: How they work Cattle MarketsCattle Markets Trends in grid marketingTrends in grid marketing Helpful ToolsHelpful Tools

What is the industry target?What is the industry target?

Quality GradeQuality Grade Yield GradeYield Grade Carcass CharacteristicsCarcass Characteristics WeightWeight

The TargetThe TargetYield Grade 1 Yield Grade 2 Yield Grade 3 Yield Grade 4 Yield Grade 5

Prime $16.20 $13.70 $12.20 $(4.80) $(9.20)

CAB $11.20 $8.70 $7.20 $(7.80) $(12.80)

Choice $7.20 $4.70 $3.20 $(11.80) $(16.20)

Select $0.80 $(3.30) $(4.80) $(19.80) $(24.20)

Standard $(11.00) $(13.50) $(15.00) $(30.00) $(35.00)

550 Carcass Weight Range 950

*Ch/Sel Spread $8.00 *60% Choice Grade

How Grids WorkHow Grids Work

PremiumsPremiums PrimePrime Upper 2/3 Choice (i.e. CAB)Upper 2/3 Choice (i.e. CAB) ChoiceChoice YG 1YG 1 YG 2YG 2

How Grids WorkHow Grids Work

DiscountsDiscounts SelectSelect StandardStandard YG 4YG 4 YG 5YG 5 B-MaturityB-Maturity Dark CutterDark Cutter Weight (either light or heavy)Weight (either light or heavy)

How grids workHow grids work

Other FactorsOther Factors FreightFreight Base price determinationBase price determination Quality grade baseQuality grade base Weight limitsWeight limits

What is your target?What is your target?

Quality GradeQuality Grade Red Meat YieldRed Meat Yield NaturalNatural

Seek out a program that fits your cattleSeek out a program that fits your cattle

Grid Marketing BasicsGrid Marketing Basics

Grid marketing does not guarantee a Grid marketing does not guarantee a premiumpremium Discounts can be substantialDiscounts can be substantial

It transfers risk from the packer to the It transfers risk from the packer to the owner of the cattleowner of the cattle

Grids change constantlyGrids change constantly

How do you maximize returns?How do you maximize returns?

Understand your cattleUnderstand your cattle Be honestBe honest

Understand the marketUnderstand the market Just because your marketing on a grid or Just because your marketing on a grid or

formula does not detach you from the cattle formula does not detach you from the cattle marketmarket

Understand the programUnderstand the program Premiums versus discountsPremiums versus discounts

CattleCattle

Do you have some history on the cattle?Do you have some history on the cattle? Performance in the feedlotPerformance in the feedlot Carcass characteristicsCarcass characteristics

Be conservative when you estimate future Be conservative when you estimate future performanceperformance

Importance of performanceImportance of performance Don’t overlook feedlot performanceDon’t overlook feedlot performance

Pen 1Pen 1 Pen 2Pen 2

ADGADG 3.03.0 -10%-10% 3.33.3

Conv.Conv. 6.06.0 -10%-10% 6.66.6

Cost of Cost of gaingain

$.50$.50 +10%+10% $.55$.55

500 lbs.500 lbs. $250$250 $275$275

$25 per $25 per headhead

Market FundamentalsMarket Fundamentals

Seasonal supply and demandSeasonal supply and demand Choice/Select spreadChoice/Select spread Timing of marketingsTiming of marketings

Steer and Heifer SlaughterSteer and Heifer Slaughter

1,500

1,700

1,900

2,100

2,300

2,500

2,700

2,900

J F M A M J J A S O N D

(000) head5-year average

2003

Weekly Average Beef ProductionWeekly Average Beef Production

425

450

475

500

525

550

575

J F M A M J J A S O N D

Million pounds

2003

5-yr avg.

Choice/Select SpreadChoice/Select Spread

$0

$2

$4

$6

$8

$10

$12

$14

$ per cwt.

1990 1992 1994 1996 1998 2000 2002

Ch/Sel Spread SeasonalityCh/Sel Spread Seasonality

$0

$2

$4

$6

$8

$10

$12

$14

$16

$ per cwt.

J F M A M J J A S O N D5-year average spread

Seasonality of Fed Cattle PricesSeasonality of Fed Cattle Prices

88%

92%

96%

100%

104%

108%

J F M A M J J A S O N D

Choosing the right programChoosing the right program

What fits your cattle?What fits your cattle? Change the grid to the cattle not the cattle to Change the grid to the cattle not the cattle to

the gridthe grid Quality grade versus yield gradeQuality grade versus yield grade Where will the cattle be fed?Where will the cattle be fed? How much does it cost?How much does it cost?

Choosing the right programChoosing the right program

Analyze the premium/discount structureAnalyze the premium/discount structure Fixed grade base vs. plant averagesFixed grade base vs. plant averages How is the Choice/Select spread determinedHow is the Choice/Select spread determined

Base price determinationBase price determination

Trends in Value DiscoveryTrends in Value Discovery

Gathering more informationGathering more information

Fine tuning managementFine tuning management

Impact on genetic selectionImpact on genetic selection

Value Discovery Changing

+1

+2

+6

-10

-12

-16

PAR

yg1 yg2 yg3 yg4 yg5

Premiums

Discounts

Additional Premiums for: -Prime -CAB or Similar Specs -Choice

1980’s

1990’s

2000

Pricing Method: Pricing on Value of Beef and the By-Products Produced

Message: “Some Cattle are Better than Others”

Result: Produce More of the Better Cattle

Grid MarketingGrid Marketing

Pulling Product Through

Sharing Information

Beef Industry Structure:The Way it is Evolving

Seed Stock

Cow/CalfStockerFeedlotPacker

ProcessorRetailerFoodservice

Consumer

Percentage of fed cattle movement from: Formula, Percentage of fed cattle movement from: Formula, contract, alliances and packer fed cattlecontract, alliances and packer fed cattle

0

10

20

30

40

50

60

Percent

1995 1997 1999 2001 2003

Percent of cattle graded ChoicePercent of cattle graded Choice

50.5051.0051.5052.0052.5053.0053.5054.0054.50

1996 1997 1998 1999 2000 2001 2002 2003

Percent

Cattle Yield GradesCattle Yield Grades

30

35

40

45

50

55

1995 1997 1999 2001 2003

Percent

Yield grade 1 & 2

Yield grade 3 & 4

Cattle Carcass WeightsCattle Carcass Weights

640

660

680

700

720

740

760

780

1990 1992 1994 1996 1998 2000 2002

pounds

TrendsTrends

Larger premiums but larger discounts as Larger premiums but larger discounts as wellwell

Different base pricesDifferent base prices More coordinated programsMore coordinated programs More cattle marketed on grids and More cattle marketed on grids and

formulasformulas