P. J. Rathwell, Extension Ag Economist

The new millennium will bring with it new and different marketing opportunities for Carolina cattle producers. Retained ownership through the feedlot to the packer is one of these alternatives that are being considered by cattlemen. One of the critical issues in this decision is how to price finished cattle. This paper attempts to summarize and compare some of the issues surrounding this question.

There are three general cattle pricing methods: live, dressed or the grid. And, there are numerous factors that affect the way cattle are priced. Some of these factors are listed in Table 1. The factor's influence is felt via the way cattle are sold. For example, on the live and dressed pricing methods, the quality grade of the animal is not considered. Quality is used in the grid method. Performance risk (the risk of the buyer's estimate of the animal's actual value) is borne by the buyer under the live and dressed method of pricing cattle. Under the grid method all risk is borne by the seller.

Live cattle sales are well known by cattle producers. So, let's talk about selling on a dressed and grid basis. Dressed (formula) price regimes consist of a base price and premiums and discounts to this base. Dr. Ted Schroeder et al. (Kansas State University) discovered that packers use different methods to develop the base. One method was the average price of cattle purchased by the plant where the cattle were to be slaughtered. The average price of cattle was usually for the week prior to, or the week of, slaughter. Other base prices were specific market reports such as highest reported price for a specific market for the week prior to, or week of, slaughter. One base price was tied to live cattle futures prices. Some base prices were negotiated. Some base prices were on a carcass weight basis, whereas others were reported on a live weight basis based upon yields of the cattle slaughtered.

Packers frequently establish base prices using plant average quality grades and dressing percentages of cattle slaughtered during the week. Before agreeing to deliver cattle to a particular packer on formula, the producer should understand in detail how the base price is calculated and obtain some base price quotes over time from several packers or alliances.

In addition to considering the base price, cattle producers should evaluate the price premium/discount structures of various packers' grids and determine the most advantageous grid. Different grids may offer significantly different prices for the same quality of cattle. And, packers and alliances value animal traits differently.

Pens of cattle that are fairly uniform generally bring similar prices with different packer grids. However, pens with even small percentages of higher or lower grade carcasses, heavier or lighter animals, or more than the average number of "out" cattle (dark cutters, stags, bullocks, etc.) have much more variable prices. For this reason, it is important for cattle producers to know their cattle, sort cattle carefully and target then for specific packer or alliance grids.

There are some other factors to consider. It is important to understand determinants of price differences over time. Small changes in dressing percentage alter relative advantages of selling on either a live or dressed basis. For example, with a $65/cwt. live steer price and a $102.50/cwt. dressed-carcass price, cattle dressing higher than 63.4 percent will receive a higher price per head if sold dressed rather than live and cattle with a lower dressing percentage will receive a higher price on a live basis. With these prices, a 1200-pound live steer will gain $6/head in value for each $0.50 increase in dressing percentage.

Over time one of the most important determinants of price grid premiums and discounts is the Choice to Select carcass price spread. The greater the Choice to Select price spread the greater the price discount for lower quality cattle. The Choice to Select price spread varies over time as the cattle supply and demand for specific quality grades change.

Yield grade premiums and discounts have remained relatively stable over time for all packer grids. Therefore, this pricing factor is expected to remain more predictable than the Choice to Select spread.