Feb 2005 Iowa Pork Regional Conferences 1. Optimal Selling Strategies & Comparing Packer Matrices IPPA-IPIC Regional Meetings

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1 IPPA-IPIC Regional Meetings Percent of Hogs Sold on Carcass Merit Basis Optimal Selling Strategies & Comparing Packer Matrices Steve R. Meyer, Ph.D. President Paragon Economics, Inc. Percent Firm Size by Head Marketed How Firms Marketed Slaughter Hogs, (percent of firms in size category) Load by load Negotiated contract Group contract Own packing plant Other - % Firm Size (thousand head mktd.) - % - % - % - % + % Contract - futures market Formula - hog prices Formula - meat prices Formula - feed/ledger Formula - feed/no ledger Window - ledger Window - no ledger Other Percent of Hogs Sold under Marketing Contracts (average of percentages reported by size category) Spot market - negotiated - Firm Size (thousand head mktd.) - - % - % - % + % Marketing More than pricing! Business schools talk about the (or ) P s of Marketing Product Place Price Promotion Positioning the th P; added in the s Surprisingly, all have a place in live hog marketing! Product What kind of hogs do you have? Carcass yield a factor only if you sell on a live weight basis Lean muscle yield BIG factor in the s and s; still a big determinant of net price Lean muscle quality growing importance but difficult to measure and quantify Breed two aspects Manifestation of muscle quality Consumer perception Black hog meat Rearing method Feb Iowa Pork Regional Conferences

2 Product What are you selling? Hogs are a PRODUCTION INPUT to the meat production process Intermediate good Today s differentiated product is tomorrow s commodity Very competitive Value is strictly a function of the value of the outputs meat, by-products Anything that causes less efficient processing detracts from value! Place Geographical location impacts transportation costs, trim loss, death loss, etc. A partial determinant of your market options for type and quality Few options: Can affect local price Not a factor in Iowa Less than mi. - mi. - mi. - mi. - mi. mi. or more Distance Hogs Are Hauled for Slaughter (percent of firms responding in size category) - % Firm Size (thousand head mktd.) - % - % - % - % + Place Extend the concept to Time.. Geographical location impacts transportation costs, trim loss, death loss, etc. A partial determinant of you market options for type and quality TIME can differentiate your product as well Possibly limited by production system/facilities Time interacts with several factors to determine optimal marketing weight:» Feed costs» Facilities costs» Other constraints One choice variable is the day of the week.. Tight schedule Somewhat flexible Market at desired weight Flexibility in Marketing Dates (percent of firms responding in size category) - % Firm Size (thousand head mktd.) - % - % - % - % + % Day of Week Differences, May -January Avg. Price* Difference from Average $/cwt. Percent $/cwt $/hd.** Monday $..% $. $. Tuesday $..% $. $. Wednesday $. -.% ($.) -$. Thursday $..% $. $. Friday $. -.% ($.) -$. Average $. *Iowa-Minnesota Prior Day Purchase, Wtd. Average Negotiated Price. **Assumes carcass weight of pounds. Feb Iowa Pork Regional Conferences

3 Price Consider a retailer s pricing decision: Buy products as cheap as possible and keep administrative costs as low as possible Add a profit margin that will pay all administrative costs plus the desired profit Offer the item to whoever will pay the price and allow them to buy as much as they want If not enough people will pay that price in a reasonable amount of time, offer the remaining stock at the highest price that will get it sold. PRICE YOUR PRODUCT WHEN YOU BUY IT! Buy inputs as cheap as you can, add expected transformation and administrative costs Add a profit margin that earns an acceptable rate of return on equity Know what packer forward contracts and the futures markets are paying on any day Sell if they meet your price objectives You can always put the remaining inventory on sale at the cash price when it HAS to be moved. Promotion and Positioning Promotion, per se, is difficult with any commodity product -- UNDIFFERENTIATED Breed or rearing method differentiation can be promoted POSITIONING Targeting a product to a buyer who you know prefers the characteristics of the product Know who wants what kind of hog Develop a relationship with packer buyer Research niche opportunities Number of Different Packers Sold to in (percent of firms responding in size category) packer packers packers packers packers packers packers packers - % Firm Size (thousand head mktd.) % % % % + % Packers reveal preferences through systems Percent of Marketings Sold to Producer s Largest Buyer Firm Size (, head mktd annually) Average of Firms Reporting % % % % % All Iowa packers pay mainly by carcass weight and leanness DIFFICULT TO COMPARE Different measurement devices Different leanness measurements Percentage versus dollar premiums Reasons for this difficulty? Different customers and different products mean different optimal systems Differences are not MEANT to be confusing but packers don t care if you can make direct price comparisons Feb Iowa Pork Regional Conferences

4 Tyson Grid parts to it Leanness Premiums/Discounts weight and leanness categories heaviest leanness categories are the same Largest discount is $/cwt carc. for <.% and ># Largest premium is $/cwt carcass for >% and ># Carcass Weight Discounts weight categories (note the difference) The round numbers on the page are LIVE weight smaller than the carcass discounts which are the ones actually used. Tyson Combine the two and get x Weight Animal Ultsasound Sesvices (AUS) % Lean Est Live Hot Casc < & up - - $ (.) $ (.) $ (.) $ (.) $ (.) $ (.) $ (.) $ (.) $ (.) $ (.) $ (.) $ (.) - - $ (.) $ (.) $ (.) $ (.) $ (.) $ (.) $ (.) $ (.) $ (.) $ (.) $ (.) $ (.) - - $ (.) $ (.) $ (.) $ (.) $ (.) $ (.) $ (.) $ (.) $ (.) $ (.) $ (.) $ (.) - - $ (.) $ (.) $ (.) $ (.) $ (.) $ (.) $ (.) $ (.) $ (.) $ (.) $. $. - - $ (.) $ (.) $ (.) $ (.) $ (.) $ (.) $ (.) $ (.) $. $. $. $. - - $ (.) $ (.) $ (.) $ (.) $ (.) $ (.) $ - $ - $. $. $. $. - - $ (.) $ (.) $ (.) $ (.) $ (.) $ (.) $ - $ - $. $. $. $. - - $ (.) $ (.) $ (.) $ (.) $ (.) $ (.) $ - $ - $. $. $. $. - - $ (.) $ (.) $ (.) $ (.) $ (.) $ (.) $ - $ - $. $. $. $. - - $ (.) $ (.) $ (.) $ (.) $ (.) $ (.) $ - $ - $. $. $. $. - - $ (.) $ (.) $ (.) $ (.) $ (.) $ (.) $ (.) $ (.) $. $. $. $. - - $ (.) $ (.) $ (.) $ (.) $ (.) $ (.) $ (.) $. $. $. $. $. - - $ (.) $ (.) $ (.) $ (.) $ (.) $ (.) $ (.) $ (.) $. $. $. $. - - $ (.) $ (.) $ (.) $ (.) $ (.) $ (.) $ (.) $ (.) $ (.) $. $. $. - - $ (.) $ (.) $ (.) $ (.) $ (.) $ (.) $ (.) $ (.) $ (.) $ (.) $. $. - - $ (.) $ (.) $ (.) $ (.) $ (.) $ (.) $ (.) $ (.) $ (.) $ (.) $ - $. - - $ (.) $ (.) $ (.) $ (.) $ (.) $ (.) $ (.) $ (.) $ (.) $ (.) $ (.) $. - - $ (.) $ (.) $ (.) $ (.) $ (.) $ (.) $ (.) $ (.) $ (.) $ (.) $ (.) $ (.) -up -up $ (.) $ (.) $ (.) $ (.) $ (.) $ (.) $ (.) $ (.) $ (.) $ (.) $ (.) $ (.) Feb Iowa Pork Regional Conferences

5 Hormel Grid x Grade/Last Rib BF, in - Est'd LW CW < & Up < < % % % % % % % - - % % % % % % % - - % % % % % % % - - % % % % % % % - - % % % % % % % - - % % % % % % % - - % % % % % % % - - % % % % % % % - - % % % % % % % - - % % % % % % % - - % % % % % % % - - % % % % % % % - - % % % % % % % & over & over % % % % % % % Apr- Red Box Quarterly Premiums: >.% & <. $./pig >.% & <.% $./pig >.% $./pig Excel Grid x Excel Lean Value Matrix Effective March, < > Under & Over Feb Iowa Pork Regional Conferences

6 Farmland Grid x Fat-O-Meater % Lean Hot Carcass Weight (lb) > <. P / D Under ($.) ($.) ($.) ($.) ($.) ($.) ($.) ($.) ($.) ($.) ($.) - ($.) ($.) ($.) ($.) ($.) ($.) ($.) ($.) ($.) ($.) ($.) - ($.) ($.) ($.) ($.) ($.) ($.) ($.) ($.) ($.) ($.) ($.) - ($.) ($.) ($.) ($.) ($.) ($.) ($.) ($.) ($.) ($.) ($.) - $. $. $. $. $. ($.) ($.) ($.) ($.) ($.) ($.) - $. $. $. $. $. $. ($.) ($.) ($.) ($.) $. - $. $. $. $. $. $. ($.) ($.) ($.) ($.) $. - $. $. $. $. $. $. ($.) ($.) ($.) ($.) $. - $. $. $. $. $. $. ($.) ($.) ($.) ($.) $. - $. $. $. $. $. $. ($.) ($.) ($.) ($.) $. - $. $. $. $. $. $. ($.) ($.) ($.) ($.) $. - $. $. $. ($.) ($.) ($.) ($.) ($.) ($.) ($.) ($.) - ($.) ($.) ($.) ($.) ($.) ($.) ($.) ($.) ($.) ($.) ($.) - ($.) ($.) ($.) ($.) ($.) ($.) ($.) ($.) ($.) ($.) ($.) Over ($.) ($.) ($.) ($.) ($.) ($.) ($.) ($.) ($.) ($.) ($.) P / D $. $. $. $. $. $. ($.) ($.) ($.) ($.) Morrell Grid x Weight Fat-O-Meter % Lean Est'd Live Carc < - - ($.) ($.) ($.) ($.) ($.) ($.) ($.) ($.) ($.) ($.) ($.) ($.) ($.) - - ($.) ($.) ($.) ($.) ($.) ($.) ($.) ($.) ($.) ($.) ($.) ($.) ($.) - - ($.) ($.) ($.) ($.) ($.) ($.) ($.) ($.) ($.) ($.) ($.) ($.) ($.) - - $. $. $. $. $. $. ($.) ($.) ($.) ($.) ($.) ($.) ($.) - - $. $. $. $. $. $. $- ($.) ($.) ($.) ($.) ($.) ($.) - - $. $. $. $. $. $. $- ($.) ($.) ($.) ($.) ($.) ($.) - - $. $. $. $. $. $. $- ($.) ($.) ($.) ($.) ($.) ($.) - - $. $. $. $. $. $. $- ($.) ($.) ($.) ($.) ($.) ($.) - - $. $. $. $. $. $. $- ($.) ($.) ($.) ($.) ($.) ($.) - - $. $. $. $. $. $. $- ($.) ($.) ($.) ($.) ($.) ($.) - - $. ($.) ($.) ($.) ($.) ($.) ($.) ($.) ($.) ($.) ($.) ($.) ($.) - - ($.) ($.) ($.) ($.) ($.) ($.) ($.) ($.) ($.) ($.) ($.) ($.) ($.) - - ($.) ($.) ($.) ($.) ($.) ($.) ($.) ($.) ($.) ($.) ($.) ($.) ($.) - - ($.) ($.) ($.) ($.) ($.) ($.) ($.) ($.) ($.) ($.) ($.) ($.) ($.) Shaded rows are the same Feb Iowa Pork Regional Conferences

7 Sioux-Preme Grid As provided Est'd Live Wt Carc Wt Wt Range in Column..... % LEAN -. % % % % % % -. % % % % % % -. % % % % % % -. % % % % % % -. % % % % % % -. % % % % % % -. % % % % % % -. % % % % % % -. % % % % % % -. % % % % % % -. % % % % % % -. % % % % % % -. % % % % % % -. % % % % % % -. % % % % % % -. % % % % % % -. % % % % % % -. % % % % % % -. % % % % % % -. % % % % % % -. % % % % % % Sioux-Preme Grid Reformatted ( x ) Est'd Live Wt. Carc. Wt. & Over Percent Lean - - % % % % % % % % % % % % % % % % % % - - % % % % % % % % % % % % % % % % % % - - % % % % % % % % % % % % % % % % % % - - % % % % % % % % % % % % % % % % % % - - % % % % % % % % % % % % % % % % % % - - % % % % % % % % % % % % % % % % % % - - % % % % % % % % % % % % % % % % % % - - % % % % % % % % % % % % % % % % % % - - % % % % % % % % % % % % % % % % % % -. Shaded rows are the same Shaded columns represent the combination of two rows that are the same in the original Feb Iowa Pork Regional Conferences

8 Compare the grids Packer System/Grid Comparison Leanness Premium Range No-Discount Weight Range Premium & Discount Range Carcass Est'd Live Meaurement Pct. Lean Base Company Device Equation Leanness Tyson-IBP AUS System Proprietary -.% % & Over -$. to +$. - - Hormel Ruler --- None BF <." -% to +% - - Excel Fat-O-Meater Purdue/NPB None % & Over -% to +% - - Farmland Fat-O-Meater SFK -.% % & Over -$. to +$. - - Morrell Fat-O-Meater SFK -.% % & Over -$. to +$. - - Sioux-Preme Ultra-FOM SFK -.% % & Over -% to +% - - Bottom of the ranges are about the same Tops are quite different Lots of difference among optimal hogs Packer Grid "Sweetest" Spots Weight Lean Company Carcass Est'd Live Hormel." -." - - Farmland % & Over - - Morrell % & Over - - Sioux-Preme % -.% - - Tyson-IBP % & up - - Excel -.% - - Feb Iowa Pork Regional Conferences

9 TYSON PREMIUMS/DISCOUNTS HORMEL PREMIUMS/DISCOUNTS $/cwt Pct. Lean Carcass weight $/cwt Backfat thickness.. Carcass Wt EXCEL PREMIUMS/DISCOUNTS FARMLAND PREMIUMS/DISCOUNTS $/cwt Percent Lean Carcass wt $/cwt Percent Lean Carcass wt MORRELL PREMIUMS/DISCOUNTS SIOUX-PREME PREMIUMS & DISCOUNT $/cwt carcass Percent Lean Carcass Wt $/cwt Percent Lean Carcass wt Feb Iowa Pork Regional Conferences

10 Other Issues How can I tell how my hogs will do on a packer s measurement system? SELL SOME HOGS TO THEM Percent lean at Farmland and Morrell should be very comparable same machine, same spot, same equation Others are NOT linearly correlated you can t predict one s grade from another s measurments Know how your hogs perform on one packer s system Split a load to another packer TWICE Other key questions What is the plant s: Condemnation rate? Trim loss rate? Percent of lost carcasses (usually added in at the average weight and leanness) Does the plant offer premiums for specific delivery times? Remember NET prices pay bills! Do not get bogged down in: Highest base price easy to see Highest premiums Lake Woebegon syndrome Highest NET return at weights that are achievable with my system. Function of: Base price Premiums/discounts at various weights Transportation costs Marginal cost of extra pounds & days (feed, direct labor & utilities, foregone profits?) Wtd. Average base price relationships $/cwt. carc. NATIONAL PRIOR DAY PURCHASE BASE PRICES Total Negotiated Swine or Pork Market Formula Other Market Formula Other Purchase Agreement A- N- F- M- A- N- F- M- A- N- F- M- A- N- F- M- Feb Iowa Pork Regional Conferences

11 Wtd. Average NET price relationships $/cwt. carc. NATIONAL PRIOR DAY SLAUGHTER NET PRICES Negotiated Other Market Formula Swine or Pork Market Formula Other Purchase Arrangement Total A- N- F- M- A- N- F- M- A- N- F- M- A- N- F- Future of carcass merit systems Larger discounts are coming for heavy hogs Pressure from retailers and restaurants on cut sizes» Retailers: Box weights and OSHA regulations, high package values or low cut counts per dollar of value» Restaurants: Can sell meals with small cuts for same amount as meals with larger, more costlier cuts Problem is not the top of the optimal ranges Problem is the pigs beyond the top of the ranges Further commoditization raising the base lean percents This presentation and materials sponsored by: Iowa Pork Producers Association National Pork Board Your Pork Checkoff Feb Iowa Pork Regional Conferences