Fed Cattle Market Simulator or Packer-Feeder Game

1. Fed Cattle Market SimulatororPacker-Feeder Game Department of Agricultural Economics Oklahoma State University

2. Historical Perspective • Began in 1991 • Developers – Stephen Koontz, Derrell Peel, James Trapp, Clement Ward, all at OSU • Used in all three Land Grant University missions: teaching, extension, and research • Current Facilitators – Derrell Peel, Kellie Raper, Clement Ward, all at OSU

3. Acknowledgements • Development would not have been possible without grant support from .. • Two Higher Education Challenge Grants through CSREES-U.S. Department of Agriculture • Chicago Mercantile Exchange

4. NCBA Workshop Locations, 1991-2007 Alberta Saskatchewan 2 NCBA NCBA 2 NCBA 2 2 NCBA 15 NCBA 2 10 2 3 6 6 9 6 NCBA 14 3 National Cattlemens’s Beef Association (NCBA) 5 Agribusiness Employee Cross-Training Producers, Students, Youth, Other

5. Simulator Structure

6. Simulator Overview • Eight feedlot teams market pens of fed cattle to four meatpacking teams • Each team’s objective is to earn a profit • One pen = 100 head of steers • Cattle are of 3 genetic types: • low (low quality grade, high yielding) • medium • high (high quality grade, low yielding) • Cattle supplies cycle from larger to smaller to larger supplies

7. Overview continued • Feedlot and packer teams negotiate prices in 6-8 minute trading weeks • Teams can trade futures market contracts (one nearby and two distant contracts) • Weekly reports received by teams • Current (within-week) Market News reports and end-of-week market summaries • Profit/loss Statements • Cattle on Feed Report • Every 4 weeks

8. Overview continued • Cattle can be sold/bought from a show list anytime during a 5-week market window at weights from 1200-1300 lbs • Cattle at lighter weights can be forward contracted • Cattle can be priced on a live weight, dressed weight, or grid method • Feedlots are penalized for feeding to excessive weights • Each packer has a different cost structure and minimum cost volume

9. Introduction and Mechanics

10. Indicates current trading week and time remaining Click tab for cash market transactions Pen status shows weeks until optimal sale weight, genetic type, current weight and sale status Cattle currently available for sale and delivery

11. Bid dialog box; accept bids (green); reject bids (red) or counteroffer (blue) Use call buttons to allow packers to view showlist “Boot” packers out to restrict access to showlist Click to offer cattle for sale

12. Click tab to trade futures Click tab for market and financial summaries Cattle pending for showlist; can be forward contracted for delivery after 1200 pounds Click to forward contract cattle Current market information

13. Click tab to view feedlot showlist Indicates current feedlot information displayed Current trading week and time remaining Indicates # of pens bought/needed

14. Make bids, accept offers or cancel bids Highlight pen to make bid or accept offer Click to leave current feedlot Each row indicates a pen of cattle, genetic type, current weight and sales status

15. Click tab to view pending contracts Click tab to trade futures Click tab to view current purchases Click tab to view market information

16. Packer 4 – Weekly Financial Report – Week 3

17. Packer 1 – Weekly Market Summary – Week 4

18. Feeder 7 – Weekly Financial Report – Week 2

19. Feeder 1 – Weekly Market Summary – Week 4

20. Monthly Cattle on Feed Report – Week 4

21. Feedlot Economics

22. Example Breakeven Price for1250 lbs Fed Cattle STEP 1: Calculate Total Cost of Gain (Out Weight - In Weight) x $/lb. (1250 - 700 lbs) x $0.474/lb. = $260.15/head STEP 2: Calculate Total Feeder Cost 700 lbs x $98.71/cwt. = $690.97/head STEP 3: Convert to Slaughter Weight (Step 1 + Step 2) / 1250 lbs = $76.09/cwt.

23. Example Breakeven Price for1275 and 1300 lb Fed Cattle STEP 1 for 1275 lb cattle: Calculate Total Cost of Gain (Out Weight - In Weight) x $/lb. x 1.08 STEP 3: Convert to Slaughter Weight (Step 1 + Step 2)/ 1275 lbs STEP 1 for 1300 lb cattle: Calculate Total Cost of Gain (Out Weight - In Weight) x $/lb. x 1.18 STEP 3: Convert to Slaughter Weight (Step 1 + Step 2)/ 1300 lbs

24. Estimated Feedlot Breakeven Prices (Medium Genetic Type, 1250 pounds)

25. Feedlot Breakeven Prices:Weight and Market Effects

26. FED CATTLEMARKET SIMULATOR

27. FED CATTLEMARKET SIMULATOR

28. FED CATTLEMARKET SIMULATOR

29. Feedlot Breakeven Slaughter Price Table(Medium Genetic Type, 1250 pounds)

30. Packer Economics

31. Packer Decisions • Decide how many pens of fed cattle to buy each week • Determine how much to pay for cattle of different genetic types and what pricing method to use

32. FED CATTLEMARKET SIMULATOR

33. Cost Schedule for Plant X Average Variable Costs Pens Slaughtered 0 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 $95,625.00 $324.10/head 173.26 122.99 109.58 98.45 88.48 79.86 72.80 67.51 64.19 63.03 64.25 68.05 74.63 84.20

34. Breakeven Live Weight Bid Price(Medium Genetic Type, 1250 lbs) STEP 1: Compute Adjusted Boxed Beef Price Projected Boxed Beef Price (Ch 1-3, 700-850) $120.00 Less Discounts: % Select x $ Discount (48% x $10) -$4.80 % YG4-5 x $ Discount ( 4% x $15) -$0.60 % Light/Heavy X $ Discount ( 0% x $10) -$0.00 Sum for Adjusted Boxed Beef Price $114.60 STEP 2: Convert Boxed Beef Price to Live Weight Adjusted Price x Dress % ($114.60 x 63%) $72.20 STEP 3: Add Byproducts Value STEP 2 + $8.50/live cwt. ($72.20 + $8.50) $80.70 STEP 4: Subtract Slaughtering-Processing Cost STEP 3 - $75.00/Head / Live cwt. [$80.70 – ($75.00 / 12.5)] $74.70 Live Weight Bid Price = $74.70/cwt.

35. FED CATTLEMARKET SIMULATOR

36. Carcass Characteristics by Weight: Medium Genetic Type

37. Breakeven Prices for Packer X (Assumes optimal # of pens)

38. Breakeven Carcass Weight Bid Price(Medium Genetic Type, 1250 pounds) STEP 1: Compute Adjusted Boxed Beef Price Projected Boxed Beef Price (Ch 1-3, 700-850) $120.00 Less Discounts: % Select x $ Discount (48% x $10) -$4.80 % YG4-5 x $ Discount ( 4% x $15) -$0.60 % Light/Heavy X $ Discount ( 0% x $10) -$0.00 Sum for Adjusted Boxed Beef Price $114.60 STEP 2: Add Byproducts Value (on a dressed weight basis) STEP 1 + Byproducts Price/live cwt. / Dress % [$114.60 + ($8.50/0.63)] $128.09 STEP 3: Subtract Slaughter-Processing Costs (on a dressed weight basis) STEP 2 - $75.00/Head / Dressed weight [$128.09 - ($75.00 / 7.88)] $118.57 Dressed Weight Bid Price = $118.57/cwt.

39. Live Weight to Dressed Weight Conversion($/cwt.)

40. FED CATTLEMARKET SIMULATOR

41. Joint Profits to Split

42. Joint Losses to Split

43. Grid Pricing

44. What Is Grid Pricing? • Grid pricing involves combining a base price and premiums-discounts for individual carcass characteristics

45. Grid Pricing Formula • Base price • Plus (minus) each premium (discount) cell times the percent of carcasses in each respective cell of the carcass distribution matrix

46. Sample Premium-Discount Grid ($/carcass cwt.) Sample grid Base price – Choice YG2-3 700-850 lbs ($/dressed cwt) $120.00 Premiums and Discounts Prime +8.00 Select -10.00 YG 1 +4.00 YG 4-5 -15.00 Light carcasses -10.00 Heavy carcasses -10.00

47. Grid in Matrix Form($/carcass cwt.)

48. Complete Premium-Discount Grid ($/carcass cwt.)

49. Carcass Distribution(Medium Genetic Type, 1250 Pounds)

50. Grid Pricing Steps(Medium Genetic Type, 1250 pounds) STEP 1. Negotiate the base price $120.00/ dressed cwt STEP 2. Calculate the net premium or discount Multiply the percentage of carcasses in each cell (in decimal form) times the respective premium or discount cell in the premium-discount grid. [($12 x 0.05) + ($8 x 0.08) + (-$7 x 0.01) + ($4 x 0.21) + ($0 x 0.35) + (-$15 x 0.04) + (-$6 x 0.10) + (-$10 x 0.16) + (-$25 x 0.02) +] + [(-$10 x 0.00) + (-$10 x 0.00)] = -$1.29/cwt STEP 3. Add STEP 1 to STEP 2 ($120 - $1.29) $118.71/cwt Net Grid Price = $118.71/dressed cwt