fed cattle market simulator fed cattle market simulator or packer-feeder game department of...

FED CATTLEMARKET SIMULATOR

Fed Cattle Market Simulatoror

Packer-Feeder Game

Department of Agricultural Economics

Oklahoma State University

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

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

National Cattlemens’sBeef Association (NCBA)

Agribusiness EmployeeCross-Training

Producers, Students,Youth, Other

NCBA 2

Alberta Saskatchewan2

Workshop Locations, 1991-2007

Simulator Structure

Cattle Feedlots1 2 3 4

Live CattleFutures Market

Market News Services

(Public Information)

Slaughter CattlePrice Negotiation

Slaughter CattleFinancial Records

Feeder CattlePlacements

# and Typeof Trades

Price of FuturesContracts

Trade Futures

Financial Records # & Price ofPens Traded

Weekly Boxed Beef Price and Slaughter Price and Slaughter Volume

Meatpackers

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

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

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

Introduction and Mechanics

FED CATTLEMARKET SIMULATORClick tab for

cash market transactions

Indicates current trading week and time remaining

Cattle currently available for

sale and delivery

Pen status shows weeks

until optimal sale weight, genetic

type, current weight and sale

status

Click to offer cattle

for sale

Use call buttons to

allow packers to view showlist

“Boot” packers out to

restrict access to showlist

Bid dialog box; accept bids (green); reject bids

(red) or counteroffer

(blue)

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

Indicates # of pens

bought/needed

Indicates current feedlot

information displayed

Click tab to view feedlot

showlist

Current trading week and time

remaining

Highlight pen to make bid or accept offer

Make bids, accept offers or cancel bids

Click to leave current feedlot

Each row indicates a pen of cattle, genetic type, current weight and sales status

FED CATTLEMARKET SIMULATORClick tab to view

current purchases

Click tab to view pending contracts

Click tab to trade futures

Click tab to view market

information

Packer 4 – Weekly Financial Report – Week 3

Packer 1 – Weekly Market Summary – Week 4

Feeder 7 – Weekly Financial Report – Week 2

Feeder 1 – Weekly Market Summary – Week 4

Monthly Cattle on Feed Report – Week 4

Feedlot Economics

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.

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 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 1 + Step 2)/ 1300 lbs

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

Trading Round

Round Pen

PlacedPlacement

Average Cost of

Current Placement

Current Cost of

Feeder Breakeven

1 -21 99.09 0.45 106.79 0.45 75.29

2 -20 98.39 0.45 103.40 0.45 74.90

3 -19 98.39 0.45 100.59 0.45 74.90

4 -18 99.79 0.45 98.84 0.46 75.68

5 -17 102.25 0.45 98.01 0.46 77.06

6 -16 105.41 0.45 97.76 0.46 78.83

7 -15 109.27 0.45 98.91 0.47 80.99

8 -14 113.49 0.46 101.12 0.47 83.79

9 -13 117.70 0.46 104.03 0.47 86.15

10 -12 121.92 0.46 107.64 0.47 88.52

Feedlot Breakeven Prices:Weight and Market Effects

Slaughter weight

1200 1225 1250 1275 1300

Sideways feeder market

Breakeven price 81.88 81.17 80.48 81.52 83.10

Difference from 1250 lbs -1.40 -0.69 0.00 1.04 2.62

Rising feeder market

Breakeven price 78.26 79.23 80.48 83.77 87.50

Difference from 1250 lbs 2.22 1.25 0.00 3.29 7.02

Falling feeder market

Breakeven price 86.65 83.50 80.48 79.66 79.76

Difference from 1250 lbs -6.17 -3.02 0.00 -0.82 -0.72

Placement pens and prices

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47 48 49 50

Trading round

100.00

120.00

140.00

Current placement quantity Current placement quantity

Feeder cattle demand

100.00

110.00

120.00

130.00

140.00

30 35 40 45 50

Number of pens

Feeder breakeven price

100.00

1 3 5 7 9 11 13 15 17 19 21 23 25 27 29 31 33 35 37 39 41 43 45 47 49

Trading round

Feeder breakeven price

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

Average Cost of Gain Feeder cattle (c/lb)

Price ($/cwt) 0.45 0.46 0.47 0.48 0.4995.00 73.00 73.44 73.88 74.32 74.7696.00 73.56 74.00 74.44 74.88 75.3297.00 74.12 74.56 75.00 75.44 75.8898.00 74.68 75.12 75.56 76.00 76.4499.00 75.24 75.68 76.12 76.56 77.00

100.00 75.80 76.24 76.68 77.12 77.56

101.00 76.36 76.80 77.24 77.68 78.12102.00 76.92 77.36 77.80 78.24 78.68103.00 77.48 77.92 78.36 78.80 79.24104.00 78.04 78.48 78.92 79.36 79.80105.00 78.60 79.04 79.48 79.92 80.36

Packer Economics

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

Packer average total cost functions

1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

Number of pens

Packer 1 Packer 2 Packer 3 Packer 4

0123456789

101112131415

PensSlaughtered

$95,625.00$324.10/head

173.26122.99109.58

98.4588.4879.8672.8067.5164.1963.0364.2568.0574.6384.20

AverageVariable Costs

Cost Schedule for Plant X

STEP 1: Compute Adjusted Boxed Beef PriceProjected Boxed Beef Price (Ch 1-3, 700-850) $120.00Less 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 WeightAdjusted Price x Dress % ($114.60 x 63%) $72.20

STEP 3: Add Byproducts ValueSTEP 2 + $8.50/live cwt. ($72.20 + $8.50)

$80.70

STEP 4: Subtract Slaughtering-Processing CostSTEP 3 - $75.00/Head / Live cwt. [$80.70 – ($75.00 / 12.5)] $74.70

Live Weight Bid Price = $74.70/cwt.

Breakeven Live Weight Bid Price(Medium Genetic Type, 1250 lbs)

Boxed beef demand

100.00

110.00

120.00

130.00

140.00

150.00

160.00

30 32 34 36 38 40 42 44 46 48 50

Trading round

Carcass Characteristics by Weight: Medium Genetic Type

Live Weight

Dressing Percent

Carcass Weight

Percent Prime

Percent Choice

Percent Select

Percent YG 1-2

Percent YG 3

Percent YG 4-5

Percent Light or Heavy

1200 62.0 744 3 35 62 70 30 0 3

1225 62.5 766 5 40 55 63 35 2 1

1250 63.0 788 7 45 48 57 39 4 0

1275 63.5 810 9 50 41 51 43 6 1

1300 64.0 832 11 55 34 45 47 8 3

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

Slaughter cost

($/hd)

Boxed beef price

($/cwt)

Slaughter weight, Medium genetic type

1200 1225 1250 1275 1300

63.03 115.00 70.52 71.54 72.51 68.20 67.20

63.03 116.00 71.14 72.17 73.14 68.83 67.84

63.03 117.00 71.76 72.79 73.77 69.47 68.48

63.03 118.00 72.38 73.42 74.40 70.10 69.12

63.03 119.00 73.00 74.04 75.03 70.74 69.76

63.03 120.00 73.62 74.67 75.66 71.37 70.40

63.03 121.00 74.24 75.29 76.29 72.01 71.04

63.03 122.00 74.86 75.92 76.92 72.64 71.68

63.03 123.00 75.48 76.54 77.55 73.28 72.32

63.03 124.00 76.10 77.17 78.18 73.91 72.96

63.03 125.00 76.72 77.79 78.81 74.55 73.60

Breakeven Carcass Weight Bid Price(Medium Genetic Type, 1250 pounds)

STEP 1: Compute Adjusted Boxed Beef PriceProjected Boxed Beef Price (Ch 1-3, 700-850) $120.00Less 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.

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

Medium genetic type

Live weight price Dressed weight price

1225 1250 1275 1225 1250 1275

85.00 85.00 85.00 136.00 134.92 133.86

85.50 85.50 85.50 136.80 135.71 134.65

86.00 86.00 86.00 137.60 136.51 135.43

86.50 86.50 86.50 138.40 137.30 136.22

87.00 87.00 87.00 139.20 138.10 137.01

87.50 87.50 87.50 140.00 138.89 137.80

88.00 88.00 88.00 140.80 139.68 138.58

88.50 88.50 88.50 141.60 140.48 139.37

89.00 89.00 89.00 142.40 141.27 140.16

89.50 89.50 89.50 143.20 142.06 140.94

Packer profit-price relationship

100.00

22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47

Trading week

-150.00

-100.00

-50.00

100.00

150.00

200.00

Live price Packer profit/head

Joint Profits to Split

1200 1225 1250 1275 1300

Weight (lbs)

Feeder Breakeven Packer Breakeven

Joint Losses to Split

1200 1225 1250 1275 1300

Weight (lbs)

Feeder Breakeven Packer Breakeven

Grid Pricing

What Is Grid Pricing?

Grid pricing involves combining a base price and premiums-discounts for individual carcass characteristics

Grid Pricing Formula

Base pricePlus (minus) each premium (discount) cell

times the percent of carcasses in each respective cell of the carcass distribution matrix

Sample Premium-Discount Grid ($/carcass cwt.)

Sample grid

Base price – Choice YG2-3 700-850 lbs ($/dressed cwt) $120.00

Premiums and DiscountsPrime +8.00Select -10.00YG 1 +4.00YG 4-5 -15.00Light carcasses -10.00Heavy carcasses -10.00

Grid in Matrix Form($/carcass cwt.)

Yield Grade

Quality Grade 1 2-3 4-5

Prime - 8.00 -

Choice 4.00 Base -15.00

Select - -10.00 -

Light Carcasses (<550bs.) -10.00

Heavy Carcasses (>950 lbs.) -10.00

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

Yield Grade

Prime 12.00 8.00 -7.00

Choice 4.00 Base -15.00

Select -6.00 -10.00 -25.00

Light Carcasses (<550bs.) -10.00

Heavy Carcasses (>950 lbs.) -10.00

Carcass Distribution(Medium Genetic Type, 1250 Pounds)

Yield Grade

Prime 5 8 1

Choice 21 35 4

Select 10 16 2

Light Carcasses (<550bs.) 0

Heavy Carcasses (>950 lbs.) 0

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 discountMultiply 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

Grid Pricing Results

Base price = $120/carcass cwt.Plus premiums = $2.08 (34 head)Minus discounts = -$3.37 (33 head)Net price = $118.71/carcass cwt.

Select Discount Pattern

34 41 48 55 62

Percent Select

Base Discount Weight

Quality Grade Premiums and Discounts (1996-2008)

Prime Select Standard Certified

Yield Grade 4-5 Discount Pattern

0 2 4 6 8

Percent Yield Grade 4-5

Base Discount Weight

Yield Grade Premiums andDiscounts (1996-2008)

YG 1 YG 2 YG 4 YG 5

Constant live price and comparable dressed and grid prices by genetic type and weight

100.00

105.00

110.00

115.00

120.00

125.00

130.00

135.00

140.00

1200 1225 1250 1275 1300 1200 1225 1250 1275 1300 1200 1225 1250 1275 1300

Weight

Dressed price Grid price Live weight price

Low Medium High

Constant dressed price and comparable live and grid prices by genetic type and weight

100.00

110.00

120.00

130.00

1200 1225 1250 1275 1300 1200 1225 1250 1275 1300 1200 1225 1250 1275 1300

Weight

Live weight price Dressed price Grid price

Low Medium High

Feeder and packer profit (constant dressed weight price) over genetic types and weights

-60.00

-40.00

-20.00

1200 1225 1250 1275 1300 1200 1225 1250 1275 1300 1200 1225 1250 1275 1300

Weight

Feeder profit Packer profit

Low Medium High

Price relationships

100.00

120.00

140.00

160.00

22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47

Trading week

Live Dressed Grid Boxed beef

Boxed beef prices and marketings

100.00

120.00

140.00

22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47

Trading week

Boxed beef price Marketings

Marketings vs Select, yield 4-5 discounts

-30.00

-25.00

-20.00

-15.00

-10.00

22 23 24 25 26 27 28 29 30 31 32 33 34 35 36 37 38 39 40 41 42 43 44 45 46 47

Trading week

Select discount Yield 4-5 discount Marketings

Futures Markets

Economic Roles of Futures Markets

1. Forward Pricing and Risk Transfer Futures markets can be used as a temporary substitute

for a cash market position – to manage price risk and establish profits

Economic Roles of Futures Markets

2. Price Discovery Futures markets are open, competitive, markets with

publicly reported prices – thus they provide information about what market participants think prices will be in the future

Futures Contract Specifications

One hundred 1250# animals Expire at eight week intervals Cash settled at the average price for 1250#

animals during the expiration week

Trading Example

Week 61: Sell Week #72 Contract for $81Week 72: Buy Week #72 Contract for $75

Futures Gain/Loss = Sell Price - Buy Price$6 = $81 - $75

Week 61: Buy Week #72 Contract for $81Week 72: Sell Week #72 Contract for $75

Futures Gain/Loss = Sell Price - Buy Price-$6 = $75 - $81

Types of Orders

Market Order: Buy/sell at the current market price and the order is executed immediately

Limit Order: Buy/sell at a specified price or better which establishes price but the order may never be filled

Stop Order: A limit order which becomes a market order when the market touches the specified price

Limit Orders Used to get in the market at a given price

Target long at price below current market Target short at price above current market

Used to get out of the market at a given price Current long to sell at target above current market Current short to buy at target below current market

Stop Orders

Used to stop losses from adverse market moves Current long use sell stop at price below current

market Current short use buy stop at price above current

market

Cash Settlement Examples

What should you do during Week #72?

(1) Week #72 Contract Price @ $75Cash price Range $71 - $73

(2) Week #72 Contract Price @ $75Cash Price Range $77 - $80

Using the Three Types of Orders in an Up Market: During Week 61

Market Order:Long #72 @ $81

Sell Limit #72 @ $84(protect profits)

Sell Stop #72 @ $79(limit losses)

Using the Three Types of Orders in a Down Market: During Week 61

Market Order:Short #72 @ $81

Buy Stop #72 @ $83(limit losses)

Buy Limit #72 @ $78(protect profits)

Example of Reported Prices

Average Cash Price

Futures Contracts:Expiration WeekExpiration WeekExpiration Week

#64#72#80

Prices$78.00

$78.50$81.00$76.00

Forward Pricing vs. Price Taking

Placed Marketed

70 71 73 74

{Price Taking

Forward Pricing

Trades This Week

Week4040242424

Price72..5572..6078..0077..9577..90

Profit/Loss0.000.002.001.901.80

Open Position Status

Number033

Week243240

Buy/Sell-SB

Avg. Price0.0076.9872.55

Est. Value0.00

2012.62172.51

Estimated Value of Open Positions 2185.13

Profit/Loss (net)3450.03230.06

Contract Week243240

# Contracts Closed1050

Closing/Opening78.0076.4072.60

Profit/Loss of Closed Positions 3680.09Contract for Week 24 Cash Settled at $76.80

Packer 4 - Futures TransactionSummary – Week 24

fed cattle market simulator fed cattle market simulator or packer-feeder game department of...

contracted cattle

lbs cattle

time remaining cattle

financial summaries

week market window

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head of steers cattle

mechanics slide

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