Under any marketing scenario, the more information on quality and consistency a seller has, the easier to correctly choose whether to sell finished steers on a live cash basis or on a grid.
Here's how the four pens of cattle in the Beef Quality Challenge would have fared using different marketing methods. Remember that packers' grid and grid prices change frequently, so these are only examples for these cattle. Carcass pricing information was obtained from USDA's Internet site (http://www.ams.usda.gov/index.htm, specifically, NW LS195, National Carcass Premiums and Discounts for Slaughter Steers and Heifers, Table 1).
Each individual animal was priced by three methods: live pricing; using a grid with Choice, Yield Grade (YG) 3 as par; and a grade-based grid. Both grid methods apply premiums and discounts to a base price to determine the price per cwt. of the carcass. Base grid prices can either be negotiated with a packer or established on a formula calculated from the past grading performance of cattle in the packing plant.
The price spread between Choice and Select carcasses also heavily influences the price/value relationship of each carcass, as well as other premiums and discounts. When the spread between Choice and Select is wide, cattle producing a high percentage of Choice carcasses tend to do better under a grid system. When the spread is narrow, as in this example, cattle with superior yield grades (1s and 2s) excel. But, remember that premiums for superior yield grading cattle are typically lower than those for superior quality grading cattle.
Both grids impose substantial penalties for cattle extreme in either quality grade, yield grade or carcass weight. The Choice/Select spread may actually be a small portion of discounts received; those resulting from low quality, excessively fat carcasses, or those with light or heavy weights are severely penalized since they don't fit the packer's demand targets.
Pricing under a Choice-equals-par grid, each carcass from each pen in the Beef Quality Challenge was assigned an individual price based on the combination of quality and yield grade and carcass weight. The base carcass price was $103.66 and premiums and discounts from Table 1 were applied.
Due to a superior number of Choice (60.3%) carcasses, Pen A would be valued at $102.67/cwt., while pens B, C, and D would be $101.59, $101.35 and $101.59, respectively (Table 2.). Even with a narrow spread, the much higher percentage Choice in Pen A resulted in a much higher price. This pen also had the highest percentage of cattle receiving premiums for Yield Grades of 1 and 2 (73.6%), a low number of Yield Grade 4s (1.5%), and no cattle receiving severe penalties as "offs or outs" (cattle not fitting the targeted endpoint).
Using a grade-based grid formula, a negotiated target quality grade is applied to the Choice/Select spread (for this example, a 60% Choice target was used). Carcass price is based on the percentage of how many inthe lot achieve the various quality and yield grades. The same "out or off" discounts are applied as a percentage of the total lot. Then, a total value per cwt. is applied to carcass weight (Table 2).
In this four-pen example, Pen A would again receive the highest price per cwt. based on previous discussion ($104.30).
Due to the number of "outs" and lower percentage Choice, YG 1 and 2 carcasses, the remaining pens ranked closely on a grade-based grid price/cwt. basis. Pens B and C also had a high percentage of carcasses as YG 3, and pens B, C and D failed to reach the targeted percentage of 60% Choice selected for this example.
Overall, all four pens benefited under a grid-based pricing system versus live cash pricing system. When converting the carcass price to a live price per cwt., dressing percent becomes an issue in determining the best marketing scenario.
Pen A benefited on the live grade-based grid formula ($2.30/cwt. more than on a live cash price) because of the high percentage of YG 1 and 2 carcasses and no "out" carcasses.
Pen B received the most over the live cash price using either grid ($2.78 or $2.03/cwt., respectively) mostly because it had the highest dressing percentage (65.2%), and because it had the second lowest percentage of outs.
Pen D combined a high percentage of YG 1 and 2 carcasses (64.3%) with an above average dressing percent (64.6%) to compensate for a low percentage Choice (34.6%) and high percentage outs for this group of cattle.
Pen C had the lowest dressing percentage and the highest percentage of Standard or "no roll" carcasses (7.1%). It was not competitive with the other pens when compared on the differences between the live cash price and the grade-based grid price ($.96/cwt.).
Overall, all four pens benefited under a grid-based pricing system versus live cash pricing system, but this isn't necessarily always true. Understanding the identified targets and comparing them to the expected endpoint of the cattle will aid in determining the most logical and profitable method for merchandising any particular group of cattle.
The major impediment in merchandising cattle by a grid may be in determining the number of "out" cattle. Reducing or eliminating these cattle will greatly enhance the profitability of the pen and reduce variability for the packer.