Fed Cattle Market Simulator – Packer Economics
Clement Ward, Derrell Peel, and Kellie Raper
Department of Agricultural Economics
Oklahoma State University
August 2008
Participants role playing as meatpacking cattle buyers purchase fed cattle from feedlot marketing
managers. The simulator processes cattle into boxed beef, sells beef into the wholesale market, and reports
packers’ profit (or loss) from the transactions. Thus, packer teams determine the number of pens to
purchase, weight and quality of cattle purchased, and the price and pricing method for fed cattle.
Meatpacker Volume and Costs – Profits are defined the same for all meatpackers. Profit is total revenue
minus total costs. Profitability in meatpacking can be calculated on a per head basis. Total revenue per
head is the sum of meat and byproducts sales. Total costs per head are all costs related to slaughtering and
processing, including byproducts processing, where the quantities are expressed in per head units.
Packers have control over several factors which affect profits, two of them are; quantity of livestock
purchased and costs of slaughtering and processing. Therefore, one key decision packers make daily, both
in reality and in the packer-feeder game, is how many animals to purchase. That decision in turn directly
affects a packer's cost of slaughtering and processing. The effect of packer costs on profits can be
illustrated with an example.
In the profit equation, there is an inverse relationship between slaughtering-processing costs and profit.
When slaughtering-processing costs increase, profit decreases; and when slaughtering-processing costs
decrease, profit increases. Gross margin for a packer is profit minus slaughter-processing costs. Two
plants could have the same gross margin (for example, $90 per head) but different per unit slaughteringprocessing costs. The plant with the lowest cost ($75 per head) will have the highest profit ($15 per head),
while the plant with the highest cost ($85 per head) will have the lowest profit ($5 per head). While this
example is admittedly simplistic, it illustrates that slaughtering-processing costs are particularly important
to meatpacking profitability.
In the packer-feeder game, there are four packers, each with a different size plant. One decision each
packer must make is how many pens of cattle to purchase to minimize average cost per head for
slaughtering and processing. Since each plant has a different cost schedule, each plant also has a different
minimum-cost volume.
Consider the cost schedule for one hypothetical plant in Table 1. Average total cost is total cost divided by
number of head slaughtered per week. The minimum-cost volume for Plant X is 1200 cattle per week or
12 pens of cattle per week. At that volume, average total cost of slaughter and processing is $75 per head.
Relationship between Volume Processed and Profit – Typically, performance of a packer team is better
when it operates its plant at the level with the lowest average total cost of slaughter and processing, i.e., the
minimum-cost volume. However, the best performing teams will deviate from this rule when it is
profitable to do so. There are times packers can increase profits by processing more pens than the
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minimum-cost volume, and there are times to process fewer pens than the minimum-cost volume. There
are other times when the best decision is to close the plant.
Table 1. Cost schedule for a hypothetical beef packing plant
Slaughter/Week
1000 Head
1100
1200
1300
1400
Pens/Week
10
11
12
13
14
Total Cost
$78,000
83,600
90,000
98,800
109,200
Average
Total Cost
$78/head
76
75
76
78
In the packer-feeder game, meatpacker performance is judged not by profit per head but by profit per unit
of minimum-cost volume. For example, Plant X has a minimum-cost volume of 12 pens per week.
Suppose cattle buyers for Plant X are able to purchase 12 pens of cattle at a $20 per head profit. Profit per
unit of minimum-cost volume is also $20 per head (1200 head x $20 per head / 1200 head). However,
suppose the fed cattle market was such that buyers for Plant X could have also bought one more pen at the
same price. Processing one additional pen increases costs. The average total cost per head increases to
$76 per head in the example above. Profit per head decreases to $19 but the profit per unit of minimumcost volume increases to $20.58 (1300 head x $19 per head / 1200 head). Plant X is using its capital more
completely and is generating more total dollars of profit. Stockholders in Plant X would like to see the
company make more total dollars of profit. The packer team must next ask if it advisable to purchase two
pens more than their minimum-cost volume. Continuing with the same example, the average total cost per
head increases to $78 per head. Profit per head decreases to $17 and the profit per unit of minimum-cost
volume decreases to $19.83 (1400 head x $17 per head / 1200 head). Therefore, the team should not
purchase two additional pens. The main point to understand is that when market conditions are such that
meatpackers are making profits, it is often more profitable for each packer to slaughter and process more
pens than the minimum-cost volume.
The same economic logic occurs in a reverse setting. When market conditions are such that meatpackers
are experiencing losses, it is often to the advantage of each packer to slaughter and process fewer pens than
the minimum-cost volume. Suppose cattle buyers for Plant X are only able to purchase 12 pens of cattle at
a -$20 per head loss. The loss per unit of minimum-cost volume is also -$20 per head (1200 head x -$20
per head / 1200 head). However, suppose that buyers for Plant X could have bought one fewer pen at the
same price. Processing one fewer pen increases costs to $76 per head. The loss per head increases to -$21
but the loss per unit of minimum cost volume decreases to -$19.25 (1100 head x -$21 per head / 1200
head). Is it to their advantage to purchase two fewer pens? The average total cost per head increases to
$78 per head, the loss per head increases to -$23, and the profit per unit of minimum cost volume
decreases to -$19.16 (1000 head x -$23 per head / 1200 head). The team should purchase two fewer pens
in this example. However, at some point the increase in average total costs is greater than the reduced
losses of purchasing fewer cattle.
A decision related to the question of how many animals to purchase is whether a meatpacker should
temporarily close a plant. At some point, losses incurred from purchasing cattle may be so great that it is
more economical for a plant to close than to remain open and continue purchasing cattle. If a plant is
closed, that meatpacker will incur fixed costs but avoid variable costs. It will be advantageous for a
meatpacker to close if the losses incurred by purchasing cattle are greater than fixed costs. Thus, plants
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should close if losses per unit of minimum cost volume are greater than fixed costs divided by the
minimum cost volume. For example, suppose Plant X has fixed costs of $40,000 per week. If it purchases
no cattle that week, it incurs $40,000 of costs (and losses). The plant should close for a week if purchasing
fed cattle results in losses greater than -$33.33 per head ($40,000 / 1200 head). In the real-world market,
other factors would affect the decision to close a plant. Two in particular are labor force agreements or
contracts and the effects on retail and food service customers. For reasons of simplicity, both factors are
ignored in the game.
Meatpacker Pricing of Fed Cattle - Another major decision packers make daily is how much to pay for
cattle. Packer pricing of cattle is a two-stage process. First, a head buyer determines a daily procurement
policy or buy order. Second, the buy order is given to field buyers to execute as they purchase cattle from
feedlots and cattle owners.
In general, packers determine what to pay for cattle by adding the expected or estimated value of the cattle
in terms of meat and byproduct sales, subtracting the processing cost and target profit levels, and dividing
the final amount by the fed animal weight. This process results in a live weight bid price. The general bid
price equation can be expressed as follows.
Bid PriceFed Cattle = [(PriceBoxed Beef x QuantityBoxed Beef) + (PriceByproducts x QuantityByproducts)
- CostSlaughtering-Processing - Profit target] / QuantityFedCattle
By inserting realistic values for each variable in the right hand side of the above equation, we can estimate
a bid price. Consider an example with prices from the real fed cattle market currently (August 2008).
Prices are in dollars per hundredweight and weights are in hundredweights per head. For example, AMS
reported prices and weights are: boxed beef, $157.48/cwt, byproducts, $11.97/live cwt, live cattle weight,
1273 lbs, dressed weight, 778 pounds (a dressing percentage of 61.1%), slaughter-processing costs
(assumed), $135/head, and the profit target (assumed), $15/head. Given those market conditions and cattle
attributes, the bid price is
Bid Price = [($157.48)(7.78 cwts.) + ($11.97)(12.73 cwts.) - $135 - $15] / 12.73 cwts.
= $96.43/cwt.
Live cattle for the same week traded slightly above that, at $97.04/cwt.
The above approach approximates the process followed by the head buyer in determining how much
buyers can pay on average for fed cattle on a live weight basis and still make $15/head profit. However,
there are other factors to consider. First, the example assumes no quality variation in cattle. Fed cattle
bids need to be adjusted to consider quality variation. Second, cattle can be purchased (sold) on a live
weight, dressed weight, or dressed weight and merit (grid) basis. And lastly, what packers would like to
pay, can pay, or must pay may vary widely due to market conditions.
Carcass Quality Characteristics – In the market simulator, there are three genetic types, referred to as
lower quality, higher yield (genetic type L); average quality, average yield (genetic type M); and higher
quality, lower yield (genetic type H). Each genetic type differs for each weight of cattle on the show list.
Carcass characteristics are shown in Table 2.
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Table 2. Carcass characteristics by genetic type and weight
Genetic Type L: Low quality, high yield
Live
Dressing
Percent
Weight
Percent
Prime
1200
1225
1250
1275
1300
61.0
61.5
62.0
62.5
63.0
732
753
775
797
819
Percent
Choice
1
2
3
4
5
20
25
30
35
40
Genetic Type M: Average quality, average yield
Live
Dressing
Percent
Weight
Percent
Prime
1200
1225
1250
1275
1300
62.0
62.5
63.0
63.5
64.0
744
766
788
810
832
Percent
Choice
3
5
7
9
11
63.0
63.5
64.0
64.5
65.0
756
778
800
822
845
Percent
Choice
7
10
13
16
19
62
55
48
41
34
Percent
Select
50
55
60
65
70
4
79
73
67
61
55
Percent
Select
35
40
45
50
55
Genetic Type H: High quality, low yield
Live
Dressing
Carcass
Percent
Weight
Percent
Weight
Prime
1200
1225
1250
1275
1300
Percent
Select
43
35
27
19
11
Percent
YG 1-2
90
85
79
72
65
Percent
YG 1-2
70
63
57
51
45
Percent
YG 1-2
48
43
36
31
25
Percent
YG 3
10
15
19
24
29
Percent
YG 3
30
35
39
43
47
Percent
YG 3
50
53
58
61
65
Percent
YG 4-5
0
0
2
4
6
Percent
YG 4-5
0
2
4
6
8
Percent
YG 4-5
2
4
6
8
10
Percent
Light or
Heavy
7
2
0
3
5
Percent
Light or
Heavy
3
1
0
1
3
Percent
Light or
Heavy
5
2
0
3
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Several trends in carcass attributes can be noted regardless of genetic type. Heavier weight cattle result in
heavier carcasses and higher dressing percentage. Pens of lighter weight cattle have relatively more
animals grading Select, YG 1-3, and have relatively more light carcasses. Pens of heavier weight cattle
have relatively more animals that grade Choice, YG 4-5, and have relatively more heavy carcasses.
Differences among genetic types can be seen relatively clearly in Table 1. For example, consider the
percentage of carcasses grading Prime. Considerably more carcasses grade Prime in the H genetic type
(higher quality, lower yield) than in the M genetic type (average quality, average yield), or L genetic type
(lower quality, higher yield). Conversely, look at the percentage of carcasses yield grading 1-2. The
percentages are much higher for the L genetic type than for the M or H genetic types.
Pricing Methods – There are several methods of pricing fed cattle. In the simulator, packers can price
cattle on a live weight, dressed weight, or grid (i.e., dressed weight and carcass merit) method. All of these
pertain to cash or spot market purchases. Packers can also forward price cattle with forward contracts or
basis contracts. Live weight and dressed weight pricing are discussed here. Grid pricing and basis
contracts are discussed in separate papers.
Live Weight Price – Packer buyers regularly visit feedlots and view fed cattle on the show list. In the
process, they assess the expected carcass characteristics of the cattle when they are slaughtered. With
information on the characteristics of cattle and their price orders from the head buyer, they can compute
breakeven prices and price bids. Table 3 is an example of a price bid on a live weight basis for 1250 lb,
medium genetic type (average quality, average yielding) steers.
Note the expected boxed beef price will be the most current boxed beef price reported plus or minus how
much a packer thinks the price will change in the following week. This generates a projected boxed beef
price, for which some market outlook and judgment is required. Not all cattle in the pen are Choice quality
grade so an adjustment is made for the percentage of Select cattle in the pen. The same is true for
percentage of yield grade 4-5 cattle. A similar adjustment would be made if there were heavier cattle or
lighter cattle in the pen. Slaughtering-processing costs and profit target are given on a per head basis.
Dressed Weight Price – Packers also can bid on a dressed weight basis, often called an “in the beef” bid.
Packers still visit feedlots and visually appraise the cattle. However, they need not estimate the live weight
and dressing percentage because payment is on the dressed weight, not live weight. Table 4 shows the
process of estimating a dressed weight bid price for the same pen of cattle and market conditions as in
Table 3.
As with live weight pricing, packers begin by anticipating next week’s boxed beef price. Also as before,
the carcass characteristics and hence the discounts are the same as in the live weight example. The
difference in dressed weight pricing compared with live weight pricing is that step 2 in the previous
example is omitted and steps 2 and 3 in the dressed weight example require converting byproducts (step 2)
and costs plus profit target (step 3) to a dressed weight basis. As with live weight pricing, packers can still
pay more in general for heavier cattle than for lighter cattle and earn the same profit per head on each pen.
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Table 3. Example live weight breakeven price for medium genetic type, 1250-pound steers
Cattle Weight
1250 lbs.
STEP 1: Compute Adjusted Boxed Beef Price
Projected Boxed Beef Price (Ch 1-3, 700-850)
Less Discounts:
% Select x $ Discount
% YG4-5 x $ Discount
% Light/Heavy X $ Discount
$120.00
(48% x $10)
( 4% x $15)
( 0% x $10)
Sum for Adjusted Boxed Beef Price
-$4.80
-$0.60
-$0.00
$114.60
STEP 2: Convert Boxed Beef Price to Liveweight
Adjusted Price x Dress %
($114.60 x 63%)
$72.20
($72.20 + $8.50)
$80.70
STEP 3: Add Byproducts Value
STEP 2 + $8.50/live cwt.
STEP 4: Subtract Slaughtering-Processing Cost
STEP 3 - $75.00/Head / Live cwt. [$80.70 – ($75.00 / 12.5)]
Live Weight Bid Price
$74.70
$74.70/cwt.
Note: This example assumes a $10/cwt. discount for Select quality carcasses and a $15/cwt. discount for
yield grade 4-5 carcasses. Slaughtering-processing costs may not be associated with the minimum-cost
volume for your slaughter plant. To make a profit, packers must pay less than the breakeven.
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Table 4. Example carcass weight breakeven price for medium genetic type, 1250-pound steers
Cattle Weight
1250 lbs.
STEP 1: Compute Adjusted Boxed Beef Price
Projected Boxed Beef Price (Ch 1-3, 700-850)
Less Discounts:
% Select x $ Discount
% YG4-5 x $ Discount
% Light/Heavy X $ Discount
$120.00
(48% x $10)
( 4% x $15)
( 0% x $10)
-$4.80
-$0.60
-$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)]
Dressed Weight Bid Price
$118.57
$118.57/cwt.
Note: This example assumes a $10/cwt. discount for Select quality carcasses and a $15/cwt. discount for
yield grade 4-5 carcasses. In the simulator, market conditions cause these discounts to vary. Slaughteringprocessing costs in the examples are associated with the minimum-cost volume. During trading, that
assumption may not be valid. Lastly, recognize that to make a profit, packers must pay less than the
breakeven price.
Forward Contracting – There are good reasons cattle feeders and meatpackers may want to purchase cattle
well in advance of slaughter. In the game, purchases of fed cattle by packers two or more weeks prior to
delivery and slaughter are considered forward contract purchases. Contracts can be priced on a live
weight, dressed weight, or grid basis. Estimating a bid price is the same as described above, with two
additional considerations. Packers must anticipate which direction market prices are moving (higher or
lower) and adjust their contract bid prices accordingly. Packers must also recognize that they are bidding
on cattle weighing x this week but weighing some additional amount the week the contracted cattle are
delivered for slaughter. Therefore, bids should be based on the expected market weight of cattle, not the
current weight.
Similarly, feeders must also anticipate which direction market prices are moving (higher or lower) and
adjust their contract offer prices accordingly. Feeders, too, must recognize that they are selling cattle
weighing x this week but weighing some additional amount the week the contracted cattle are delivered for
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slaughter. Therefore, offer prices should be based on the expected market weight of cattle, not the current
weight. Feeders also must consider how forward sale of cattle affects their breakeven price, especially if
the cattle to be delivered weight 1275 or 1300 pounds.
Joint Feedlot and Meatpacker Profits
It is useful to combine two useful pieces of information about feedlot and meatpacker breakeven prices
with some ideas about negotiation, market conditions, and market dynamics. From the feedlot economics
discussion, it was shown the breakeven price for a given pen of cattle falls as cattle on the show list grow
from 1200 pounds to 1250 pounds but then rises as cattle grow from 1250 to 1300 pounds. The breakeven
price for meatpackers does something of the opposite. From the meatpacking economics discussion, it
could be shown meatpackers can pay more (have higher breakeven prices) for heavier fed cattle than
lighter cattle. However, meatpacker breakeven prices increase at a decreasing rate as cattle weights
increase.
Often, during the game, feedlot breakeven prices will be below packer breakeven prices (Figure 1). The
difference between the two prices is the amount of profit per hundredweight to be split between the feedlot
and meatpacker in the negotiation process. Typically, the amount of profit to split is widest for 1250
pound cattle.
FED CATTLE
MARKET SIMULATOR
Joint Profits to Split
83.00
82.00
Price ($/cwt)
81.00
80.00
79.00
78.00
77.00
76.00
75.00
1200
1225
1250
1275
1300
Weight (lbs)
Feeder Breakeven
Packer Breakeven
However, during other phases of the game there will be no profit to split (Figure 2). Supply and demand
conditions, i.e., high feeder cattle and feed prices combined with low boxed beef prices, may be such that
the market is in a state of disequilibria where feedlot breakeven prices are above packer breakeven prices.
In this case, losses must be split.
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FED CATTLE
MARKET SIMULATOR
Joint Losses to Split
83.00
82.00
Price ($/cwt)
81.00
80.00
79.00
78.00
77.00
76.00
75.00
1200
1225
1250
1275
1300
Weight (lbs)
Feeder Breakeven
Packer Breakeven
Market dynamics and conflict resolution become very important in this situation. If both sides of
the market are losing money and both are holding out for the other side to give in, the unprofitable
situation can easily be prolonged to the detriment of all firms. (Read those last two sentences again.)
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