LIVESTOCK LIVESTOCK MARKETSMARKETS

HOW DO MOST LIVESTOCK HOW DO MOST LIVESTOCK MOVE TO MARKET?MOVE TO MARKET?

HOW DO MOST LIVESTOCK HOW DO MOST LIVESTOCK MOVE TO MARKET?MOVE TO MARKET?

DIRECT SALESDIRECT SALES

DIRECT SALES DIRECT SALES INVOLVE A DIRECT INVOLVE A DIRECT CONTACT BETWEEN CONTACT BETWEEN

PRODUCER AND PRODUCER AND PACKER BUYER.PACKER BUYER.

PACKER BUYER WORKS FOR A PACKER BUYER WORKS FOR A PACKING COMPANY.PACKING COMPANY.

THUS THE ANIMALS HE/SHE THUS THE ANIMALS HE/SHE BUYS ARE DESTINE FOR BUYS ARE DESTINE FOR SLAUGHTER, HOW DO MOST SLAUGHTER, HOW DO MOST LIVESTOCK MOVE TO MARKET?LIVESTOCK MOVE TO MARKET?

SMALL PRODUCERS ARE NOT SMALL PRODUCERS ARE NOT USUALLY INVOLVED WITH USUALLY INVOLVED WITH PACKER BUYERS PACKER BUYERS

NOT AN EFFICIENT USE OF TIMENOT AN EFFICIENT USE OF TIME

COST AND BENEFITS OF DIRECT COST AND BENEFITS OF DIRECT SALESSALES

CONVENIENCE -- SELLERS SAVE CONVENIENCE -- SELLERS SAVE TIMETIME

COST -- LOADING, SHIPPING, COST -- LOADING, SHIPPING, SHRINKAGE ARE REDUCEDSHRINKAGE ARE REDUCED

MARKET POWER -- SELLER CAN MARKET POWER -- SELLER CAN REJECT SALE IF HE WISHES REJECT SALE IF HE WISHES (ANIMALS ARE STILL ON THE FARM)(ANIMALS ARE STILL ON THE FARM)

THE PACKER BUYER IS UNDER THE PACKER BUYER IS UNDER PRESSURE TO SUPPLY THE PLANTS PRESSURE TO SUPPLY THE PLANTS ENOUGH STOCK TO KEEP THEM ENOUGH STOCK TO KEEP THEM OPEN HOWEVER THEY WANT TO OPEN HOWEVER THEY WANT TO PURCHASE THE STOCK AS CHEAPLY PURCHASE THE STOCK AS CHEAPLY AS POSSIBLE.AS POSSIBLE.

GENERAL BID PARAMETERS AND GENERAL BID PARAMETERS AND QUOTAS ARE GIVEN TO THE BUYERS QUOTAS ARE GIVEN TO THE BUYERS EACH DAY FROM THE HOME OFFICEEACH DAY FROM THE HOME OFFICE

PACKER BUYERS ARRANGE PACKER BUYERS ARRANGE LONG TERM CONTRACTUAL LONG TERM CONTRACTUAL AGREEMENTS WITH AGREEMENTS WITH PRODUCERS BASED ON PRODUCERS BASED ON PRICING FORMULASPRICING FORMULAS

Formula pricing refers to Formula pricing refers to establishing a transaction establishing a transaction price using a formula that price using a formula that

includes some other price as a includes some other price as a reference. As such, formula reference. As such, formula prices are not discovered for prices are not discovered for

each transaction. Rather, each transaction. Rather, some other price is used, a some other price is used, a price discovered external to price discovered external to the particular formula priced the particular formula priced

transactiontransaction

The source of the The source of the external price may be a external price may be a USDA quoted price or a USDA quoted price or a

futures pricefutures price

MOST FORMULAS ARE MOST FORMULAS ARE BASED ON A REPORTED BASED ON A REPORTED

NEGOTIATED PRICENEGOTIATED PRICE

(WESTERN CORN BELT)(WESTERN CORN BELT)

Percent of Hogs Sold Percent of Hogs Sold Through Various Pricing Through Various Pricing

ArrangementsArrangements

YearYear 19991999 20002000 20012001 20022002

Hog or Hog or Meat Meat FormulaFormula

44.244.2 47.247.2 54.054.0 44.544.5

Other Other Market Market FormulaFormula

13.213.2 20.820.8 21.921.9 11.811.8

NegotiatNegotiateded

35.835.8 25.725.7 17.317.3 16.716.7

A MAJOR ISSUE OR A MAJOR ISSUE OR CONCERN IN LIVESTOCK CONCERN IN LIVESTOCK PRICING IS THE DECLINE PRICING IS THE DECLINE IN NEGOTIATED PRICESIN NEGOTIATED PRICES

THE PRICE A PRODUCER THE PRICE A PRODUCER RECEIVES FOR HIS HOGS RECEIVES FOR HIS HOGS WILL BE THE FORMULA WILL BE THE FORMULA PRICE WITH PREMIUMS PRICE WITH PREMIUMS

OR DISCOUNTS BASED ON OR DISCOUNTS BASED ON YIELDYIELD

SELLING ON A GRADE AND YIELD SELLING ON A GRADE AND YIELD BASISBASIS

A LARGE PERCENTAGE OF DIRECT A LARGE PERCENTAGE OF DIRECT SALES INVOLVE THE PRICING ON SALES INVOLVE THE PRICING ON A GRADE AND YIELD BASISA GRADE AND YIELD BASIS

THE CARCASS IS PRICED NOT THE THE CARCASS IS PRICED NOT THE LIVE ANIMAL. A BASE PRICE IS LIVE ANIMAL. A BASE PRICE IS ESTABLISHED BY THE PACKER ESTABLISHED BY THE PACKER THEN PREMIUMS AND DISCOUNTS THEN PREMIUMS AND DISCOUNTS ARE GIVEN BASED UPON THE LIVE ARE GIVEN BASED UPON THE LIVE WEIGHT TO CARCASS WEIGHT WEIGHT TO CARCASS WEIGHT RATIO ( OVER A RANGE OF LIVE RATIO ( OVER A RANGE OF LIVE WEIGHTS)WEIGHTS)

Grid pricing consists of a Grid pricing consists of a base price with specified base price with specified premiums and discounts premiums and discounts for carcasses above and for carcasses above and below a base or standard below a base or standard

set of quality set of quality specifications. Grid specifications. Grid pricing involves a pricing involves a

formula for establishing formula for establishing the base price.the base price.

NATIONAL DAILY BASE LEAN HOG CARCASS SLAUGHTER COST FOR Mon, Feb 10, 2003 This report includes: Volume, Weighted Average Carcass Weight, and Base Cost Avg Base Cost (Packer Buying Programs) Head Carcass Backfat (Inches): 1.00-1.09 0.80-0.99 0.65-0.79 Date Count Weight Percent Lean: 49-50% 51-52% 53-54%

Date Volume Avg Carcass 49-50% 51-52% 53-54% Wt.

02/10/2003 156,380 197.95 46.23 48.09 50.27 02/07/2003 176,366 199.15 46.53 48.44 50.5102/06/2003 158,429 199.82 46.48 48.37 50.5502/05/2003 161,698 198.56 46.70 48.58 50.7302/04/2003 163,687 198.56 46.60 48.49 50.68 02/03/2003 158,820 198.50 46.74 48.62 50.74

-------------------------------------------------------------------------------- IOWA/MINNESOTA DAILY DIRECT

NEGOTIATED HOG PURCHASES MATRIX 185 lb

Carcass Basis (Defined by Muscle and Fat) LOIN AREA/DEPTH (INCHES) BACK-FAT 4.0/1.4 5.0/1.7 6.0/2.0 7.0/2.3 8.0/2.7 0.4 49.00 62.11 50.50 61.11 52.00 61.11 53.00 61.11 53.00 61.11 0.5 46.50 62.11 49.00 62.11 52.00 62.11 53.00 61.11 53.00 61.11 0.6 46.50 62.11 49.00 62.11 50.50 62.11 52.00 62.11 53.00 61.11 0.7 46.50 60.11 46.50 60.86 49.00 62.11 52.00 62.11 53.00 62.11 0.8 44.50 59.61 46.50 60.11 49.00 60.86 50.50 60.86 53.00 62.11 0.9 44.50 57.11 46.50 58.11 46.50 59.61 49.00 60.11 52.00 60.86 1.0 43.50 56.39 44.50 57.11 46.50 57.11 49.00 58.11 50.50 60.11 1.1 42.50 54.11 44.50 55.11 46.50 56.11 46.50 57.11 50.50 58.20 1.2 42.50 53.11 43.50 53.68 44.50 54.81 46.50 55.94 49.00 57.63 1.4 39.00 51.98 42.50 52.55 43.50 53.68 44.50 54.81 44.82 55.94 -------------------------------------------------------------------------------- CARCASS WEIGHT DIFFERENTIALS 145# -21.60 -8.16 175# -2.83 0.00 205# 0.00 0.00 155# -21.60 -5.41 185# -1.13 0.00 215# -3.00 1.13 165# -8.10 -0.67 195# -0.57 0.00 225# -5.26 0.00

THE SYSTEMS OF GRADE AND YIELD THE SYSTEMS OF GRADE AND YIELD WILL VARY FROM PACKER TO PACKERWILL VARY FROM PACKER TO PACKER

ORDER BUYERSORDER BUYERS

THEY WORK AS BROKERS (DO THEY WORK AS BROKERS (DO NOT TAKE TITLE TO THE NOT TAKE TITLE TO THE ANIMALS)ANIMALS)

MAY WORK FOR A PACKER (S) OR MAY WORK FOR A PACKER (S) OR FEEDERSFEEDERS

ORDER BUYERS ARE PAID A ORDER BUYERS ARE PAID A COMMISSION COMMISSION

THEY MAY SPECIALIZE IN A THEY MAY SPECIALIZE IN A PARTICULAR TYPE OF PARTICULAR TYPE OF ANIMAL (VEALERS)ANIMAL (VEALERS)

ORDER BUYERS MAY ALSO WORK ORDER BUYERS MAY ALSO WORK FOR PRODUCERS TO ACQUIRE FOR PRODUCERS TO ACQUIRE FEEDER ANIMALS -- FEEDER AND FEEDER ANIMALS -- FEEDER AND STOCKER CATTLE AND FEEDER PIGSSTOCKER CATTLE AND FEEDER PIGS

LIVESTOCK DEALERSLIVESTOCK DEALERS

DEALERS TAKE OWNERSHIP OF DEALERS TAKE OWNERSHIP OF THE ANIMALS. THE ANIMALS.

MAY SELL TO PACKERS, OR MAY SELL TO PACKERS, OR PRODUCERSPRODUCERS

DEALERS OFTEN SPECIALIZE IN DEALERS OFTEN SPECIALIZE IN FEEDER ANIMALS.FEEDER ANIMALS.

SERVE AS A SALVAGE FUNCTIONSERVE AS A SALVAGE FUNCTION