Where Premiums Come From

March 5, 2010

FOR IMMEDIATE RELEASE

For more information contact:

Steve Suther, Certified Angus Beef LLC Industry Information Director, at (785) 889-4162 or ssuther@certifiedangusbeef.com

Premiums and discounts rule the world of value-based cattle marketing. If you’ve fed cattle or followed calves through a feedlot to a packer grid, you have been enrolled in continuing education.

When a truckload of finished cattle sells on a grid, individual data can tell a lot about the cow herd and sire genetics, health and management. Within a couple of years, you may be able to see patterns that separate better from worse. But you still need to see the big picture: what carcass traits add to premiums and which clearly point to discounts?

That’s tough to discern from the close-up look at how your cattle did — you can’t see the forest for the trees. Answers begin to appear when you can look at grid marketing data that spans 11 years and a million cattle in more than 20,000 harvest groups.

GeneNet LLC, operated by Ken Conway, Hays, Kan., has amassed just such a resource, based on his successful marketing alliance through JBS-USA.

Conway recently agreed to work with Certified Angus Beef LLC (CAB) data analyst Mike King to see what larger lessons can be learned from percentile rankings, ranges and correlations among the traits. Results show where dollars are earned or lost.

Analysis and results

“We looked at all of the relationships between variables,” King explains, “but we focused on their effect on carcass premiums.”

He sorted the lots by quartile based on carcass grid premiums, finding means and ranges (Table 1). Simple statistical correlation coefficients were also calculated for all lot data.

The trait most positively associated with grid premiums is Certified Angus Beef ^®(CAB^®) brand acceptance, showing a strong 0.57correlation. Grading low Choice is only slightly correlated with a premium. On the other hand, percent Select is almost as negatively correlated with premiums as CAB is positive.

In the quartile rankings, both live and carcass weights were similar for the top three premium quartiles, but significantly heavier for the bottom quartile. “Pounds do not always mean more dollars, especially on a grid with YG 4 and heavyweight discounts in play,” Conway notes.

Although the GeneNet grid pays some of the highest premiums available for lean Yield Grades, according to the data only the YG 3s are moderately and positively correlated with carcass premiums.

“That’s probably because YG 3 is also moderately correlated with CAB and Prime,” Conway says. YG 2 is slightly correlated with premiums, but YG 1 joined YG 4 and 5 in a moderate negative correlation.

Outliers

Many excellent cattle are represented in the top quartile group, of course. There are the 78% Prime, the 92.9% YG 2s, the many groups of 100% Choice and higher. But some lots in the database overcame significant discounts to remain at the top, buoyed by their excellent quality grades.

The range in base price for cattle sold in the top quartile of carcass premiums ran from less than $98/cwt. to nearly $180/cwt., and the net premiums were from $33.15/head to $137.71/head.

Perhaps the most unusual cattle are the outliers in the bottom quartile for premiums, those with an average premium net loss and a range down to -$174.88, usually the result of feeding or marketing errors.

There are lots with 78% Prime in both the top and bottom quartile, but those in the bottom ended up with no premium but rather losing $27.04 per head. That’s because of their 37.5% YG 4s, 5% YG 5s and 12.5% heavies. “Overall, the bottom quartile still averaged more than 59% Choice or higher, but they had 18% discounts,” Conway points out. “The key to profit on our grid is to avoid those discounts.”

For more details on GeneNet, visit www.genenetbeef.com or call Conway at 785-628-3004. For more details on the analysis or to read the abstract on the 1999-09 database submitted via the Midwest Section of the American Society of Animal Science, visit www.cabpartners.com/news/research.

Table 1. Continuous Lot Variables in GeneNet Data (1999-2009), by Quartile and Ranges

Quartile or Group	Carcass Premium/ $ Head	CAB^® Acceptance % Rate	% Choice and Above	HCW	%YG 4s & 5s	%Out Cattle*	%Total Discount (with YG 4-5)
Top	48.35	29.1	88.7	755.1	3.9	1.2	5.1
Second	25.18	18.2	81.1	754.7	4.2	2.0	6.2
Third	10.62	12.1	72.2	758.6	5.5	2.1	7.6
Bottom	-15.48	7.6	61.4	774.6	9.7	8.3	18.0
Range High	137.71	86.0	100	971.0	>50.0	>50.0	>50
Range Low	-174.88	0.0	2.2	551.0	0.0	0.0	0.0

* Out cattle are Standards, Commercial, dark cutters, heavies and lights

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