Is the Packer Who Pays for Yield Disadvantaged?
It has been argued that the packer who pays for beef carcasses on the basis of their percentage yield is disadvantaged relative to his competitors because he pays more for higher yielding cattle and, because he does, he would receive a disproportionate share of high yielding cattle and a less than proportionate share of lower yielding cattle which he could discount to offset the higher than average price paid for the higher yielding cattle. To examine and quantify this claim I have set up the accompanying analysis.
Establishing a Base Price
In the day to day buying and selling of cattle a sort of base price becomes revealed. For example that base price for AAA cattle might be $250.00.cwt on a rail grade basis with discounts for AA and A, and a premium for Canada Prime. These quality premiums and discounts are of little or no consequence to the matter of pricing on the basis of yield since yield and quality can, and should be, priced separately.
So the first thing the packer who is buying on the basis of carcass yield needs to do is to set a competitive base price. Here is how he does that.
He knows the distribution of yield grades in Canada as set out in Column B in the accompanying table. This ratio changes constantly but hopefully there will be a current record of this distribution. He also accepts the average boneless lean meat yield percent for each yield class is as set out in Column C. It is therefore an easy calculation to determine that the weighted average yield is 69.99%, which I have rounded to 70%. Therefore the average value of a pound of boneless beef yield from beef carcasses, given the current distribution is $2.50/0.70 = $3.57 per pound.
To keep the math simple we assume that Packer A and Packer B are each purchasing just 100 cwt of fed steer beef carcass but that packer A is paying a flat price of 250.00/cwy while Packer B is offering $357.21/cwt on a boneless yield basis. The results are displayed below.
For simplicity’s sake we deal with only 100 cattle and the carcass weight of each is 100 lbs.
The analysis is based on the USDA 5 yield system where the overall distribution is as shown in the accompanying table.
Packer A is buying at a base price of $250 on the rail with a $6.00 Premium for AAA and Prime and a $6.00 discount for A carcasses. The AA carcasses are bought at the base price.
Packer A knows, based on the distribution of the yield grades in Canada, that the weighted average yield is 70%. So Packer A is prepared to offer the base price of $250.00 for the weighted average yield. This converts to a price of $3.57 per pound of yield.
Because it is known that packer A is bidding on the basis of yield he gets 68% of all the Y1 and Y2 carcasses. Two Packers are involved in this analysis. Packer A is the innovator who is paying for yield, Packer B is not paying for yield.
Packers A and B paid the same total for the 100 cwt of carcass beef but Packer B paid $329.00 more for the Y1’s $208.50 more for the Y2’s $288.00 less for the Y3’s $190.00 less for the Y4’s and $59.70 less for the Y5’s. While the total layout was the same the sellers got distinctly different messages concerning the product they were selling.
Next let us assume that, because Packer B is bidding on a boneless yield basis he gets a disproportional share of the higher yielding cattle and packer A, who is bidding on a carcass basis, gets a disproportionate share of the poorer yielding carcasses. Because I am dealing only with 100 Cwt of carcass I will assume that each Packer buys 50 cwt. In the table below we see that Packer A actually buys more Boneless beef than Packer B and because of that he actually pays more ($12,595.00) for his 50 cwt than does packer B. But he still acquires his supply for the agreed price of $3.57 per lb while Packer B , because he bought lower yielding cattle paid $3.60 per pound.
This exercise confirms that the packer who buys on a carcass yield basis is not disadvantaged relative to the packer who buys on a carcass weight basis. He may however be disadvantaged by not being able to buy enough AAA and Prime carcasses. This underlines the importance of producing carcasses that combine high yield and high quality. It suggests as well, however, that the producer who sells on a carcass yield basis is thereby rewarded and induced to produce high yielding carcasses that also grade high for quality.