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Factors Influencing the Extent of Grid Pricing of Fed Cattle

Practitioner’s Abstract: Motives for grid pricing of fed cattle have been identified in previous
research. Also, estimates of grid pricing exist from feedlot surveys and data generated via
mandatory price reports since 2001. However, no research has attempted to estimate factors
influencing the extent of grid pricing by cattle feeders. Cattle feedlot respondents to a survey
primarily in Nebraska, Colorado, Kansas, and Texas reported a wide range of grid pricing use
in 2003. Two groups of feedlot respondents were created; those using grid pricing for half or
less of their fed cattle marketings in 2003 and those using grid pricing for more than half of their
marketings. Ordinary least squares and ordered logit models were estimated to determine
factors affecting grid pricing use for the two comparison groups. For many potential factors
influencing grid pricing, no significant differences were found between groups. The two most
robust factors were the percent of fed cattle sold to the largest buyer and the percent of fed cattle
marketed with some type of agreement, contract, or through an alliance or cooperative. Other
significant factors related to market conditions and expected carcass performance of the cattle.
However, results were neither consistent nor strong enough to explain the sharp drop in formula
pricing fed cattle during the third year following implementation of mandatory price reporting.

Keywords: Cattle, Fed cattle, Marketing, Pricing, Grid pricing

Introduction

Previous research shows a distinct trend toward grid pricing of fed cattle, away from live weight
and dressed weight cash market pricing (Schroeder et al. 2002). Cattle feeder survey
respondents reported pricing 16% of fed cattle with a grid in 1996, 45% in 2001, and anticipated
using a grid to price 62% of fed cattle marketed in 2006.

Since implementation of the Livestock Mandatory Reporting Act in April 2001, additional
information is available on the methods of procuring and pricing fed cattle. Both volume and
price levels for packer procurement of fed cattle by several methods now can be tracked weekly;
including negotiated pricing, formula pricing, forward contracting, and packer owned deliveries
(Ward 2004a, 2004b). Formula pricing was the predominant method of pricing fed cattle on a
grid, both based on a survey of feeders (Schroeder et al. 2002) and data since mandatory price
reporting (Ward 2004a). In 2001, formula pricing accounted for 46.7% of fed cattle purchases
and increased to 49.1% in 2002, quite consistent with the feedlot survey findings in Schroeder et
al. 2002. However, in 2003, the extent of formula pricing dropped sharply, to 34.0%.

Considerable research has been conducted on grid pricing, most dealing with price, revenue, and
profit level implications, risk differences, and market signals associated with grid pricing (Feuz,
Fausti, and Wagner 1993, 1995; Fausti and Feuz 1995; Schroeder and Graff 2000; Anderson and
Zeuli 2001; Feuz 1999; Fausti and Qasmi 2002; McDonald and Schroeder 2003; Whitley 2003).
Schroeder et al. 2002 identified the primary motives for using grid pricing. The three
predominant motives were to receive premiums for carcass attributes, to receive carcass data
from packers, and to receive a higher base price. However, no research has addressed how much



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