Pork Carcass Lean Value Pricing

1. Pork Carcass Lean Value Pricing Prepared by: Dr. Davey Griffin Texas A & M University

2. Conversion of “Pig to Pork” $

3. Carcass Grading Systems • Most Meat Animal Species Have a Dual Grading System That Addresses Both the Quality/Palatability of the Product as well as the Yield of Edible Lean.

4. Carcass Evaluation of: • Lean Quality • Lean Quantity

5. Lean Quality

6. Ideal Pork Quality • Color • Reddish-pink • Drip Loss • < 0.5% • Ultimate pH • 5.6 - 6.2 • Marbling • Equivalent to 2.5 - 4% intramuscular fat

7. Genetics On-Farm Handling Nutrition Transportation Carcass Handling Pre-Slaughter Handling Stunning Lean Quality May Be Influenced By:

8. Lean Quantity

9. Pork Carcass Measurements Backfat Measurements: Last Lumbar Vert. Last Rib 1st Rib Carcass Length: Anterior Edge of First Rib to Anterior Edge of Aitch Bone

10. USDA Pork Carcass Grades Expected Yield of the Four Lean Cuts By Grade, Based on Percentages of Chilled Carcass Weight U.S. No. 1 60.4% and Over U.S. No. 2 57.4 to 60.3% U.S. No. 3 54.4 to 57.3% U.S. No. 4 Less than 54.4% U.S. Utility USDA Yield Grade Equation: (4 x Last Rib Fat Measurement) – Muscling Score NOT commonly applied in commercial operations

11. Percent Lean (Ribbed Carcasses) • Hot carcass weight • Fat depth at the tenth rib • Loin eye area at the tenth rib Most accurate, but NOT commonly applied in commercial operations because most carcasses are not ribbed

12. Fat Free Lean Equation Pounds of Fat Free Lean = 8.5876–(21.8957 x 10th rib fat, in) +(3.0047 X LEA, in.2) +(.4650 x HCWT, lbs.) Percentage Fat Free lean = (Pounds of Fat Free Lean/ Hot Carc. Wt.)x100

13. Percentage Fat Free lean • Typical values: 48-60% • Extremely lean pigs >60% • As live or carcass weight increases, what happens to fat? • With heavy-weight hogs, FRAME is very important

14. Hog Procurement • Live Cash (Spot) Market • Auction • Delivery to Packing Plant • Hog Buying Station • Few Hogs Traded on Live Cash Market • 62% in 1994 • 17% in 2001 • 9% in 2007

15. Hogs Sold on Carcass Basis Versus Live Cash Source: Lawrence, John and Glenn Grimes. Production and Marketing Characteristics of U.S. Pork Producers, 2006,

16. Hog Procurement • Marketing and Production Contracts • Specifies time and quantity of hogs to be delivered • Production Contract - Contractor supplies hogs • Marketing Contract - Types, numbers, pricing formula are normally specified

17. Carcass Weight Pricing Producer Paid on a Carcass Weight Basis Dressing Percentage Is The Most Important Factor! 74% 26% 250 lbs. “Dress-Off Items” Head, Viscera, Pluck, Hair, Blood, etc. 65 lbs. 185 lbs.

18. Carcass Pricing • Carcass pricing is heavily affected by dressing percentage • Dressing percentage is affected by: • Amount of fill • Amount of fat • Amount of muscle • Amount of carcass trimming • Producer is not paid if carcass is condemned

19. Lean Value Pricing Lean Value or Carcass Merit Pricing • Differential pricing by carcass, based on the estimated lean merit of each individual carcass • Lean Merit estimation is completed by a variety of methods, but usually takes the form of a prediction equation using on-line measurements to estimate total lean. • A base carcass price is established and adjusted according to the results obtained by the prediction equation • The majority of lean value pricing formulas do not currently include estimates of quality.

20. Lean Value Pricing On-Line Methods and Measurements • Ruler • Invasive Optical Probe • Ultrasound – Hanging Carcass • Ultrasound – Entire Carcass • MRI – Entire Carcass or Primals

21. Lean Value Pricing On-Line Methods and Measurements Ruler

22. Lean Value Pricing On-Line Methods and Measurements Invasive Optical Probe (Fat-O-Meater, Hennessy Grading Probe)

23. Lean Value Pricing On-Line Methods and Measurements Ultrasound – Hanging Carcass (Animal Ultrasound Systems CVT, UltraFom)

24. Lean Value Pricing On-Line Methods and Measurements Ultrasound – Entire Carcass (AutoFom)

25. Lean Value Pricing On-Line Methods and Measurements MRI – Entire Carcass or Primals (TOBEC)

26. Lean Value Pricing Merit Estimations • Typically Percent Lean or Percent Wholesale Cuts derived from a formula (regression equation) • Merit = 55.234 - (.4 x Fat Depth) + (6.2 x Muscle Depth) • Calculated for each individual carcass (not an average)

27. Lean Value Pricing Caution!! • Equations are only as good as the data used in deriving the equation • They are an estimate (based on data), not absolute • Typically varies due to differences in weight, genetic type, etc.

28. Lean Value Pricing • Carcass merit estimates do differ from plant to plant • Different equipment, different data collected, human to human differences, etc. • Each processor develops their buying program (grid) to meet their product needs. • It is the producer/seller’s challenge to match the right hogs with the right carcass merit program to maximize value.

29. Lean Value Pricing Each carcass is priced individually Different Plant Examples: PRICE = Base Price + Value Premium - Deductions PRICE = (Base Price x Relative Value) - Deductions

30. Lean Value Pricing • Base Price Does Differ From Plant to Plant • Each packer/plant sets it own base • Base can differ from supplier to supplier, based on market forces and past history • Base Price Negotiated From: • Publicly reported cash or “spot” market trades • Futures market price • Publicly reported feed price • Plant averages

31. Lean Value Pricing

32. Lean Value Pricing

33. Lean Value Pricing • Grid carcass weight and leanness adjustments may be applied: • Fixed premiums (known dollar amount) • Relative premiums (percent adjustment) • Carcasses are not typically USDA (third party) graded • Packer employee measures • Objective measures • Fat-O-Meater, ruler, ultra-sound, etc.

34. Example Program 1 Begin with a negotiated base price and adjust according to the grid below:

35. Example Program 1 Begin with a negotiated base price and adjust according to the grid below: Carcass Price = $85/cwt x 1.08 = $91.80/cwt. 200 lbs. X $91.80/cwt = $183.60 Total Value Example: Base Price = $50/cwt., Carcass Wt. = 200 lbs., LR Fat = .90 in.

36. Example Program 2 Begin with a negotiated base price and adjust according to the grid below:

37. Example Program 2 Begin with a negotiated base price and adjust according to the grid below: Carcass Price = ($85/cwt + $0.00) + $1.50 = $86.50/cwt. 200 lbs. X $86.50/cwt = $173.00 Total Value Example: Base Price = $85/cwt., Carcass Wt. = 200 lbs., 10thR Fat = .90 in., LEA = 7.00 in2, %Fat-Free Lean = 51.5%.

38. Example Program 3 Begin with a negotiated base price and adjust according to the grid below:

39. Example Program 3 Begin with a negotiated base price and adjust according to the grid below: Example: Base Price = $85/cwt., Carcass Wt. = 200 lbs., 10thR Fat = .90 in., LEA = 7.00 in2, %Fat-Free Lean = 51.5%.

40. Selling On: Lean Value Pricing Summary • Live weight • One average price for all live pounds • Negotiated price before delivery • Weighing conditions important • Mud, shrink (fill, time, stress) • Was most common for hogs

41. Selling On: Lean Value Pricing Summary • Carcass weight • One average price for all carcass pounds • Negotiated price before delivery • Dressing percent (also called yield) is extremely important! • Producer stands risk of trimming and condemnation losses

42. Selling On: Lean Value Pricing Summary • Lean Value Pricing (Grid Marketing) • Each carcass evaluated and priced independently by the packer (not third party) • Producer stands grading risk • Base price may be negotiated or come from packer-generated formula • Premiums and discounts typically determined ahead of delivery • Different buyers have different systems • Most market hogs are sold by some variation of this method today

43. Lean Value Pricing Summary Lean Value Pricing differentiates carcass merit and the producer is paid its worth to the packer. Producers must determine how best to capture relative value of the pigs produced by matching them with the most profitable pricing program (limitations due to transportation costs or other variables may also influence marketing decisions).