Pricing/Formula Grids: Which Fit and Which Don't Fit

Authors

Dillon M. Feuz, University of Nebraska - Lincoln

Date of this Version

December 1997

Comments

Published for Proceedings, The Range Beef Cow Symposium XV December 9, 10 and 11, 1997, Rapid City, South Dakota.

Abstract

Over the last couple of years there has been a much greater emphasis on improving the quality and consistency of beef. Cattle producers, breed associations, feed suppliers, and beef packers have all initiated new value based pricing methods. Grid pricing, formula pricing, and strategic alliances are examples of these new value based pricing methods. While these pricing methods may differ substantially in the carcass and management traits they seek to reward or penalize, they all have one common feature: price is established on each individual animal.

The goals of these new pricing methods are to price cattle based on their "true" value to consumers, to reduce problems of inconsistency in the final product, and to send appropriate market signals to producers. Pricing accuracy improves as pricing moves from a showlist to a specific pen to an individual head basis. However, price variation also increases when pricing on an individual head basis. Cattle are not created equal, or at least do not produce equal carcasses. They have a different value.

What is the true value of a carcass? Do consumers only want upper choice product? Do all consumers want lean beef! There are different markets for beef and each market places a higher or lower value on certain traits. Some of the grids, formulas and alliances seek to target different consumer markets by placing greater premiums on selected traits and greater discounts on others. The true value of a specific animal is therefore dependent upon the target market. To achieve the greatest economic return, it is necessary to match cattle to the market for which they are most suited.

The objective of this paper is to outline some of the issues and problems associated with matching cattle to the appropriate market. The following questions will be addressed: How to choose the “best” grid? How important is the base price to a grid? Is maximizing the sale price equivalent to maximizing revenue or profit? What are some of the industry concerns with grid and formula pricing?