Where Premiums Come From

US - 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.

8 March 2010

3 minute read

North America

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, Kansas, has amassed just such a resource, based on his successful marketing alliance through JBS-USA.

Mr 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.

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

He sorted the lots by quartile based on carcass grid premiums, finding means and ranges. 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 carcase 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,” Mr 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 carcase premiums.

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

Many excellent cattle are represented in the top quartile group, of course. There are the 78 per cent Prime, the 92.9 per cent YG 2s, the many groups of 100 per cent 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 carcase 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 per cent 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 per cent YG 4s, five per cent YG 5s and 12.5 per cent heavies. “Overall, the bottom quartile still averaged more than 59 per cent Choice or higher, but they had 18 per cent discounts,” Mr Conway points out. “The key to profit on our grid is to avoid those discounts.”