Brester, Gary W.

McNew, Kevin

English

Research Papers in Economics

What is the Value of Cattle Quality Information?
Evidence from the Montana Beef Network
Kevin McNew and Gary Brester
 B R I E F I N G
    Briefing No. 31                 September 2002
                            
                            
                                                           
Agricultural Marketing Policy Center
Linfield Hall
P.O. Box 172920
Montana State University
Bozeman, MT 59717-2920
Tel: (406) 994-3511
Fax: (406) 994-4838
email: ampc@montana.edu
website: www.ampc.montana.edu
Objective
Analysis
for Informed
Decision Making
In recent years, the cattle sector has
moved towards grid pricing of cattle
as opposed to pricing cattle on a live
weight basis. Grid pricing rewards
livestock producers for producing
high-quality cattle while discounting
cattle with low-quality characteristics.
Grid pricing of cattle represents an
important step towards improving
beef quality to consumers and
compensating livestock producers for
high-quality cattle.  
The shift from live weight pricing to
grid pricing  alters relative risk
between producers and packers. With
live weight pricing, livestock
producers have no risk in terms of end
quality of their cattle, whereas the
packer absorbs all of the quality risk.
In contrast, livestock producers have
all of the risk of cattle quality with
grid pricing while packers have no
quality risk. 
One way producers can reduce quality
risk is to acquire information about
the quality of their cattle. Producers
historically had to retain ownership of
their cattle until slaughter and sell
their cattle on a grid in order to learn
about the quality of their cattle. This
can prove costly. As a result, some
cattle organizations are forming
information collection services to
acquire cattle quality data for
individual producers. In doing so , it
is hoped that cattle producers will
learn more about the end-quality of
their cattle and therefore, be able to
make better management and
marketing decisions.
The Montana Beef Network is an
example of a data collection service
for cattle producers. Along with
collecting data on cattle production
and end-quality characteristics, the
Montana Beef Network provides
educational and certification
programs. It is jointly managed by the
Montana Stockgrowers Association
and Montana State University
Extension Service. Currently, the
Montana Beef Network is financially
supported with public funds and
small user fees, but eventually it will
likely be self-supportive. 
If the program is to be self- supported
through user fees in the future, how
much would cattle producers be
willing to pay to acquire quality data
on their cattle? This briefing looks at
this issue by examining differences in
pricing with a grid system versus a
dressed weight pricing system.  The
key premise is that producers will
make better decisions about which
method to use for selling their cattle
if they have better information
regarding end-use quality.
Overview of Montana Beef
Network Data
The Montana Beef Network helps
producers collect and analyze data on
the performance of their cattle.
Contact:
Kevin McNew
(406) 994-7816
kmcnew@montana.edu
Gary Brester
(406) 994-7883
gbrester@montan.eduPage 2
Figure 1. Distribution of Quality Grade for Montana Beef Network Cattle and U.S. Cattle: 
1999-2001
1.3%
61.6%
36.2%
0.9%
3.4%
57.5%
39.0%
0.0%
0%
10%
20%
30%
40%
50%
60%
70%
Prime Choice Select Standard
Quality Grade
P
r
o
p
o
r
t
i
o
n
 
o
f
 
C
a
t
t
l
e
MT
US
Producers apply an identification tag to
each animal which aids in data
collection. Data collected includes
cattle specific data such as birth
weight, weaning weight, vaccination
histories, feedlot performance and in
some cases, the quality grade and yield
grade of the cattle at slaughter. 
Our interest is in estimating the value
of quality information to cattle
producers. As a result, we retained and
evaluated information on the cattle that
had data on yield grade and quality
grade at slaughter. There were over
9,600 head of cattle that had quality
and yield grade data in the Montana
Beef Network between 1999 and 2001. 
Figures 1 and 2 show the distribution
of these cattle for quality grade and
yield grade, respectively. As a means
of comparison, quality and yield grade
data for all U.S. cattle over this same
period are shown in the figures.
Montana Beef Network cattle tend to
be more concentrated at Choice
quality grade as compared to the U.S.
average, with small porportions
grading Prime or Select. However,
the differences between Montana and
the U.S. are only statistically
 different for Prime and Standard
grades. Yield Grade results also
suggest noticeable differences
between cattle in the Montana Beef
Network and the U.S. averages.
Montana Beef Network cattle tend to
be concentrated at Yield Grade 3, as
compared to U.S. cattle which tend
toward Yield Grade 2. With the
exception of Yield Grade 5, the
differences between cattle from the
Montana Beef Network and the U.S.
average are statistically significant.
The average Yield Grade for
Montana Beef Network cattle is 2.58,
while the U.S. average is 2.35.
Grid Pricing Premiums and
Discounts
Producers generally have three
options for pricing their cattle. The
first is a live weight sale, implying
that the cattle are weighed prior to
slaughter and a price is set based on
local cash market prices.  
The second option is to have cattle
slaughtered to determine carcass
weight, and then apply a
corresponding dressed weight price. 
In each of these two cases,the packer
bears all of the quality risk of the
cattle while the producer bears no
quality risk. Page 3
Figure 2. Distribution of Yield Grade for Montana Beef Network Cattle and U.S. Cattle: 
1999-2001
4.4%
39.7%
50.0%
5.3%
0.6%
11.0%
46.0%
40.6%
2.2%
0.2%
0%
10%
20%
30%
40%
50%
60%
12345
Yield Grade
P
r
o
p
o
r
t
i
o
n
 
o
f
 
C
a
t
t
l
e
MT
US
Under the third grid pricing option,
cattle are slaughtered and graded with a
quality grade and yield grade
designation assigned. When cattle are
sold on a grid, packers pay premiums
or discounts depending on the outcome
of the quality grade (Prime, Choice,
Select, or Standard) and yield grade (1,
2, 3, 4 or 5). The premiums and
discounts are in reference to a base
price, usually the dressed weight price.
Like any competitive price, the
premiums and discounts paid will
usually vary across packers as well as
over time as market forces change.
With grid pricing, all the risk of cattle
quality falls on producers. 
Whether a producer should sell on the
grid or not depends on two factors.
First, the size of the premiums or
discounts for quality and yield grades
will play a factor in pricing decisions.
All things equal, higher premiums or
smaller discounts will give producers
better prices by selling on the grid
versus dressed weight or live weight. 
Table 1 illustrates premiums and
discounts for some example grids. The
first, labeled U.S. Average, is reported
weekly by the USDA Agricultural
Marketing Service and represents an
average over various packers.  Values
reported in table 1 are averaged over
the period January 1998 through April
2002. The Gelbvieh Alliance Muscle
Grid is used by a major meat packer to
reward high quality cattle. An
important feature of grid pricing is the
asymmetry in premiums and discounts.
For cattle grading Prime on the
Gelbvieh grid, there is a $6 per cwt
premium over Choice as compared to a
$7.83 per cwt discount under Choice
for grading Select. Likewise, producers
earn a $1.50 premium for yield grade 2
but are discounted $20.00 per cwt for a
yield grade 4. 
The rewards for high quality cattle are
smaller than the discounts for poor
quality cattle, which makes it important
for a producer to truly understand cattle
quality. 
The second factor that influences whether
a producer should sell a grid is the
quality of a producer’s cattle. Higher
quality cattle should be sold on a grid
that rewards quality.  Lower quality cattle
should be sold either live or dressed
weight or on a live or carcass basis, or
perhaps on a grid which rewards
producers for yields opposed to grade.  
Because of the asymmetry of the
premium/discount schedules even
“average” cattle may best be sold on a
dressed or live weight basis. As an
example, applying the distribution of
cattle displayed in figures 1 and 2 to the
average premiums and discounts of table
1, producers would on average receive a
discount for their cattle if sold on the
grid. For example, cattle from the
Montana Beef Network would average a
discount of -$3.46 per cwt if sold using
the U.S. average premium/discount
schedule or a -$3.36 per cwt discount if
sold on the Gelbvieh grid. Using the U.S.
average distribution of cattle also shows a
discount on average, although smaller
than the discount for cattle from the
Montana Beef Network.Page 4
                                            Table 1.  Average Grid Prices for the U.S. and Gelbvieh Alliance:                                     
                                            January 1998 – April 2002
U.S. Average Grid Gelbvieh Alliance
Muscle Grid
Prime $5.51 $6.00
Choice $0.00 $0.00
Select -$7.83 -$7.83
Standard -$17.38 -$17.83
Yield Grade 1 $2.13 $4.00
Yield Grade 2 $0.97 $1.50
Yield Grade 3 -$0.20 $0.00
Yield Grade 4 -$15.11 -$20.00
Yield Grade 5 -$20.54 -$25.00
U.S. Average  -$2.66 -$2.23
MT Average -$3.46 -$3.36
Although average cattle should not be
sold on the grid this does not imply that
all cattle should not be sold on the grid.
Some producers have high quality cattle
and can earn better prices for those
cattle by selling on the grid. From the
cattle producer’s standpoint, however, it
is difficult to judge cattle quality until
they have been graded. As such,
producers face significant uncertainty
about their cattle quality as well as
financial risk. 
One way producers can learn about their
cattle’s quality is to retain ownership of
the cattle until slaughter and then sell
them on the grid. This may prove costly,
especially for those producers that have
low quality cattle. 
The Montana Beef Network and other
organizations like it are attempting to
reduce these costs of learning by
collecting data on cattle quality, without
the producer retaining ownership and
pricing the cattle on a grid. Through
repeated collection of cattle quality data,
it is hoped that producers can improve
management decisions as well as
marketing decisions. 
Value of Cattle Quality Information
The value of information is determined
by the added benefits (or reduced costs)
that the information will give to the user
from knowing the new information.
For a cattle producer, learning about
his/her cattle quality could lead to
management decisions that may
improve the quality of their cattle or it
could result in a change in how the
cattle will be sold (grid versus dressed
weight).  If these actions lead to higher
profits, then the information is of value
to the producer.
We explore the issue of economic
value within the context of how cattle
quality information would influence
the decision to sell on a grid or sell
dressed weight. Producers who
participate in the Montana Beef
Network acquire information on their
cattle regarding their quality and yield
grade. Over time as a producer sends
more and more cattle through the
program, they can gain a better
understanding of their distribution of
cattle over yield and quality grades. In
essence, they can build histograms for
their own cattle showing distibution by
grade and by yield similar to those
displayed in figures 1 and 2. 
Based on the Montana Beef Network
data, we selected those producers that
had 20 or more cattle with
quality/yield grade information. This
resulted in 79 producers over the
period 1999 through 2001. On average,
these 79 producers had 118 head of
cattle go in the Montana Beef Network. 
For each of these 79 producers, quality
and yield grade distributions were
computed based on the observed cattle
grading, which we assumed to be the
true distributions of their cattle. 
To determine the value of knowing
their distribution of cattle, we examine
two different selling strategies. The
first can be thought of as a “naïve”
strategy where a producer assumes that
his/her cattle have identical
quality/yield grade characteristics as
the overall population of all cattle
producers. In this case, the producer
observes the premium and discount
schedule and computes the expected
premium based on selling on a grid. If
the expected premium is positive, the
producer would sell on a grid otherwise
the producer will sell the cattle on a
dressed weight basis. The second
selling strategy is similar to the first,
except the producer makes his/her
pricing decision on the basis of his/her
true cattle distribution and not the
overall cattle distribution.  If the
expected premium is positive from
selling on the grid the producer will
sell on the grid. Page 5
Grid prices were used for the U.S.
average as reported by USDA and the
Gelbvieh Alliance Muscle Grid over
the period January 1998 through
April 2002. Premiums and discounts
are reported weekly, so we assume
that each producer delivers cattle
weekly and the distribution of those
cattle across quality and yield grades
is identical to their distribution
computed historically.  
Table 2 reports the results of the
analysis. Since the U.S. average grid
prices are generally lower for higher
quality as compared to the Gelbvieh
grid, very few producers would
actually sell on the grid. Only 2.5
percent of all producers would ever
find it advantageous to sell on the
grid if the U.S. Average Grid were in
effect. For those 2.5 percent of all
producers, they would sell on the grid
only 35.7 percent of the time and the
average premium would be $0.053
per cwt. If the Gelbvieh grid were in
effect 24 percent of the producers
would find it worthwhile to sell on
the grid at least once over this time
period. On average, this group (24
percent of all producers) would sell
on the grid 11 percent of the time and
earn an average premium of nearly
$0.04 per cwt.
What is the value of knowing this
information? Obviously, for
producers that would choose to sell
on the grid the information is more
valuable than those that would not.
However, in pricing information all
users are generally charged the same
price. For participants in the Montana
Beef Network, the value of the
information on cattle quality and
yield grade ranges from $0.001 per
cwt when the U.S. average grid is
used up to $0.009 per cwt when the
Gelbvieh grid is used. The
information may be of higher value
than these numbers if the
quality/yield grade information can
be used to alter management or
production practices. However, we do
not have available data to address that
issue. As such, these estimates are
likely to be conservative.
Table 2.  Producers Selling on the U.S. Average Grid and Gelbvieh Grid: 1998-2002
U.S. Average Grid Gelbvieh Alliance Muscle
Grid
Producers Selling on the Grid
 Proportion of Producers  2.5% 24.1%
 Proportion of Time Sold on Grid 35.7% 11.1%
 Average Grid Premium ($/cwt) $0.053 $0.039
All Producers
 Proportion of Time Sold on Grid 0.9% 2.7%
 Average Grid Premium ($/cwt) $0.001 $0.009
The programs of the MSU Extension Service are available to all people regardless of race, creed, sex, disability or national
origin.  Issued in furtherance of cooperative extension work in agriculture and home economics, acts of May 8 and June 30,
1914., in cooperative with the U.S. Department of Agriculture, David A. Bryant, Vice Provost and Director, Extension
Service, Montana State University, Bozeman, MT 59717.

What is the Value of Cattle Quality Information? Evidence from the Montana Beef Network

Abstract

Similar works

Full text

Available Versions

Research Papers in Economics