Mobile Edition
Print
Get the Mag
Weekly UpdatesIn examining these schedules it is clear that the strategy of the packer has changed over time. In schedule 2, animals with carcass weights of 170 to 208 lbs and leanness of 51 to 53% were considered to be the "baseline" for which no discount or premium was applied. Animals that were lighter or heavier than this range, and/or that had a lower percent carcass leanness ("fatter" carcasses) were penalized; premiums were awarded for animals that had a higher percent leanness than this range. The more recent payment schedule 1 follows a similar pattern of discounts and premiums. In this instance, the "baseline" no-discount range is applied to animals with carcass weights of 170 to 223 lbs and who have a carcass leanness of 49 to 51%. Thus, the baseline weight range became nearly 40% wider due to an increase in the upper bound of the desired weight range, and the baseline carcass leanness range shifted downward by 2%. While the pattern of discounts beyond this baseline grid region is similar to the one used for schedule 2, the penalties and premiums imposed are notably larger. Comparing these schedules suggests that, over time, the packer has become willing to accept a wider range of live weights that was extended to include heavier animals. At the same time, the steeper discounts provide additional incentive to producers to deliver animals within the desired range.
Results and Discussion
Animal heterogeneity is important from the perspectives of both producers and packers. Herd heterogeneity has an impact not only on when producers should market their animals, but also on which animals to market in a multiple batch marketing setting. For packers, the heterogeneous quality of the animals received as inputs to their production processes has an impact on the mix of products they can produce, and thus their profit potential. Understanding producer responses to payment schemes may help packers design discount/premium schedules that encourage delivery of animals which better suit the demand for final pork products.
Results from a Producer Perspective
For producers, animal heterogeneity will affect the optimal shipping strategy and thus affect the potential returns which may be realized by producers. The following discussion presents results of shipping animals under the three alternative marketing strategies. This analysis makes use of the more recently available carcass payment schedule (schedule 1 in table 2).
Single day shipment strategies. Analyses of swine shipping decisions have historically been based on a representative animal. In this analysis, the homogeneous herd and heterogeneous herd with a single shipping decision models were used to determine the difference in the optimal shipping decision when herd heterogeneity is taken into account. The results of this analysis are displayed in the first two columns of table 3.
The first column in table 3 displays the results when the analysis is based on the representative animal, but revenues are calculated based on the true, heterogeneous animal weights. Based on 100 randomly sampled herds, the expected annual return for a 1,000 head barn was $97,247 with a standard deviation of $586, and the observed range is from about one and a half percent below the mean to about one percent above the mean. The average number of days on feed was quite stable with a range of 111 to 113 days.
The second column of table 3 displays results when herd heterogeneity is explicitly recognized (the heterogeneous herd with a single shipping decision model). The average number of days on feed is reduced by two days, and the average return to fixed facilities and operator labor increased by over 0.3%. In addition, the standard deviation of returns is reduced by about 0.4%. The range of optimal shipping dates is slightly wider with this approach to analysis--six days as opposed to two days with the analysis based on the representative animal.
Multiple shipment strategies. The results for the analysis that explicitly recognizes that the herd is heterogeneous and allows truckload shipments on multiple dates are displayed in columns 3 through 5 in table 3. Because multiple shipment dates are permitted, but not required, one feasible strategy is to market all animals on the same day. This was not optimal for any of the 100 randomly generated herds. In a majority of cases (91% of the time), it was optimal to ship one truckload of animals on one day and ship the rest of the animals on another day. These cases are summarized in the fourth column of table 3. For the remainder of the herds (9%), a shipping strategy in which the two single loads were shipped on different days, with the remainder of the animals shipped on a third day was determined to be optimal. These cases are summarized in the fifth column of table 3. The average of the of these multiple shipment strategies are presented in column three of this table.
The multiple shipment strategy offers the potential to increase returns to fixed facilities and operator labor. When the overall impact of a multiple shipment strategy is compared with the homogeneous herd model results, an increase of 1.6% in profit was realized. This strategy also reduces the standard deviation of returns (-2.2%), providing a modest benefit in terms of risk management. The optimal date for shipping the final load is only slightly changed by the multiple shipment strategy. It increases by about four days on average, reflecting the fact that the marketing of an early truckload or two removes the heaviest animals from the herd, thereby reducing the incidence of discounts for heavy animals in the final shipment. However, the fact that the increase in the shipping date for the final load is small indicates that the opportunity cost of the facility continues to dominate that decision.
Impact of packer schedule on shipping strategy. Packer payment schedules change over time. Two payment schedules used by the same packer at two different points in time were obtained and compared from the perspective of a producer. Results obtained using the most recent payment schedule (schedule 1) are provided in table 3 and are discussed above. Table 4 describes the results when the three marketing models are evaluated with schedule 2 (table 2).
In general, the differences between results for the alternative marketing models are even greater than with discount/premium schedule 1. Results of the homogeneous herd model are found in column 1 of table 4. This strategy offers the lowest average annual return to the facility and has highest standard deviation of returns. Results of the heterogeneous herd with a single shipping decision model, which considers animal heterogeneity and ships animals on a single day, are displayed in column 2 of table 4. Expected annual returns with the heterogeneous herd with a single shipping decision model are more than 1% greater than with the homogeneous herd model, and the standard deviation of annual returns is decreased by about 1%. This income improvement over the homogeneous herd model is largely due to a reduction in the barn turn-over period by four days. Consideration of herd heterogeneity and use of multiple shipment dates (the heterogeneous herd with a multiple shipping decision model; presented in column 3) offer producers the highest potential average return by increasing expected annual returns by over 1% and decreasing the standard deviation of annual returns by 10%, relative to the heterogeneous herd with a single shipping decision model.
While the differences in the distributions of annual returns appears to be larger across the three models under schedule 2 than under schedule 1, the differences in shipping patterns are more pronounced. Under schedule 2 with multiple shipping dates, the vast majority (80%) of herds were shipped in three batches, one early truckload followed by another truckload about a week later, and the rest of the animals shipped about one day later.
Results from the Packer Perspective
The fundamental goal of discount/premium schedules is to influence the distribution of the attributes of the animals packers procure. The following sections explore the impact of herd heterogeneity and choice of payment schedule on packer procurement costs and the distribution of animals received as inputs.
Price Paid for Hogs
In table 5, the average packer payments as well as producer costs and producer net returns are examined under each model. The top half of the table displays results for schedule 1, while the bottom half of the table displays results for schedule 2. Producer revenue is the base price less discounts plus premiums, and represents the packer payment to producer on average. Under schedule 1, discounts and premiums are of similar magnitude, and so producer revenue is near the base price. (The exception to this rule is with multiple shipments where premiums are near twice discounts.) The situation under the older schedule 2 was quite different with discounts ranging from 7.5 to over 16 times larger than premiums.
Composition of Inputs
Because packer payment schedules affect the marketing decisions of producers, payment schedules will, as a consequence, influence the composition (weight/leanness characteristics) of inputs which packers receive. Table 6 displays the distributions of animals marketed for 100 simulations of herds of 1,000 hogs using the heterogeneous herd with a multiple shipping decision model under payment schedules 1 and 2. The distributions under each of these schedules are quite heterogeneous with carcass weights ranging from 164-170 to over 238 pounds under schedule 1 and 149-156 to over 237 pounds under schedule 2. Similarly, the lean percentages range from 43-45 to 5557 for both schedules. Despite their wide range, these distributions are quite peaked with over 37% of the distribution falling in the 215223 carcass weight range and 49-51% leanness range for schedule 1, and over 30% of the distribution in the 208-215 carcass weight range and 49-51% leanness under schedule 2.
FEED