Grid Pricing of Fed Cattle: Risk and Information
Clement E. Ward, Oklahoma State University, Ted C. Schroeder, Kansas State University, Dillon M. Feuz, University of Nebraska
Increased Risk with Grid Pricing
A move toward value-based pricing, or carcass merit pricing, is essential if the beef industry is going to send proper economic signals to producers. Grid pricing provides rewards for producinghigh quality beef and properly discounts for producing low quality beef.
At the same time, producers need to understand that the potential for higher prices compared with pricing on averages also entails more risk. For example, with live weight pricing, packers bear the risk that actual carcass characteristics for cattle purchased will equal or exceed estimated carcass characteristics by buyers in the price discovery process. With dressed weight pricing, a step closer to value-based pricing, packers continue to bear the risk of some carcass characteristics (for example, quality grade, yield grade, and “out” or non-specification carcasses). However, producers bear the risk of dressing percentage. Packer buyers do not have to worry about carcass weight risk because they pay on the basis of the known carcass weight, not an estimated weight.
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