JBS Holstein Contract Comparison Tool Webinar

June 3, 2021

Dr. Jerad Jaborek introduces the JBS Holstein Contract Comparison Tool and highlights the differences between the old and new contracts available for Holstein cattle feeders to market their finished Holstein steers with JBS.  Jerad also discusses some of the implications of the basis and dressing percentage changes on cattle value, as well as the implications of the seasonality of the choice/select spread price.

Video Transcript

Okay. Thank you everyone for attending tonight's presentation on how to use the JBS contract comparison tool. My name's Jerad Jaborek and I'm the MSU Extension Feedlot Educator. Quick disclaimer. Before before we get going too far, all MSU Extension programming is open to anyone. So with that, we will move on to tonight's program. So some of you may already know. In February of this year of 2021, JBS decided to offer a new high-energy calf fed Holstein and Holstein crossbred contract. So this is different to what we'll refer to as the old contract that was previously used. So for the time being, producers or suppliers of the Holstein steers to JBS, have the choice, choosing to market their cattle with either the old or the new contract. So because produces have the option of using the new or the old contract. We've received quite a few questions about which contract should they be using, which is going to be more profitable for their operation. So here at MSU, myself and some of my colleagues have designed the JBS Holstein contract comparison tool. So what this is, it's an Excel spreadsheet tool that should help the producer decide between choosing to use the new or the old JBS contract. This way, the producer will see how premiums and discounts can affect the value of their load of cattle that they are shipping or selling to JBS. So the tool has three tabs, or three different pages. One of those being an instructions page. So that's the first tab. This will give you a rundown of how the spreadsheet is set up and what you need to do on each tab to make the tool work for you. Next, the second tab is the tool itself, the contract comparison tool. In this tab here, you'll be able to enter in data from your previous receipts. And just a second, we've got a question, I'll make sure everything's going okay. Okay. There you go. So the second tab, like I said, is the tool itself. This allows you to input the data from your previous receipts. So any cattle that you've sold in the past, you get the data back on them as to how they're performing and how you're paid. So using that data from that receipt, you can enter in that information in this tab. And it will give you summary statistics and show you how the premiums and discounts of those cattle calculate the total value of those cattle on the new and the old contract. So here you'll see that we have the new and we have the old contracts set up here and it will calculate a difference between those for you. And then we also have a third tab, which is the sensitivity analysis tab. And this allows the producer to manipulate the data a little bit from what they have had on a previous receipt or make a hypothetical load of cattle. So this allows you to basically change the number of cattle that you may have at a certain weight or receiving a certain quality grade or yield grade or anything like that, that could affect the outcomes of that value of cattle. So first things first, where can you find this tool? So you can find this tool on the Michigan State University Extension beef web page. So here's the website right here. You can type that in, you can do a Google search for this tool and it should pop up. So if you go to the beef team webpage, they have a search bar like this one here. And if you go to the Resources tab, click on resources, you should be able to scroll down and find the JBS Holstein contract comparison tool, go there, click on download file and it'll pop up and ask you to open an Excel spreadsheet, and that's the tool there. So let's get into how to use this tool. So the first thing you're going to want to do, once you've read the instructions, you can go to the contract comparison tool. And the first few columns, columns A through H, you're going to be able to input information that you got from your previous receipt. So I have an example, in the instructions tab we have example receipt that you can look at and as instructions as to where you can find some of this information, which cells and columns to input data. So here you can see, you can input an animal ID that you may have or ear tag that you had to identify each individual animal, that's optional. The most important thing is that you have hot carcass weights entered in. You can find that from your receipt. You can also in quality grade for each of those animals. And you have, if you click on the cell, you actually get a drop-down menu to choose which quality grade to select. You can type it in if you'd like. But the drop-down menu works pretty nice. You can actually pull all those cells down if you have a bunch in a row. And then likewise, you want to enter in the yield grade of those animals. If there's a muscle score. Commonly what we've seen, there hasn't been any data reported as far as muscle scores. So if there's a muscle score you can report that. And then there's also a drop-down menu for dark cutters, yellow fat, or if their age, if the age of those cattle is over 30 months. It's a yes or no drop-down. You can fill those in. So what that's going to do, once you get all your data entered in, the spreadsheet's going to auto calculate some summary statistics for you. So just to the right of this is going to be the summary stats. So it's going to give you the total number of head based on the number of cells that you filled in over on your data. And it's also going to tell you the number of outs that you have. So outs would be considered your no rolls, your standards, and your dark cutters on the old contract. So it'll let you know how many outs you had. And then you're actually going to have to input the total live weight. So all the gray cells in the spreadsheet are actually cells that you as the producer can manipulate, or change, or input a value. All the other ones should be locked. Most of them also auto calculate, hence why they're locked. But the spreadsheet itself will also calculate average live weight, total hot carcass weight, average hot carcass weight, and then the average dressing percentage. And your receipt should also have this data. So you can make sure that it checks out and it's doing what it should, the spreadsheet should be doing. So you'll also get a summary as to how many cattle are of which carcass weight category. So in this case, it looks like 33 of the cattle were between seven hundred and one thousand pounds. Likewise, it does the same thing for the number of cattle that qualify for each quality grade, each yield grade, and then also for the number of cattle that are over 30 months of age or qualifying for each muscle score. So the next thing you'll want to do after you get all your data entered in is entering some of the prices. So if we scroll over just a little bit further in the tool, a little bit further right on the spreadsheet, we'll come to a spot where we can enter in a purchase group number. This is optional, not necessary. You also come to the choice select spread where you can input that. We'll come back to that in the next slide here. Like I said, we have these summary statistics. So one of the things that you're going to have to input is the total live weight. If you go to your payout report or your receipt, you will have a total live weight. So you can find that number. Enter that into this cell. Like I said, we have an example in the instructions. It's really quite nice, telling you what numbers are going to go into what cells. And you can see here based on some of the summary statistics I was reading off earlier, we actually have those all auto calculated for you. Then just a little bit further to the right on your receipt, we have some of the prices that we can input. So you'll have your contract price and current cash price. And you'll be able to input these here. So some other things in the contract that you'll have to input is the contracted total live weight. So when you made your agreement with JBS, how much, what weight of cattle did you contract with them? You will input that here. Likewise, based on the futures price, you can, you will input the futures price. And with the basis, it will calculate the live contract price. You want to make sure that that matches up with the contract price that you have on your receipt. So if it's not working out, you can make sure that you do a little math and it comes out just right. So one thing that's going to be a little different between the new and the old contract are going to be the basis. So on the old contract, the basis was a minus $12 per hundred weight back from the CME futures price. And that's how they calculated their live contract price. On the new contract, the basis will be minus $8 per hundred weight. Another change between the old and new contract, on the old contract, they used a dressing percentage of 61% to calculate the carcass contract price. So basically what they do is they take this live contract price here and divide that by the dressing percentage. In the case of the old contract, 61%. And that calculates the carcass contract price and that's how you're paid based on the hot carcass weight of those cattle. For the new contract, you can see here the dressing percentage was changed to 61.5%. So same math. You're going to take your live contract price, and this is auto calculated, divide that by your dressing percentage, and that'll give you or auto calculate the carcass contract price. One of the other prices you'll need to enter in, you'll have to bring in the current cash price. Can enter that in here. It will automatically put it in for the old contract. So we may need the current cash price for some of that cattle that were considered outs or any cattle that or any weight that was in excess of what you contracted. So this spreadsheet should also calculate if you've delivered cattle in excess or deficiency. So that should show up here. The contracts allow you to deliver, I believe it's plus or minus 3% of that. So you have a little leeway there. Any weight that is delivered in deficient or in excess is sold at the cash price. So like I said, the next step is entering in that choice select spread price. So you can enter that right here at the top of the spreadsheet and that will auto calculate where it's needed in a few other places in the spreadsheet tool itself. So the choice select spread that's going to be used is obviously the one that was from the week prior that your cattle are going through the plant and you can see what the choice select spread is from the boxed beef, USDA boxed beef report. You can follow this website here. Oops, I didn't mean to click that. Sorry guys. Sorry about that. I didn't mean to click that, but anyways, it will pop up with the report here. This is an example of the report from Friday, May 14th. So a recent report here, you can see that they have the choice select spread. You will enter in that value into that cell there. And it will do its thing. And we'll come back and talk a little bit more about the effects of the choice select spread and the impacts it may have on the new or old contract. So some other differences. There's a section that takes into account the carcass weight, so you'll be able to see for carcass weight, they're all laid out by the different categories. You will have an auto calculated section for total weight for each of those categories. And then you will also have price at which the discount or premium is applied. And then it will calculate a value. So it's setup where you have the new contract to the left and then the old contract is on the right. So on the old contract there was no discount or premium for cattle between 700 or one thousand pound carcasses. Anything above or below that was going to be a $15 per hundred weight discount. I have seen some receipts where cattle that were really, had really light weight carcasses, in this case, one was under 600 pounds, it was awarded a $40 per hundred weight discount. So some changes to that on the new contract. You can see just on the tails of that 700 and thousand pound carcass weight, the discounts aren't nearly as great, so we have minus $5 and minus $10. However, the further you get from that, you can see that the discounts get much greater. So that's JBS signaling to the producer that they want uniform carcass size so that they have a uniform product for their consumers, or their customers. Likewise, a similar set-up for the quality grade premiums and discounts. On the old contract, you were, the target was 70 percent Choice or Prime. If you have any cattle that are in excess of 70%, you would receive a premium at that choice select spread price. So that's an auto calculated price. That's not going to be you're not going to be able to manipulate. You can see it's not gray like some of these other cells that you can change. So that value is calculated for you based on the excess of those cattle. Likewise, if you didn't achieve that 70%, and that's the case here. I believe this was around 55 percent for this example. You can see that it's going to charge you, or discount you at that choice select spread price, hence the negative value there. And then like I said, Standards and dark cutters in this case on the old contract would be outs. So they would be so marketed or sold or paid at the cash price. And then they will be assigned these discounts, as you see here. Negative $20 per hundred weight for each of those things. And then some changes on the new contract. Instead of the percentage that you're trying to shoot for. Now, everything's going to be multiplied by the weight of those cattle. So all the Primes will be given a 10 dollar premium per 100 weight. At Choice, those cattle will not receive any premiums or discounts. So that's kind of the goal where you're trying to reach that. However, there's going to be much steeper discount for cattle that are grading Select. So in this case, the Select discount is going to be the choice select spread plus $4. So in this case on the previous slide, we saw that the choice select spread in this example was $10 and 25 cents, so plus $4. This is an auto calculated cell, but it also allows you to manipulate it. You just got to remember when you're, if you mess or change with any, change any of these cells that you at $4 to choice select spread there. On the new contract, there's no, the standards and no rolls and dark cutters are no longer considered outs, but you will get a discount based on the weight of those cattle. We can see they're pretty steep discounts at 35 dollars per hundred weight. And then there's also a discount for cattle that have yellow fat at $20 per hundred weight. So moving on to the next section that we have is looking at yield grade differences between these contracts. So on the old contract, there's no discount for cattle grading 1, 2, or 3. There was a little leniency on the number of cattle grading yield grade 4, you were given a 5% leniency and then any cattle in excess would receive a $10 per hundred weight discount. Cattle grading yield grade 5 at $20 per hundred weight discount. So some changes, no longer using the percentages on the new contract. Again, just the weight that's going to be multiplied by the discount for yield grade minus $10 per hundred weight discount. And now the yield grade 5 is only minus 10 as well compared to a minus 20. So this is JBS singling that they want cattle achieving higher marbling scores or higher quality grades. And they understand that these cattle may put on a little bit more back fat and achieve some of these higher yield grades. But they'd like to see those cattle, it least achieving Choice as you saw on the previous slide. And then you can get a premium for cattle that are grading Prime. If those cattle aren't grading Choice and they're only Select, there's a pretty hefty discount with that. Then the next section here, we have our age and muscle grade discounts. And the old contract there was $5 per hundred weight discount for cattle that were over 30 months of age. Nothing for the, no discounts for the muscle score. Similar on the new contract, same discount for age, there is a discount for muscle score minus $3 for a muscle score of 3, and minus $10 per hundred weight for muscle score 4. In speaking with the gentleman who are in charge of JBS's cattle procurement. The muscle score problems are practically nonexistent for today's Holsteins and the genetics they have now. The muscle scoring system that they had in place in the past was developed when Holstein genetics, basically those cattle were finer muscled than they are today. I was told that the muscle score was kind of based off of 1.1 square inches per 100 pound of carcass. So basically, the ribeye size of the Holsteins today are meeting their standards. So I was told that this is practically nonexistent and is hardly ever seen. And you can see on the example that I'm showing here today that they didn't even report muscles scores, and in a number of their receipts I've seen, I have not seen the muscle score categories even reported. So it's not really a problem I guess, in today's, with today's Holstein cattle. So getting towards the bottom of the contract tool itself, this is where we're going to summarize the value of those cattle and we have the gross revenue of those cattle, and that's going to be the total hot carcass weight multiplied by your carcass contract price for the price of those cattle. And then you will have any load size adjustments. And that's going to be, like I said earlier, considering that plus or minus 3% of the contracted weight. And then anything in excess or deficient of that weight is going to get cash price. So you'll see that your load size adjustments. Likewise, you have you're, you have a total for carcass weight discounts, and then anything for your, you have a total for your grid premiums and discounts as well. You have the ability to input freight or trucking costs. If you have that and that's put on your seat, you can input that there in the new contract summary it'll auto calculate for your old contract summary to make sure that they're the same. And then there's a beef council fee, of $1 per head. So in this case we had 36 head. You can see minus $36. It'll give you, the spreadsheet will give you a net revenue total for the old contract and the new contract. And then there's another little section there that compares it to or shows the difference between the new and the old. It'll tell you what the net revenue difference is and then it'll also put that on a per head basis as well. So like I said, I wanted to come back and look at some of the implications of some of these changes between the new and the old contract. And this slide here looks at the implications of the change to the basis price and dressing percent of the new and old contract. So across the top here I have the futures price from a $125 per hundred weight all the way down to a $105 per hundred weight. Those are some prices that we're pretty used to, that we kinda see these cattle being sold at. And then on the left here we have, on the new contract, the basis is minus $8 per hundred weight. And on the old contract, remember, was minus $12 per hundred weight. Then we'll have our difference between the two. And then a little bit of an example. So here in each cell I have a live price and then a dressed price. So the dress price obviously considers that dressing percentage. Remember the dressing percentage was 61% on the old contract and 61.5% on the new contract. So you can see those differences in the price. There on a live basis and the dressed basis. When we come down and compare the difference, you can see that our difference is going to be about $5 per hundred weight to $5.25 per hundred weight across these prices that were typically seeing for cattle. So let's say we have 36 head of cattle that we sold as a load. On average they were 800 pounds dressed, so as a carcass. If we're looking at what kind of premium or what's that value we're getting in difference between the new and old contract, we can see the new contract, in this example is bringing about 1400 to 1500 extra dollars total. So coming back to that choice select spread that I mentioned earlier. Remember on the old contract, quality grade premiums and discounts were multiplied by the choice select spread. So any of those cattle that were in excess of 70% Choice and Prime or deficient, you got charged by the choice select spread price. On the new contract, the choice select spread price is going to be the discount of the cattle that are Select plus $4. So the figure here to the right that I have is from the same link that I accidentally clicked on earlier from the USDA boxed beef report. They have a figure that shows the yearly trend of the choice select spread. You can see that here in the red, 2021. And then they had the previous year, 2020, and then a five year average across each of the months of the year. One of the things that's interesting about this is the choice like spread is seasonal. So you can see here, if we look at the five year average, we typically see a greater spread around the time of grilling season, our summer months, June and July. And then we'll also see another peak, typically around the holiday season, we have more people buying high-quality, or looking, or desiring to purchase high-quality beef as well around the holiday season of November, December. So we see a peak there as well, with our lowest period being around January and February of the year. So based on kind of what I showed you there and the seasonality of the choice select spread, I've kind of put together another example of how this may impact your value if you use the old or the new contract. And depending on the time of year, whether the choice like spread would be high or low, and then the type of cattle that you possibly have, you have really high grading cattle or high marbling cattle or cattle that don't quite marble as well. So in this example, we had 36 head, cattle that were 800 pounds dressed on average. We have the new contract here, the old contract here to the right of that. And then we'll have when the choice select spread is high, so this would be your summer or Christmas time months. So I just chose $20 per hundred weight. You could see based on the other figure, it's around, around there from the previous slide. And then when it's low, I chose about $10 per hundred weight. So we have that on the old contract here as well. So the first example was, let's say we have 50 percent of our cattle are Prime, 50% are Choice, coming on down here, the next example would be, let's say all of our cattle are just Choice. And then the third example, let's say 50% of our cattle are Choice and 50 percent of our cattle are grading Select. And then the last example here on the bottom of this table I have, let's say of all of our cattle are grading Select. So the trend you'll start to see here is that on the new contract, we can make around 1400 dollars in this example, for the high contract for cattle that were Prime, 50% Prime, 50% Choice. On the old contract, when the choice select spread is high. So you're getting a premium for those cattle in excess of 70 percent Choice and Prime. In this case, all of them were, so about, you get 10.8 head of cattle in excess at that weight gives you about 1700 dollars per head. So a little bit better there. However, if the choice like spread is low at that time of year, you're not gaining nearly as much from a premium standpoint there. In the next example, when we have 100% Choice, on the new contract you're not gaining any money. Whereas on the old contract, you still can make money on those cattle obviously needed only 70% of those cattle to be Choice or Prime. So you're still making that same value as you were in the previous examples here. So the next example, let's say 50% Choice, 50% Select. Remember I said that the new contract is going to discount you pretty hard for those Selects and that's exactly what we see here. You don't get any premium for Choice cattle as you saw in the previous example. So you're going to take a pretty heavy discount here with those cattle grading Select. Compared to on the old contract, not quite as bad. And then finally, the last example here, let's say all the cattle are grading Select. There's a pretty hefty discount for cattle on the new contract. You can see we have about minus $7000 of value. And then if it trace like spreads low, That's around 4000 compared to when it was high. On the old contract though, when you have a high choice select spread, we're only around 4000. And then when it's low, you can see that we're around minus 2000 dollars. Looks like I probably have some, might have some math wrong here. I don't know why those two values are the same. Sorry for that. (It's actually correct). But so for the old contract, it looks like it's maybe a little bit more beneficial when you have some of those Select cattle. You're actually getting 30% leeway there. And compared to where all the cattle are going to get charged that discount price on a new contract. And remember in that previous example, the new contract was bringing us about $1500 compared to the old contract. So in this case, you'd want the *old contract to at least make that much more money than the *new contract in regards to some of these discounts, but these are some of the numbers or things that you should possibly be considering when looking at, okay, When should I be marketing these cattle? How's that choice select spread going to affect me when I market these cattle? So that's it for the contract tool right there. Moving on to the next tab. So the third tab that we have here is a sensitivity analysis tool. And this tab is set up similar to the contract tool tab that we've just been talking about. One of the differences is that you can manipulate or create hypothetical loads, so you can change the number of cattle that actually are in each summary statistic. So you can see here, originally, we had 33 cattle and between 700 and 1000 pound carcasses. I could change that. I could say I want to add one. It'll total it up and we'll have 34. So it allows you to add and subtract a little bit. Obviously, you can't have negative numbers, so you don't want to do that. And then if we slide over on the spreadsheet a little bit further to the right, it's set up similarly, however, there's one *column that's added in and that's going to be the average weight column. And right now it auto calculates based on the previous information that you've added in the contract comparison tool tab. However, those cells are gray, so it allows you to manipulate those as you'd like. Some things to consider. If you are changing average weights. Think about the hot carcass weights. You want an average weight to make sense. So say we're looking at cattle between 700 and 1000 pounds. You want the average weight to be between those numbers. You don't want to have an average weight that is say 650, because that's, that would put cattle in a different category. So you have to be cognizant of that if you are changing those average weights. So this allows the user the flexibility to change that up and see what they, if they implement different management practices and they change things a little bit, or their marketing decisions when they're going to market cattle, say they want to market them a little heavier, or they want to, they're going to marble little bit better and reach higher quality grades. Or they think, oh, maybe I got more yield grade 5s this time, they can change that and see how it might affect the value of those cattle that they plan on selling. So likewise, that will also give you the same totals at the end that we previously showed with the contract tool. So in summary, the user has, or the producer or the supplier of the Holstein's has the choice between using the old or new Holstein contracts for the time being. JBS wants to give you the flexibility. Also, this allows you to possibly adopt new management so that your new management practices to produce higher quality cattle or to produce cattle that are not going to be heavily discounted. So say you use a potent implant, aggressive implant strategy. And maybe your cattle aren't reaching quality, Prime and Choice quality grades on a regular basis. Maybe you have a lot of Selects. Well, maybe this'll give you time to back off on the implants a little bit. Adopt less aggressive implant strategy to possibly improve your quality grades. And then the JBS contract comparison tool that I've been demonstrating tonight allows you to compare the value of the cattle sold on either the new or old contract, allows you to see what that is and make an informed decision. And then the new contract that we've been talking about offer signals from JBS as a desire for higher quality cattle or cattle achieving higher quality grades. They also want a uniform product. We saw that with uniform in size based on the carcass weight discounts. So with that, that's the end of my presentation here. My information is here. You can see my e-mail, my cell. You can also see my profile online as far as publications like extension articles or stuff like that or previous recordings from other presentations, if you're interested in stuff like that. Feel free to reach out to me if you have questions that pop up after this or if you'd like to ask me any other questions that come up. I'm happy to talk with you. So with that, I will stop sharing so I can answer questions. Looks like we got a lot of action in the chat. So, lets see. Okay. Looks like we got a comment there. Let's see, muscle score. So here I'll read this comment or question. So the muscle score calculated from ribeye, so is the muscle score calculated from ribeye and carcass weight or is it a visual assessment of the animal similar to a feeder calf muscle score? Seems like at one time there was a width of ribeye criteria that they like them to be greater than but as you indicated and showed us, there were none on the kill sheet. So yup, good question. So in the past the muscle score has been based on, the grader would assign it based on a visual assessment. And like I said, the information that I was given, is that had to do with relative size of that ribeye in relation to the carcass weight. So that was all done based on visual assessment. It sounds like there's really not problems with that or they haven't seen it in a long time, so likely is not going to be a factor. Okay, another question. Do you foresee a shortage or a supply chain concern significant enough to impact the choice average yield grade to the seasonality choice select spread. So obviously there are factors that can change the choice select spread. You could see that actually in that figure, the impacts of the COVID-19 pandemic. How shortages can change that figure. Also, depends on people's shopping preferences. A lot of that is based on the demand for high quality beef. So you can see that spread grows when people are looking for higher quality beef. And that's typically around grilling season and a little bit around the holidays. Another question here, does the extra revenue for the higher percentage Prime grades cover the extra feed to get them there? That's a good question. So a lot of that. We can talk about marbling. There's a lot of different factors that can affect that. Obviously, the longer, the more time cattle are on feed that's going to help them have more time to deposit fat in those intramuscular fat stores. Additionally, they're likely going to deposit more back fat as well, which may increase your yield grade, which I kind of alluded to earlier. Some of the things that are going to affect the rate at which you're going to be able to deposit marbling to achieve those Prime quality grades is going to be your implant strategy if you're using a really aggressive implant. Research has shown that that's going to hinder marbling deposition in those cattle. They're going to require extra time on feed. Once that implant pays out, make up for that. The potency of that implant. Additionally, genetics can play a role. Cattle that are predisposed genetically to marble are going to be able to reach those Prime quality grades much more easily. There's some cattle that just have not been bred to deposit intramuscular fat. In that case, those cattle are going to struggle. Typically with dairy breeds, Jerseys, and Holsteins. We see that the marble pretty well. Likewise, in the beef industry they've been selecting beef breeds to have improved marbling. Can't say that the dairy industry has really been selecting for that, that's not really been a major concern on their end. But on average, Holsteins seem to grade pretty well. But that's a good question. Definitely would be interesting to look at an example here to see if feed costs will be covered in there based on extra time possibly needed. So that looks like all the comments and questions I see in the chat. Anybody else have any additional questions they'd like to ask or type into the chat? I'm not seeing any new questions coming into the chat. So with that, I'd like to thank everyone for taking the time this evening to attend this presentation. And hopefully you found it to be informative and provide you with a new resource or tool to help you make decisions between choosing to use the new and old JBS contract, Holstein contract. If you have any questions, please feel free to reach out and contact me. I'd be happy to discuss with you further and help answer any additional questions you may have. So thank you. And I'll stop recording and let you guys go. Have a good night.