PRE-WORK MATERIAL FOR THE FED CATTLE MARKET SIMULATOR: MECHANICS. Prepared by

Transcription

1 PRE-WORK MATERIAL FOR THE FED CATTLE MARKET SIMULATOR: MECHANICS Prepared by Stephen R. Koontz, Derrell S. Peel, James N. Trapp, and Clement E. Ward * Agricultural Economics Departmental Paper AE-9397 October 1995 * Department of Agricultural Economics at Oklahoma State University.

2 TABLE OF CONTENTS Section Page Introduction... 1 Room and Materials... 2 Scanner Forms... 4 Financial Statements... 6

3 INTRODUCTION This is one of three pre-work papers. Each is an independent piece yet all are interrelated. Thus, you will find some overlap among the three, especially in the introductory sections of each. The pre-work material is designed to introduce you to The Fed Cattle Market Simulator. This market simulator is more commonly called, the "Packer-Feeder Game." The game involves simulation of the market for fed cattle through role playing by seminar participants. At this seminar participants will role play as Feedlot Marketing Managers and Meatpacking Plant Cattle Buyers. A large portion of the game involves interaction between participants in the trading of cattle. The remaining portion of the game is computer driven. Actions by participants, i.e., sales of cattle and trade in live cattle futures contracts, are entered into a computer program which summarizes this information and uses aggregate actions by all participants in the fed cattle market to drive the boxed beef and feeder cattle markets. Actions by the individual players determine the profitability of each individual's team (i.e., feedlot or packing plant) and the direction of aggregate market movements. The computer program keeps track of the financial performance of all teams (or firms) made up by participants. An overall objective of the seminar is to use this market simulator to provide participants with a compressed experience of most aspects of the fed cattle market. This market is compressed in that several months of fed cattle trading can be simulated in one seminar, which should allow participants to gain measurable market experience in a short period of time. Further, the fact that the market is simulated, but structurally realistic, should allow participants the luxury of experimenting with different trading and management strategies. Strategies which, should they prove costly or ineffective, do not result in real dollar losses. Last, participants should gain experience about the different perspectives of players within the fed cattle markets through role playing on both sides of the market. The game is fairly fast paced; one weeks worth of real time trading is compressed into five-to-eight minute trading sessions. The material and assignments in this document should brief participants understand the mechanics or basics of the game which are essential to its efficient operation. Review of this document will be worth your time and will save time in the seminar, leaving more time for trading. Specifically, the material is designed to familiarize you with the game and allow you to beginning playing as quickly as possible. In this material we describe the room setup, identify each team's materials, explain how to complete the input forms properly, and summarize important features of the output from the game. Periodically, we guide you to specific components of the companion pre-work material on the cash market (AE-92126) and the futures market (AE-9314). 1

4 ROOM AND MATERIALS Normally we have the four meatpacking teams located in the center section of the room with four feedlot teams located on each of the outer sides of the room. Each team should have at least two participants. Hardware needed for the game (computer, scanner, and printer) will be located at the front of the room, along with equipment for market information. A light bar will scroll current market information during each trading session. Information includes volume of cash market trades (TTL Cash Vol), volume of forward contract trades (Contracts), cash market high (Hi) and low (Lo) prices, futures market volume (Futures Vol), and current futures market prices for the three active contracts (Wk x, Wk y, and Wk z). Market information is updated by the computer each 20 seconds during the trading period. On the blackboard we maintain a summary of each trading week's cash market trading and other pertinent information for each team. Information shown will be the average reported price for three weight groups of cattle (1125, 1150, and 1175 pounds), price for feeder cattle purchased that week, cost of gain for cattle on feed that week, boxed beef price for meat sold that week, and volume of cattle traded (both cash and contracted cattle). We use an overhead projector to give cattle on feed reports after every four weeks of game time. Each feedlot will have slips of paper representing five weight groups of cattle available for sale (1100, 1125, 1150, 1175, and 1200 pounds) across the top the table (Figure 1). Below some or all weight groups will be a variable number of scanner sheets. Each sheet represents a 100-head pen of steer cattle. The cash market pre-work details the physical characteristics of each pen by weight group. Cattle characteristics vary for each weight of cattle. Combined, the stacks of scanner sheets for the five weight groups represents the "show list" or cattle which may be delivered for slaughter in any market period. It is important to keep the stacks of scanner sheets under the correct weight slip. The computer knows how many cattle are in each weight group. Even if players mix them up, the computer will not. Each feedlot and meatpacking team will have a notebook of materials at their table. The front page of each notebook indicates the contents of each notebook and gives a capsule summary of the game from each team's perspective. A review of the notebook material when you arrive will be useful. The feedlot team notebook contains the following. 1. Example Break Even Calculations for 1150# Fed Cattle. The cash market pre-work explains break-even prices for cattle feeding. Note especially discounts for feeding cattle to heavier weights (1175 and 1200 pounds). 2. Break-Even Price Matrix for 1150# Fed Cattle. This table provides a means of estimating break-even prices for combinations of feeder cattle prices and costs of gain. While we recommend calculating breakeven prices, there may be times when this table will be useful to you. 3. Game Initialization Table. This sheet is one of most important for feedlots and contains considerable useful information. We highly recommend studying the pre-work section which explains the initialization table. It contains a large amount of information in a compact format. Once its format is clearly understood, you will recognize the importance of the information provided therein. 2

5 The meatpacker team notebook contains the following. 1. Cattle Characteristics Summary and Meat Price Discounts. Remember that not all cattle in a pen are 100% Choice, YG 1-3 cattle producing carcasses weighing pounds. Adjustments must be made for differences in quality when pricing cattle. 2. Boxed Beef Demand Schedule. In equilibrium, 40 pens of 1150-lb. cattle are traded weekly. That number of cattle and weight results in a boxed beef price of $120/cwt. The boxed beef price responds to the number and weight of cattle traded. Packers can use the boxed beef demand schedule to estimate the future boxed beef price. Remember that cattle delivered for slaughter this week will be sold in the boxed beef market next week. Estimating future boxed beef prices is important. 3. Example Break-Even Price for 1150# Cattle. The pre-work explains in more detail the pricing process followed by meatpackers in purchasing fed cattle. This table provides an example. You may use a similar process to compute your bid prices. Remember that your bid prices will differ depending on the weight of cattle you are purchasing, the expected boxed beef price, and your expected slaughtering-processing costs. 4. Packing Plant Cost Schedule. This table allows each meatpacking team to determine how many pens of cattle should be purchased to minimize average slaughtering-fabricating costs per head. This is a very important component of meatpacking. Each packing plant in the simulator is a different size, with different minimum average cost and optimum purchasing volume. 5. Break Even Price Matrix. This table provides a means of estimating break-even bid prices for combinations of boxed beef prices and plant-specific minimum average slaughtering-fabricating cost for various weights of cattle. While we recommend calculating break-even bid prices, there may be times when this table will be useful to you. 3

6 SCANNER FORMS Cash Market Transactions Figure 2 is a sample scanner sheet for 1 pen of cattle. This is Pen 5 for Feedlot 6. Cattle in the pen reached 1100 pounds and first entered the show list in week 24. Cattle in this pen were placed on feed in week 8 when they weighed 700 pounds. The cash market pre-work explains when cattle are placed on feed, reach the show list, etc. Note that numbered weeks are used in the game rather than dates. For convenience, think in terms of four consecutive weeks equaling a month. The first week on the show list corresponds to the week cattle reach 1100 pounds. In week 26, if the cattle have not been sold, they will weigh 1150 pounds and be aligned on the table under the weight slip for 1150 pounds. The following procedures explain how to properly complete the scanner sheet in Figure After each transaction between a feedlot and meatpacker has been completed, transaction information is recorded on the scanner sheet. In the middle of the sheet is a section for the sale price. You must use a pencil (which will be provided to you) and darken in one box in each column. The scanner reads best those boxes which are completely filled and darkly shaded. You can go outside the box slightly without a problem. 2. In the section labeled "Sold to Packer," you must identify the number of the packer (from 1 to 4) to whom cattle were sold. 3. In the box labeled "Week Sold," write in the number of the week in which the transaction was negotiated. For cash trades, this is usually the same week that cattle are delivered for slaughter. 4. Complete the box indicating whether or not the sale was a forward contract or not. We define a forward contract as follows: When you agree in Week X to deliver cattle in Week X plus 2 or more weeks into the future. If you agree this week to deliver cattle this week or if you agree this week to deliver cattle next week, we consider both of those cash trades. 5. If the sale is a contract transaction, complete the bottom of the scanner sheet. The Week Contracted is the week in which the transaction was negotiated and will be the same as in the Week Sold box. The delivery week is the week in which the cattle are actually delivered for slaughter. It is the responsibility of the buyer and seller to ensure cattle contracted are delivered in the mutually agreed upon week. It is the responsibility of the buyer and seller to ensure that the scanner sheets are completed accurately and that cattle are delivered per the agreement. The computer cannot correct errors. Any errors will have to be corrected by transacting parties. After a scanner sheet has been completed, raise your hand and one of the instructors will take your completed scanner sheet to the scanner and enter the transaction into the computer. To keep the game moving, complete your trades and complete the scanner sheets well before the end of each trading session. We will disallow trades which are finalized after the trading period. Further, if we have to wait for people to complete scanner sheets after the trading session ends, we may disallow those trades until the next trading period in order to keep the game moving. 4

7 The scanner we have is not very smart. It only reads what is on the sheet. Do not write on the upper portion of the scanner sheet. Do not make stray marks on the scanner sheet. Do not spill food or drink on the scanner sheet. Futures Market Transactions Figure 3 is a sample scanner sheet for used to place an order in the futures market. This sheet is for Speculator 4. Scanner sheets for speculators are identical to sheets for feedlots and meatpacking firms. Each futures market contract is equivalent to 100 head or one pen of 1150-pound cattle. As before, the upper part of the card is for the computer. Do not write on the upper portion of the scanner sheet. The following procedures explain how to properly complete the scanner sheet in Figure 3. You must complete a separate scanner sheet for each buy or sell order and for each contract in which you want a position. All futures market transactions are filled at the market. All futures market orders are processed in sequence, i.e. as they are received at the scanner. Running is not allowed on the trading floor. 1. For each futures market order, you need to complete the box indicating whether you are taking a "Buy" or "Sell" position. As before, you must use a pencil and darken in each box thoroughly. 2. Darken in the box of the type of order you wish to place: "Market," "Limit," or "Stop." 3. Darken in the box for the number of contracts you want to trade (1 to 5). 4. Darken in the box for the "Contract Week" in which you want to take a position. Three contracts will be actively traded at all times. Remember that futures market contracts are cash settled, unlike the live cattle futures market which allows for physical delivery. 5. Darken in the price boxes. Limit and Stop Orders are placed with price instructions. The boxes you darken are your price instructions. Market Orders do not have price instructions, they are filled at the current market price. However, the scanner must have a number to read. Darken in $00.00 for Market Orders. After a scanner sheet has been completed, you may bring it to the front of the room or raise your hand and one of the instructors will take your order to the scanner. As before, to keep the game moving, complete the scanner sheets well before the end of each trading session. Figure 4 is a sample scanner sheet to cancel a Limit or Stop Order. Orders with price instructions are not executed immediately and a participant my wish to cancel a standing order. An order is cancelled by darkening in the order number. The order number is identified at the top of each transaction card. For example, the order number for the transaction card in Figure 3 is 31. To cancel this order, darken in 0031 on the card in Figure 4. 5

8 FINANCIAL STATEMENTS Each week you will receive a summary of your futures market transactions and a financial statement for cash and forward contract trades. Figure 5 is a sample of the futures market summary. The sample if for Speculator 4 in Week 46. This report identifies each transaction, i.e. either buy or sell, futures contract week, price at which the order was filled, and the profit/loss on each trade. A 0.00 in the Profit/Loss column typically indicates an open position. The section following the itemized list of transactions summarizes open positions. Then an estimated value of open positions and cumulative profit/loss from closed positions are given. Lastly, there is a cumulative summary of closed positions by contract week. The cumulative summary also lists the most recent price for each futures contract, which is the cash settlement price for the contracts which have expired. Figure 6 is the weekly cash market financial statement for a feedlot. This sample is for Feedlot 2 in Week 22. The top section provides an itemized listing of fed cattle sales during the most recent week. The key figure in the financial statement for comparing performance over time and with competing firms is the average profit per head, at the bottom of the column labeled Profit/Hd. The Expenditures section, indicates how many pens of cattle were purchased and placed on feed that week, as well as the total feed bill for all pens of cattle currently on feed. Recall that cattle placed on feed during the current week will not be ready for market for another 16 weeks. Total cattle on feed, total gains, and average cost of gain for cattle on feed that week are also shown. The remainder of the financial statement is for your information only but is not necessary to playing the game and evaluating your performance. Figure 7 is the weekly cash market financial statement for a meatpacking plant. This sample is for Packer 2 in Week 22. The top section provides an itemized listing of fed cattle sold as boxed beef during the most recent week. Recall that these cattle were purchased and/or delivered for slaughter the previous week. The key figure in the financial statement for comparing performance over time and with competing firms is the average profit per unit, at the bottom of the column labeled Profit/Head. Since meatpacking plants vary in size and have different cost structures, profits and losses per head have been adjusted. Therefore, comparing profit per unit of plant capacity across teams is more equitable than profit per head because it takes into account differences in plant size and costs. The Expenditures section, indicates how many pens of cattle were delivered for slaughter this week. These cattle may have been purchased this week or may have been forward contracted. Recall that these cattle will be sold next week and will be listed in next week's financial statement under the transactions summary section. Following the Expenditures section is the processing costs for cattle slaughtered and fabricated last week and sold this week as boxed beef. The remainder of the financial statement is for your information only but is not necessary to playing the game and evaluating your performance. 6

9 Figure 1. Feedlot Table Layout of Weight Slips and Cash Transaction Cards Cash trading scanner forms (See Figure 2). 7

10 Figure 2. Cash Market Scanner Transaction Card. 8

11 Figure 3. Futures Market Scanner Transaction Card. 9

12 Figure 4. Futures Market Order Cancel Card. 10

13 Figure 5. Futures Market Weekly Summary. Speculator 4 Futures Transaction Summary Week 46 Trades This Week Buy Sell Week Price Profit/Loss X X X X X X X X X X X X X X X X X X X X Open Position Status Number Week Buy/Sell Avg. Price Est. Value S S S Estimated Value of Open Positions Profit/Loss(net) Contract Week # Contracts Closed Closing/Opening Profit/Loss of Closed Positions

14 Figure 6. Weekly Feedlot Financial Statement. FEEDLOT #2 -- WEEKLY FINANCIAL SUMMARY WEEK 22 OSU Ag Economics ==================================================================== CASH RECEIPTS AND EXPENDITURES Receipts From Sale of Cattle $ Transaction summary Packer Weight Price Profit/Hd. Transaction # Avg. Avg. Avg Expenditures $ Feeder Cattle Purchased $ # Pens Weight Price Cost/Hd Feeding Cost $ # of Pens Total lbs. Cost of on Feed Gained Gain/lb Receipts Minus Expenditures $ Interest Income (Expense) $ Net Change In Cash Position $ ==================================================================== Balance Sheet Total Assets $ Cash Reserves $ 0 Cattle on feed (at Purchase Value) $ Total Liabilities $ Loans Payable $ Net Worth $ Maximum Credit Line Available (50% of Assets) $ Residual Credit Available $

15 Figure 7. Weekly Packing Plant Financial Statement. PACKER #2 -- WEEKLY FINANCIAL SUMMARY WEEK 22 OSU Ag Economics ==================================================================== CASH RECEIPTS AND EXPENDITURES Receipts From Sale of Boxed Beef $ Transaction summary Weight Adj. BB Price Gross Rev. Profit/Head Trans.# Avg. Avg. Avg. Profit/Unit Expenditures $ Slaughter Cattle Purchased $ Feedlot Weight Price Gross Cost Trans.# Processing Cost $ # Pens Cost/Pen Receipts Minus Expenditure $ Interest Income (Expense) $ Net Change In Cash Position $ ==================================================================== Balance Sheet Total Assets $ Cash Reserves $ 0 Cattle in Process (Purchase Value) $ Total Liabilities $ Loans Payable $ Net Worth $ Maximum Credit Line Available (50% of Assets) $ Residual Credit Available $