Feeder cattle price determination is a complex process. Many factors affect feeder markets — markets that, however they evolve, at some point become squeezed between the cost of feed and the price of the fed cattle.
The object of feeding cattle, whether stocking, backgrounding or finishing, is to add weight at a cost that's less than the value of the weight gained. But, as cattle grow, the cost of adding that weight changes.
In order to adjust for cost of gain, buyers “slide” prices depending on weight. But, a formidable task facing both buyers and sellers is determining how to value feeder calves at different weights.
This is especially tough in times of price volatility and uncertainly in feed costs and future fed cattle markets.
“The negative relationship between weight and price, what we often call a price slide, reflects a buyer's expected cost of gain versus the value of gain,” says Kevin Dhuyvetter. He's a professor of agricultural economics at Kansas State University (KSU). “Thus, feeder cattle price slides will vary as both cost of feed and the price of fed cattle vary.”
Buyers and sellers often use a predetermined price slide. But, if premiums and discounts associated with weight vary with market conditions, a price slide that's held constant increases risk to both parties.
“A dynamic price slide — one that varies with market conditions — is more appropriate than a fixed price slide,” explains Dhuyvetter. The most economically important price-weight slide determinants are price of feed and expected fed cattle price.
Using 10 years of historical sale barn data, Dhuyvetter and KSU's Ted Schroeder have estimated several formulas to demonstrate price-weight relationships.
Figure 1 shows the feeder steer price-weight relationship for three levels of corn price. As corn prices vary, the price slides respond differently.
The expected fed cattle price also has a sizeable impact in the price-weight relationship as shown in Figure 2.
“Price-weight slides increase notably when corn prices decline,” Schroeder says. “In other words, premiums for lightweight calves increase as feed prices decrease. Likewise, when expected fed cattle prices increase, price-weight slides increase.”
Figure 3 shows the relationship between feeder steer and feeder heifer prices as weight varies with corn and fed cattle prices. As expected, the price slide is negative for both sexes. But the relationship differs between steers and heifers.
A couple of possible explanations exist for this result, says Dhuyvetter. First, an 800-lb. heifer is not equivalent to an 800-lb. steer because they have different end weights. The price-weight relationship is not expected to be exactly the same.
Also, it is possible that heifers may be in a completely different market than steers at times (e.g., breeding stock versus feeder cattle). Thus, differences between price slides would be expected.
“Regardless of the reason, the price slide is similar for lightweight steers and heifers, but it's considerably less for heavy weight heifers and steers on average,” Dhuyvetter says.
Analyzing these feeder cattle price-weight relationships can be made easier using an electronic spreadsheet developed at KSU.
“Our spreadsheet estimates the expected price-weight relationship for various corn and fed cattle prices and feeder cattle weights,” adds Dhuyvetter. “Using this information, producers who forward contract feeder cattle, backgrounders who feed calves to varying weights, and producers who purchase feeder cattle can do a better job of adjusting weight-price relationships in a very complex marketplace.”
For more information and an Excel version of the KSU feeder cattle price-weight relationships spreadsheet, contact Dhuvetter at 785/532-3527 or [email protected].