Price discovery and price determination are not the same thing. But both affect the value of your calves.
You can affect the physical attributes of your calves by your breeding, cow management and calf handling programs. You choose when calves will be marketed, in what size groups and by what marketing method.
Calf prices some years are $90/cwt. and some years $120/cwt. In a $90 market, some producers receive $85 and others $95. In a $120 market, some producers receive $112 and others $128. Why? What causes wide swings in prices and the variability at any given time?
The example above illustrates two economic concepts — price determination and price discovery. The two are often confused and too frequently used interchangeably. While they are related concepts, they are different. Understanding the difference provides insight into what you can and cannot do to affect the value of the calves you raise.
Low or high cattle prices are related to price determination factors. Low calf prices result from supplies that are too large relative to the demand for calves. Widely varying calf prices, both above and below the market price level, result from many factors related to price discovery. These include quality and characteristics of the calves, the time and place calves are marketed, and the prospects for fed cattle profitability.
Price determination is the interaction of the broad forces of supply and demand that determine the market price level, whether it's $90 or $120.
For calves, the factors that affect the quantity of calves on the market include cow herd inventory and calving rate, cost of raising or buying replacement heifers, the cost of borrowing capital, and the availability and cost of forage.
The factors that affect the number and willingness of stocker/feedlot buyers to purchase calves include the price of grain and the expected price for fed cattle.
While supply begins with producers, demand really begins with consumers. The demand for calves is influenced by the packer demand for fed cattle, the wholesale demand by retailers for boxed beef and, ultimately, by the consumer demand for beef at retail supermarkets and in restaurants.
(Editor's note: For the supply/demand picture and calf price outlook, see Wayne Purcell's “The Demand Picture,” page 10.)
Price discovery is the process of buyers and sellers arriving at a transaction price. For calves, it involves a specific quality (breed, frame, muscling, etc.), a specific quantity (few head or a semitrailer load), a specific time (day or week) and a specific location (local market in Alabama or direct trade in Montana). These are the factors that affect whether a producer gets $85 or $95 in a $90/cwt. market, or $112 to $128 in a $120/cwt. market.
The price discovery process begins with the market price level and the information available to the buyer and seller:
Are calves trading for $90/cwt. or $120?
What is the value of this sale lot of calves relative to the market average?
Are they worth more — or less — than the market?
Part of the information needed by calf buyers, therefore, involves the physical attributes that will influence the animals' stocker and feedlot performance, carcass characteristics and, ultimately, the eating quality of the beef produced from them. Another part involves the competition for the purchase of the calves. How many bidders want them? How many similar sale lots of calves are being offered at that time?
Market analysts constantly examine the changes in broad forces affecting supply and demand to understand and forecast the price level for calves. While most price discovery research in recent years has focused on fed cattle, research is available on the many physical attributes of calves that influence the final sale price for calves.
(Editor's Note: See “The Value Of Feeder Cattle Traits,” page 36, to learn more about the physical attributes that affect calf value.)
Discovery Vs. Determination
Price determination and price discovery are interrelated. Again, price determination finds the market price level. The relationship with price discovery involves whether or not satisfaction or dissatisfaction arises concerning price discovery.
Fig. 1 is a matrix showing potential price discovery problems or concerns under given supply and demand scenarios. When demand for beef is strong or expanding and when calf supplies are small or declining, price discovery problems are generally not a major concern (as indicated in the lower left cell of Fig. 1). Competition is generally keen, calf prices are strong and price discovery is thought to be efficient.
In contrast, the opposite conditions may exist. Beef demand may be weak or declining and calf numbers may be increasing through the inventory building phase of the cattle cycle. Under these conditions, calf prices are likely low and producers have heightened concerns about price discovery (as in the upper right). When these conditions occur, many factors become targets for producers' concerns, such as packer concentration, captive supplies and beef imports.
For the other two cells (upper left and lower right), limited concerns may exist. However, one side of the price determination equation, either supply or demand, differs from the other side. So, while one side is positive, the other is negative. The positive feature offsets the negative influence from the other.
|Demand for Beef|
|Strong or |
|Weak or |
|Supply of Calves|
|Large or |
|Small or |
How does this affect cow/calf producers? First, producers must recognize that they have little effect individually on the broad forces of supply and demand. Individuals can't control the market price level (price determination). An individual increasing or decreasing the size of their cow herd has almost no effect on the calf supply.
However, all cow herd owners increasing or decreasing their cow herds at the same time greatly affects the calf supply. Cow herd owners react to the same price signals — higher prices signal to expand the herd and lower prices signal a cutback in cows.
You do, however, have more control over price discovery factors. Will your calves bring a premium relative to the market level or will they be discounted? You can affect the physical attributes of your calves by your breeding, cow management and calf handling programs. You choose when calves will be marketed, in what size groups and by what marketing method.
Understanding the difference between price determination and price discovery will illuminate what you can and cannot do. It will also help you focus on what you can do without fretting unduly over what you can't.
Clement Ward is a professor of economics at Oklahoma State University, Stillwater. He can be reached at 405/744-9821; e-mail: ceward @okstate.edu.