Bearish fed cattle and stocker markets (see “Market Madness,” page 8) may prevent sellers from offering summer bids high enough to entice cow/calf producers to forward contract their feeder calves and cattle this summer.
After all, many market analysts expect five-weight calves to bring $10-$15/cwt. less this fall than last; seven-weights about $10/cwt. less. That's based on supply-side fundamentals and a record-large equity drain from the cattle feeding business over the past five years.
“I don't think the reality of the current price crunch has really hit the cow/calf producer yet,” emphasizes Ken Jordan, vice president of cattle operations for eMerge Interactive. The firm traded in excess of 2 million feeder calves and cattle last year.
Between inter-segmental communication gaps in the market place and market uncertainty, Jordan expects many producers to market their cattle this fall. That's instead of forward contracting them this summer, which historically has offered the opportunity to lock in profits.
Hedging The Possibilities
But, a forward contract bid that locks in a profit continues to be one way cow/calf producers can manage price risk. That's especially true in a market like the current one, which has been more volatile than a skittish horse in a circus parade.
Of course, knowing whether to hold calves until fall markets arrive or cash them in for future delivery today has plenty to do with knowing actual breakeven costs, whatever the market conditions.
“Producers need to understand their production costs so they can have a realistic idea about the price,” says Travis Booher, director of cattle sale operations for eMerge. “They need to set a realistic price for what the market has been doing, while understanding their profitability level at the current market price.”
Notice the emphasis is on setting the price and asking for it rather than asking others to price them, then deciding whether that sounds low or high and not really knowing whether costs make the price profitable or not.
Keep in mind forward contract prices, though locked in today, represent a market in the future. So, if you contract cattle in June for October delivery, the prices being paid for calves in the current June cash market have no relevance. You're setting a price based on what you believe the market in October will be.
Booher expects forward contracting to gain more industry use in the future as vertically coordinated supply chains seek to tie up cattle that fit narrowing specification windows. One of the barriers of participation today, he says, is that some producers have never done it before and aren't familiar with the standard mechanisms of a forward-contract trade.
Plus, in a perennial game of economic chicken, even producers who utilize forward contracts tend to wait until someone else sets the market.
“People are always hesitant to be the first one, and they wait for momentum to build to get an idea of what the price might be,” says Booher.
For the uninitiated, keep these standard forward contract components in mind:
Slide — This is the mechanism buyers use to discount the price when cattle are delivered to them at heavier weights than they purchased in the contract. For instance, if you forward contract five-weight calves for $95/cwt. but deliver them weighing 550 lbs., the pre-existing slide will adjust the price downward. Up to a point. Booher explains it's not uncommon for buyers to refuse loads that weigh 100 lbs. or more (per head) than what they contracted for.
Base weight — That's the weight you're contracting, and the point from which the slide begins.
Shrink — In order to try to offer fair and standard weigh-ups to both buyer and seller, cattle weighed on the ground are typically pencil-shrunk 3%, while cattle weighed on the truck usually receive a 2% pencil shrink.
Quality — This is a basic description of the cattle. Also, keep in mind when forward contracting that it's up to you to sort out the cattle that don't fit the description of the contract. Likewise, health papers are the seller's responsibility.
Delivery time — As it implies, you're agreeing to deliver the cattle by a certain time to a certain location. That means it pays to have a secondary plan in mind. As an example, if you contract in June for fall delivery and run out of feed by the first of August, it's up to you to figure out how to hold the cattle until the specified time of delivery.
“When you forward contract in a declining market, buyers are very specific in holding sellers to the terms of the contract,” adds Booher.
As much as anything, whatever the market, Booher says forward contracting has plenty to do with basic business philosophy. “Forward contracting is about knowing your production costs and being willing to accept a profit rather than hoping to hit a homerun,” he explains.
June 7-9 — National Cowgirl Museum and Hall of Fame Grand Opening, Fort Worth, TX; 800/476-3263.
June 8 — 39th World Livestock Auctioneer Championship, Dunlap, IA; 816/891-0502.
June 18-20 — Western Forage/Beef Group Pasture School, Lacombe, AB, Canada; 403/782-8030.
June 19-20 — 13th Annual Nebraska Ranch Expo, Bassett; 402/244-5434.
June 19-21 — American Society of Animal Science Symposium: Efficiency of Beef Production on Western Pastures and Rangelands, Fort Collins, CO; 928/474-2844.
June 20-22 — Independent Cattlemen's Association of Texas 2002 Trade Show and Exhibition, San Antonio; 512/620-0162.
June 20-22 — 51st Annual National Highland Convention, Mount Vernon, WA; 303/292-9102.
June 21 — University of Tennessee Beef and Forage Field Day, Knoxville; 865/974-7201.
June 29 — University of Missouri Forage System Research Center Beef Marketing Workshop, Linneus; 660/895-5121.
July 10-13 — Beef Improvement Federation Conference, Omaha, NE; 402/472-6417.
July 13-17 — Soil and Water Conservation Society Annual Conference, Indianapolis, IN; 515/289-2331.
July 14-17 — 2002 American Forage and Grassland Council Annual Conference and Trade Show, Bloomington, MN; 800-944-2342.
July 20-August 1 — National Institute for Animal Agriculture ID/Info Expo 2002, Chicago, IL; 270/782-9798.
July 28-31 — American Meat Science Association Reciprocal Meat Conference, East Lansing, MI; 217/356-5374.
August 13 — 2002 Arkansas Cattle Grower's Conference, Arkadelphia, AR; 871-246-2281.
August 22-24 — National Association of Animal Breeders Annual Convention and Technical Conference, Milwaukee, WI; 573-445-4406.
August 26-27 — OSU ANIM: Manure Science Review, Wapakoneta, OH; 330-202-3533.
August 27-29 — Grazing School (beginning) University of Missouri Forage Systems Center, Linneus, MO; 573-499-0886.
August 28 — University of Nebraska-Lincoln Gudmundsen Sandhills Laboratory Open House, Whitman, NE; 308-532-3611, Ext. 150.
August 29-30 — OSU ANIM: Manure Science Review, Wooster, OH; 330-202-3533.
September 9-11 — American Feed Industry Ass'n Liquid Feed Symposium, Westminister, CO; 703-524-0810.
September 10-12 — Grazing School (advanced) University of Missouri Forage Systems Center, Linneus, MO; 573-499-0886.
October 1-3 — Grazing School (beginning) University of Missouri Forage Systems Center, Linneus, MO; 573-499-0886.