By now, most of you are pondering marketing your 2005 calves. Thus, I'll share my most recent planning price projections and the management implications of these prices on the marketing of those calves.
As these good times won't last forever, take maximum advantage of the current cycle's remaining good years. Do this by finding the optimal marketing plan for your 2005 calves and then implement it. Here's the process I use:
Step 1: Determine the most recent cattle prices.
USDA's Agricultural Marketing Service (AMS) publishes weekly salebarn price summaries from around the U.S. at www.ams.usda.gov/lsmnpubs/pfauction.htm. Pick the salebarn nearest you, or the one at which you tend to sell. I picked “AMS Report WH_LS795,” which is a composite market report for several central and western Nebraska salebarns that sell more than 2,000 head of cattle.
Step 2: Calculate a market price-line.
Figure 1 presents the regression market price-line calculated for the week of July 29. Each point on the line represents the sale price for that weight of calves. The slope of the price-line at any particular point represents the price slide for that weight of feeders. This regression equation is used to generate a complete price-weight table, but space prohibits my including that table here.
Price slides can change for different feeder weights. The price-line's slope at any given weight represents the market price slide for that weight of feeders. For example, the price slide for 550-lb. feeders was calculated at a -$11.84. High negative price slides favor the marketing of lightweight calves — important for those producing lighter-weight May/June calves.
Step 3: Adjust the price-line for the Chicago futures contract months of interest.
This price-line becomes a key component in making fall 2005 and 2006 price projections. Conceptually, you take this weekly price-line, hold the slope of the line constant, and slide it up or down until the line goes through the price point for Chicago Feeder Cattle Futures prices for 800-lb. feeders for that specific contract month. Your price-line then becomes your price projections for that month.
Let's do an example price projection. The October 2005 Feeder Cattle Futures contract closed July 29 at $106.67. Keep the slope of your price-line constant and slide it up or down until it shows 800-lb. feeders at $106.67. The price-line is your price projection for October 2005. The only thing I do differently is use equations in a spreadsheet to do this price-line shifting.
Step 4: Localize the Chicago price-line to your local market.
Basis is the marketing tool to localize this Chicago planning price back to your local market — in my case, central/western Nebraska. The nearby Futures price is subtracted from each feeder weight's price. That becomes the new current basis for each weight of feeders.
The nearby Chicago Futures price for the October contract was $106.67 for 800-lb. feeders, which is 24¢ less than the calculated salebarn cash price for central/western Nebraska. The difference — futures minus cash — is -24¢ for 800-lb. feeders. The basis for 550-lb. feeders was +$23.62. All my calculated central/western Nebraska basis values are presented in Figure 2.
Step 5: Calculate your planning prices.
Figure 3 presents the 2005 and 2006 planning prices calculated with this process. Planning prices are calculated for four critical marketing time periods for each year. The critical months assumed are identified at the bottom of Figure 3. Actual prices for 2004 are also presented in Figure 3 for comparative purposes.
Step 6: Determine the management implications of these planning prices.
The planning prices in Figure 3 were entered into previously prepared budgets for several traditional production/marketing alternatives for 2005 calves. The marketing alternatives evaluated for traditional spring-born calves are:
Sell calves at weaning (late October).
Background calves with a January 2006 target marketing date — the next tax year.
Background calves in your own lot and then retain ownership in a local custom feedlot targeting a June 2006 marketing date.
Wean calves in October and then put them in a calf-fed program targeted for a May 2006 marketing date.
Here are the marketing alternatives for May/June calving herds:
Retain light, early October-weaned calves and winter them over to grass on a grower ration with a targeted May 2006 marketing date.
Keep wintered calves (from the above option) and run them as grass cattle in summer 2006 with a target marketing date of early August 2006.
Retain the steers off grass in 2006 in a custom lot with a target December 2006 marketing date.
Figure 4 summarizes the projected management implications of inserting my suggested planning prices into these seven production/marketing programs.
Two key components determine the profitability of each production/marketing alternative. The first is the buy/sell margin; the second is cost of gain (COG).
Buy/sell margin is the marketing loss generated on the initial weight of feeder cattle. The buy/sell margin is calculated based on the selling price minus the purchase price/cwt. For example, let's look at the -$26 in the backgrounding alternative, which is marketing alternative #2 in Figure 4.
Calves (569 lbs.) are projected to enter the backgrounding lot at $129/cwt. and leave the feedlot at $103, thus generating a buy/sell margin of a -$26. In this case, backgrounding is projected to generate a marketing loss of $148 ($26 × 569) on the original 569 lbs.
The second key component is the COG on the weight gained in the feedlot. In this same backgrounding case, total COG (including marketing and shrink) was projected at 51¢/lb. for the 231 lbs. gained. Combining the $120 feedlot gain with the marketing loss of $148 generated a projected $31 loss for the backgrounding production/marketing alternative. Figure 4 summarizes profit projections for all seven alternatives.
Follow this process with September 2005 numbers before finalizing your optimal marketing plan for your 2005 calves.
One final comment
Two primary economic forces could substantially change these projections. One is a volatile market driven by negative or positive national and international incidents (the Japan market, more BSE, terrorism, etc.). Second is the volatile corn market.
Because there are currently no farmer- or government-held corn reserves to even out corn prices, cattle feeders are at the mercy of the weather-driven corn market, and by extension so are ranchers. By the time you read this, we will know considerably more about the 2005 corn crop.
Harlan Hughes is a North Dakota State University professor emeritus. He lives in Laramie, WY. Reach him at 701/238-9607 or firstname.lastname@example.org.