Submitted by: agcomm, Thu Aug 7 09:53:27 1997 The Market Advisor: How To Make Some Cents Out Of Today's Cattle Market (Part III) Harlan Hughes, Extension Livestock Economist NDSU Extension Service I suspect that the feeder cattle market is overreacting to the spring storm losses in the Northern Plains. At least that is a partial explanation for today's strong feeder cattle market. The USDA All-Cattle July Inventory confirmed that the 1997 calf crop was not affected much by the highly publicized storm losses in the Northern Plains. This, in turn, suggests that supply/demand relationships will return to more normal relationships as the "real" storm losses become evident. This could occur during the last half of the fall runs of feeder calves. By that time, feedlots will have a better feel for how many cattle are really out there. Feedlot operators are apparently worried that they will not have enough feeder cattle this next winter and their loss minimization strategy is to contract now to ensure their feeder cattle supply. If you study the 1987 markets during the same turn-around point in the last beef price cycle, you will see that feedlots were in this same precarious position in 1987, when the market power switched to the cow/calf producer. I project that feedlots will bid aggressively for feeder cattle over the next several years as they did in 1987-1993. This year's 2 percent reduction in feeder calf supply is amplified by the feedlot capacity that has been added during the last 10 years. Even so, some feedlots will be without cattle in the next few years. Oh, how fast things change in the turn-around years of the beef price cycle. With that background, let's take a look at how we might put together a simple price projection system for fall calf prices. This system is based on two fundamental factors. First, the absolute level of the market price schedule used in this price projection system will be based on where we are in the cattle cycle. This will be determined by the October futures market for 700-800 pound feeders. The second factor in our price projection system is the relative price slides, calculated from the July 31 West Fargo market price equation. This means that our price projection system will be heavily influenced by where today's market thinks 1997/98 corn prices are headed. Let's apply this simple price projection system based on the last week in July, 1997. The projected market price equation is: Market Price = 114.1351 + (-5.152217 * Cwt) + (0.122506 * Cwt * Cwt) This equation gives a current North Dakota market price of $89.50 for 550 pound steer feeder calves. If this equation is plotted for a wide range of feeder cattle weights, the price schedule is convex-to-the-origin, which implies that price slides get smaller as feeder weight increases. This relationship is typical for a normal feeder cattle market. Untypical feeder cattle markets, such as the one for the week of June 27 reported in my first "Market Advisor" of this series, are concave-to-the-origin price slides get bigger as feeder cattle weight increases. It is comforting to see a more normal price/weight relationship return to the current feeder cattle market. Let's use these two current price factors futures price for October 1997 feeder cattle and the week of July 31 market price equation to project feeder calf prices for this fall. Because the futures market contract covers 700-800 pound feeders, let's focus on the midpoint 750 pounds. October feeder cattle futures closed (settlement price) on July 31 at $81.85. If we compare this to the July 31, price schedule of $82.38 for 750 pound feeders, the October futures price is $0.53 per hundredweight less than the market price. Clearly, the small $0.53 per hundredweight difference implies that the futures market is not anticipating much of a price drop from now until the feeder calf runs in October. It is somewhat indicative to note that the fall feeder calf prices are projected to be weaker than today's market prices. If the $0.53 price difference is adjusted for a typical North Dakota $0.25 basis, the projected market price equation's constant term needs to be adjusted downward by $0.29 per hundredweight; i.e., the whole projected price schedule is shifted downward $0.29. This is done by subtracting the $0.29 from the constant term in the market price equation and the constant term now becomes 113.8421 (113.8421 = 114.1351 - 0.29). The price projection schedule now projects that 500 to 600 pound feeder steer calves will sell in the fall for $87 to $91 per hundredweight, with a 550 pound mid-point at $89 per hundredweight. This projected price schedule suggests 700-800 pound yearlings off grass in October will sell for $80 to $84 per hundredweight, with a mid-point of $82 for 750 pound grass yearlings. Grass yearlings heavier than 800 pounds are projected to drop into the very high $70s. The key to the price projection system is to design your spreadsheet so that it automatically makes the adjustment in the constant term when you enter a futures price. If you study the top of my projected market price schedule included in this article, you will see that I first use the market equation to calculate the equation's market price for that specific weight. When projecting with the futures market, I equate 750 pounds to the target price, because a futures contract is for 700-800 pound steers. I then subtract the futures price from the equation's calculated price for 750 pound steers to see how much the constant term has to be adjusted. I also adjust the constant term by the local basis (cash - futures) to arrive at the final constant term adjustment used for the projected price schedule ($0.29 in this case). If you study the projected price table in this article, you will see how this is done. If you are indeed making your own spreadsheet, you might want to duplicate the one accompanying this "Market Advisor." You now have a simple price projection system that can be updated in 15 minutes or less. My next Market advisor will focus on generating price projections for backgrounding 1997 calves and 1998 grass cattle. Stay tuned. ### NDSU Agriculture Communication Source: Harlan Hughes (701) 231-7380 Editor: Barry Brissman (701) 231-7866