Last month, I suggested that the basic profit equation for a beef cow operation consists of market price, unit cost of production (UCOP), and cwts. of calf produced. Traditionally, beef cow producers have focused their management energies on cwts. of calf produced.
This month, I'll focus on the market price component of the profit equation for 2001 calves. A future article will focus on the UCOP component.
Expansion Phase Looms The U.S. beef industry is nearing the end of the turn-around phase of the 10-year cattle cycle. We're about to begin an expansion phase triggered by heifer retention.
It appears, however, that the 2000 Great Plains and Western drought delayed heifer retention in the U.S. by one year into 2001. Early indications are that Canada may have started its heifer retention last year.
Let's take a look at the three-year history of Northern Plains feeder cattle prices and October 2001's projected feeder cattle prices (Figure 1). Each line on the graph represents the Northern Plains' October average price for various weights of feeder calves during 1998 to 2001.
October calf prices have dramatically increased the last three years. The average price for a 500- to 600-lb. steer jumped $14/cwt. in 1999, and jumped another $8 in 2000. It's projected to rise an additional $4 in 2001. These absolute price increases were influenced by renewed beef demand and by where we are in the 10-year cattle cycle.
To examine the projected October 2001 market price of feeder calves, let's review a pair of fundamental relationships that shape feeder cattle prices.
- The absolute level of feeder cattle prices are heavily influenced by where we are in the cattle cycle.
- The relative prices of feeder cattle tend to decrease as feeder calf weight increases. Such price slides are heavily influenced by feedlots' cost of gain (COG).
When COG is low, cattlemen bid up the price of lightweight cattle. This results in large price slides - often very large like last fall's markets. When COG is high, cattlemen bid less for lightweight feeders leading to small price slides - often very small like in 1996, a time of record corn prices.
Figure 2 summarizes the theoretical impact the cattle cycle has on absolute feeder cattle prices, and that price slides have on relative feeder cattle prices.
Cattle cycles move the absolute price line up or down depending on where we are in the cattle cycle (vertical arrows). Changing price slides rotate the price lines (curved arrows). As COG goes down, the price line rotates clockwise. As COG goes up, the price line rotates counter-clockwise.
Study the price lines in Figure 1, and you'll see a general upward trend in the price lines as 1998 progressed through 2001. You'll also see a general clockwise progression of the price line as we progressed through the same years.
I credit the general upward movement of the price line to the cattle cycle effect and the increasing demand. I credit the general clockwise rotation of the price line to reduced COG; i.e., the price slide effect.
Let's take particular note of the year 2001 projected price line in Figure 1. In fall 2001, 500- to 600-lb. steer calves are projected to bring $102, up from the $98/cwt. average in October 2000.
Two characteristics of the 2001 price line are noteworthy.
- The small price increase over 2000 indicates annual increases are decreasing, and it suggests the top of the beef price cycle is nearing.
- Projections for the 2001 price line show a slight counter-clockwise rotation when compared to October 2000. This suggests COG will increase slightly in 2001.
Primary Market Forces Let's look into 2001's price projections in more detail. Two primary market forces are integrated into the 2001 price line equation (Figure 3).
- First, the appropriate month's feeder cattle Futures price is used to project the absolute height of the projected price line.
- Second, Northern Plains sale barn price slides are used to project 2001 line's price slides.
The resulting equation projects a market price for a wide range of feeder cattle weights. (The latest weekly version of this equation is available at: www.ag.ndsu.nodak.edu/aginfo/lsmkt/prices/dknmkt.htm). One can use this equation in budgeting spreadsheets to arrive at a projected market price for various feeder cattle weights.
From this price line equation, one can also generate a second price line for the "value of added weight" (VAW) represented by the bottom line in Figure 3. VAW is determined by the magnitude of the price slide at any given feeder cattle weight. The larger the price slide, the lower the VAW. The cost of output-increasing technologies, such as creep feeding, need to be evaluated against VAW and not against the projected per cwt., as is typically done.
For example, while the projected average price of 550-lb. steer calves in fall 2001 is $102/cwt., the projected VAW for these same 550-lb. calves is $63/cwt. The critical economic principle here is that the value of an added pound of weight is always less than the average market price/pound.
Creep feeding decisions must be based on comparing creep's COG to the 63 value of added weight/pound. This analysis suggests one should creep feed only if the COG is under 63/lb. The added power of this price equation projection system is that it provides a projected VAW for alternative weights of feeder cattle.