Logic, experience and intuition say feeder-weight prices (750 lbs. and heavier) and feedlot cost of gain (COG) drive the price of lighter-weight cattle. But Derrell Peel, Oklahoma State University Extension livestock marketing specialist, says understanding why that’s true enables more precision in identifying buy-sell opportunities in the marketplace.
“It isn’t how high feeder cattle prices are, or how high feedlot COG is, it’s the relationship between the two,” he says.
This relationship explains why calf prices are at more of a premium or discount to feeder-weight prices at any point in time.
Though it sounds simple, ferreting out the reasons and developing an economic model to document the subtleties of this reality came as something of an epiphany to Peel, one that was some 30 years in the making.
At a particular COG, Peel’s chart above illustrates how the prices of lighter-weight cattle change relative to a feeder-weight animal at 825 lbs. So, if feedlot COG remains the same but feeder prices increase or decrease, the relative price of lighter cattle changes accordingly.
At a given price level for an 825-lb. steer, Peel also explains how the prices of lighter-weight cattle change relative to varying levels of COG.
There’s nothing magical about 825 lbs., Peel says, but it’s a weight at which there are generally no options other than going to the feedlot.
“A calf weighing 550 lbs. can go to the feedlot now or later. The value of gain, which depends on feedlot COG, tells us whether it should go now or later,” Peels says.
Peel adds that increased corn prices and volatility mean the industry is working closer to that stocker-or-feedlot line of economic demarcation more often. Consequently, he says paying attention to the relationship among calf prices, feeder prices and feedlot COG becomes more important.
“We never concentrated on this relationship before because, with only a few exceptions, the feedlot COG never changed much for decades, and was well below the price of feeder cattle,” Peel explains. “In the last several years, though, as corn prices have increased and become more volatile, and as feedlot COG has run closer to feeder cattle prices, it’s become more difficult to understand the impact on calf prices.”
In simple terms, if you know the trend for feeder cattle prices and feedlot COG, then this relationship means you also know the trend for calf prices. Though somewhat intuitive, by adding detail with historic and actual prices, Peel explains you have the opportunity to see whether a calf price offers more of a buying or selling opportunity, and whether it has more economic value to the stocker or feedlot sector. It also allows identifying arbitrage opportunities when the market is out of balance relative to the relationship.
At the very least, it’s another tool to use in gauging the reasonableness of tendered calf prices at a given point in time.
Heading into the fall marketing season, new-crop corn is projected in the $5/bu. range. Peel explains that’s equivalent to a feedlot COG of about 87¢/lb. Relative to feeder prices suggested by the futures market, he says, “There is more room for calf prices to move higher relative to feeder cattle prices.”
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