The most frequently asked question at county meetings is; "What is the price of cattle going to be in the fall?" This is always a tough question to answer. Many factors go into the valuation of feeder cattle. The grade of the calf, its age, its sex, its color, and the year are all important factors that influence the price a cattle producer can expect to receive when he sells his calves. To answer what specific price he should expect to obtain this year, I would have to know all of these factors and how each factor affects the type of cattle that he produces. The best I can do is to provide a educated guess based upon what the market is saying today about fall cattle prices.

You, as producers, also can estimate fall cattle prices. It is not a difficult task. It does not require a crystal ball or a mystic. The futures market is a good predictor of cattle prices. The Chicago Mercantile Exchange's feeder cattle futures contract literally reflects what buyers and sellers believe the price of feeder cattle should be today in the market. Yes, there are speculators in the market that are trying to make a profit from trading futures contracts and they are risking their own money betting that their price guessing ability is right. If it isn't, they lose money.

The reason why we use this futures price is to predict what a local Carolina market cash price should be, today, tomorrow and in the fall (Figure 1). The futures and local cash market prices are related and they move in the same direction, although not perfectly. This local estimate is developed by comparing the local cash price for cattle to the CME's feeder cattle futures contract price. The proper term for this comparison is the "basis." This basis will be negative, if the local cash price is lower than the futures price, or positive, if the local cash price is higher than the futures price. Figure 1 shows the October 1, 1993 basis was a negative $2 per cwt., i.e., the local cash price was $2 per cwt. under the futures market price.

Within any market area, the basis for feeder cattle differs according to the weight of the cattle, the sex of the cattle and the season of the year. Basis numbers are also influenced by the market's supply and demand forces. These forces show (Figure 1) that the basis increases and decreases, reflecting the supply of feeder calves in the market. The basis will also reflect the distance between markets by taking the relative cost of transporting cattle from farm to stocker operator or feedlot into consideration.

The difference that we see between feeder cattle futures prices and the local cash market is frequently shown in a basis table (Table 1). It is this table that helps the cattle producer estimate his local price based upon a given futures price quote. For example, if we wanted to estimate a 1997 October price for 500-600 pound cattle in the Carolinas, first we would look up the October futures price as quoted on the Chicago Mercantile Exchange, then we would adjust this price by the basis. Today (early August) the October 1997 feeder cattle futures is quoted at $81.00 per cwt. The table says that the basis (average for 1991-1994) for October is $-2.73 per cwt. The expected local October cash price for a Carolina-based 500-600 pound steers should be around $78.27 per cwt.

Is this gospel? The price for October calves will be $78.27 per cwt.? What this estimate is saying is that today the market is estimating that 500-600 pound calves are worth $78.27 per cwt. Tomorrow, market forces may change. The price of corn may decrease making the calf worth more; the price of slaughter steers may decrease making the calf worth less. But, today the market's estimate for the fall is $78.27 per cwt. This is probably the best price estimate that is readily available to cattle producers and generally quite accurate.

Management Marketing Memo Index   Ag Econ Home

updated 8/20/97