MMM 378

August 31, 1998

Cattlemen in the Carolina are facing an uncertain fall feeder calf market. Prices this summer are significantly below last year and a strong upward movement in fall prices appears unlikely. Average prices across Carolina's auction markets for 400-500 pound steer feeder calves are $15 per cwt. below last year's prices (Figure 1). Price expectations for October sales, as expressed through October feeder cattle futures are $ 66.13 per cwt. The "basis" for 400-500 pound Carolina cattle in October is +$3.00 per cwt. over the October futures price. Hence, today's futures market is estimating that a local cash market price for 400-500 pound Carolina calves will be $69.13 per cwt. in October. This price is $11 per cwt. below what cattlemen received from local cash markets last year.

Two factors are influencing fall feeder calf price expectations. First, record-heavy slaughter weights and active feedlot placements suggest that fed-cattle prices are unlikely to average above $65 during the last part of 1998. These large feedlot inventories have forced fed cattle prices down and consequentially feeder cattle prices. The level of cattle marketed from feedlots will need to increase significantly if feeder calf prices are to improve this fall.

Second, the drought in the south, especially Texas, is forcing early sales of cows and calves, increasing the volume of cattle on the market earlier than normal and consequently forcing feeder calf prices down. Several areas of the south have received needed rainfall in the last few weeks, but it has not helped a large portion of the winter wheat belt in Texas, Oklahoma and Kansas. If much needed rain is not received in short order, wheat pasture acreage will be in doubt. Short wheat pasture acreage will curtail lightweight calf placement opportunities and likely continue the pressure on price.

Although the summer price outlook is negative, and the impact of the drought will continue, cattle prices could turn around. The longer-term outlook for feeder cattle is for higher prices as feedlot inventories diminish and the chance of rain improves. The futures market is suggesting through today's price quotes that a 500-pound feeder calf in the Carolinas will be worth $345.65 per head in October and a 750 pound calf would be worth $455.48 per head in April. This is an improvement in returns from August estimates. Extended ownership could improve these return potentials further, if the market does in fact improve.

The cash market is offering the cattle producer two options for his calves:

SELL CALVES NOW. This alternative is for the producer who feels that the market is not going to recover and in fact will likely get worse. He is better off selling now and not using available pastures or feed reserves. Any weight gain from a feed supplementation program would not justify his cost outlay. He would, in fact, be better off selling his calves, resting his pasture and using his feed reserves to supplement his cow herd.

SELLING CALVES IN THE FALL: this alternative is for the producer who feels that the market is going to recover in the fall. This producer must have access to sufficient feed to economically justify continued ownership of the animals. In essence, this is speculating, in the cash market, that fall prices will rise and not decline.

Each alternative makes several assumptions about market conditions. The first alternative suggests that there is little hope of prices improving and with feed supplies and/or pasture declining the best way to minimize losses is to sell now and bank the proceeds (Table 1). Sale proceeds, using today's August price and a 400-pound calf, would be $296 per head.

The second alternative drives off seasonal price patterns, expectations of weight gain, and the assumption that an economical feed base will be available. Seasonal price patterns indicate that October feeder calf prices are generally some of the lowest prices seen within any given year (Figure 2). Weight gain expectations are for the calf to gain about 100 pounds over the next two months. The producer must determine the net effect of a continued price decline, offset by an increase in weight, on his per head revenue.

We can use the October feeder cattle futures price, adjusted by the local market basis, as a proxy for an October local market price. Today this price is $71.28 per cwt. ($68.28 + $3.00 basis). If we assume that the 400-pound calf that we didn't sell in August gained 100 pounds, this calf is worth $356.40 ($71.28 x 5 cwt.). The difference between an August sale and an October sale is $60.40 per head ($354.40-$296.00). Can the calf be feed for two months for $60.40 per head or $0.604 per pound? If he can, then the decision to hold the calf for a fall sale would be advantageous.

Table 1. A Comparison of returns between an August sale and October sale of a lightweight calf.

THE CLEMSON UNIVERSITY COOPERATIVE EXTENSION SERVICE OFFERS ITS PROGRAMS TO PEOPLE OF ALL AGES, REGARDLESS OF RACE, COLOR, SEX, RELIGION, NATIONAL ORIGIN, OR HANDICAP AND IS AN EQUAL OPPORTUNITY EMPLOYER.
COOPERATIVE EXTENSION WORK IN AGRICULTURE AND HOME ECONOMICS--STATE OF SOUTH CAROLINA, CLEMSON UNIVERSITY, U.S. DEPARTMENT OF AGRICULTURE, AND SOUTH CAROLINA COUNTIES COOPERATING.

Management Marketing Memo Index   Ag Econ Home

updated 9/04/98