Mixed Calf Price Signals
The recent decline in fed cattle prices has producers wondering about calf prices for this fall. Higher beef production levels in the short run are a likely cause of lower fed cattle prices. However, the price signals for this fall remain mixed, especially related to calf prices. In this article, some price factors and risk management tools are discussed with a focus on late fall. Typically two-thirds of the 5-600 pound steers in South Dakota are marketed during October and November. Thus, the price at that time dictates the overall profitability of the calf crop.
The 2017 weighted-average cash price for 5-600 pound steers in South Dakota was $178.70 per cwt. The weekly prices for such steers were higher for the first quarter of 2018 compared to last year. The weekly prices have remained similar to year-ago levels in recent weeks. The weighted-average price so far for 2018 is $186.17 per cwt.
What do the fundamentals suggest going forward? Slightly higher calf supplies are expected to pressure prices. The USDA baseline provides a U.S. calf price projection. For 2018, that price is projected at $167.29, down slightly from the 2017 level. Over the last five years, the South Dakota price has averaged 100% of the national calf price. Based on that relationship, the recent South Dakota price is relatively high.
The discrepancy between the baseline projection and the cash price for the year to date is likely explained by a couple of factors. First, the baseline is a long-run projection that was made late last fall. Second, there were more cattle than expected placed on feed early in 2018. Cattle on feed levels have been high. However, even when assuming a normal calf crop, there will likely be fewer cattle left to replenish feedlots. Or, once the current fed cattle supplies are harvested, there is likely a smaller supply of feeder cattle to replace them. Lower cattle trade volumes during early 2018 also support the tighter supply, which is supportive of higher calf prices this fall.
Higher expected feed costs will likely have a negative effect on calf prices this fall. A tighter ending supply of hay nationally has supported hay prices. With normal production, the supply of hay will likely be smaller for the 2018 crop year, leading to higher prices at the time this year’s calf crop is sold. Corn price expectations are also for higher prices for the 2018 versus the 2017 marketing year. As complementary inputs to calves for feedlots, higher feed prices mean lower overall calf prices and a smaller basis level versus feeder cattle prices.
Despite mixed price signals, it is not too late to begin looking at risk management of calf prices. There have been few forward contract quotes, so no observed basis pattern is yet available. Producers could consider a hedging plan using feeder cattle futures with price objectives. Put options are another tool that could be used. The mid-June implied volatility for the November feeder cattle contracts is around 16.5%, sharply lower than both of the last two years and similar to the longer-run average. Thus, put premiums would not be as expensive as last year.
A final tool is Livestock Risk Protection, or LRP, which has fallen out of favor in the past few years. The high volatility (and cost) would have been a deterrent to its use. LRP quotes are available out through March of 2019. Regardless of the tool used, planning now would let a producer take advantage of opportunities should they arise.
