Marketing
Mixed Calf Price Signals
By Matthew Diersen, South Dakota State University Extension
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
26 | AUGUST 2018
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. I