Where Do Prices Come From

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Where Do Prices Come From?

• Jim Sartwelle, III
• Extension Economist
• Department of Agricultural Economics
• Texas AM University
• February 25, 2003

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Outline

• Where do prices come from?
• How do you form a market outlook all your own?
• Raising vs buying replacement females
• How can you tell if your operation is really
  making money?
• Calculating a breakeven for a cow-calf herd

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Where do prices come from?

• Short answer supply and demand
• Long answer it depends what price youre
  concerned with
• Beef prices
• Fed cattle prices
• Feeder cattle prices
• Weaned calf/stocker prices

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Derived demand

• the demand for factors of production that exists
  because of the demand for the product the factors
  produce
• Since calves, feeder cattle, and fed cattle are
  NOT end products, we have to step deeper to
  determine what influences their prices

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How are prices determined?

• Cattle price f (Quantity of cattle/beef
  produced, quantity of competing meats, quantity
  of feed available, disposable income, consumer
  tastes and preferences)
• As you can see, this is no simple proposition,
  but the market tends to handle it.

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Blueprint for Developing Your Own Market Outlook

• James D. Sartwelle, III
• Extension Economist, Risk Management
• Texas AM University

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Market OutlookWhat Is It?

• Market outlook is your expectation of where a
  particular commodity market is headed
• It can be developed in as many different ways as
  there are different people

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How Many Different Easy Ways Are There?

• Use someone elses forecast
• Use the futures markets
• Ignore things and hope for the best
• The last strategy is unfortunately used far too
  often by cattlemen

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There Are No Easy Ways

• Being a good marketer of cattle requires many of
  the same elements of being a good producer of
  cattle
• Persistent monitoring of changing conditions
• Staying abreast of new technologies and
  strategies
• Not putting your head in the sand when things
  start heading south on you

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Determine the Time Frame

• Actual and expected beef production levels and
  production of competing meats drive cattle prices
  in the short term
• Those numbers, plus expectations of consumer
  income and changing dietary preferences, drive
  cattle prices in the longer term

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What Decision Are You Trying to Make?

• Do I sell my calves this week or next?
• Should I consider retaining ownership on part of
  my calf crop thatll be weaned this fall?
• What year is the cattle cycle going to turn on us
  again?

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Follow the Leaders

• Leading indicators Information that might tip
  market movements
• Short-term indicators
• Longer-term indicators
• Sources of this information
• USDA (www.ams.usda.gov)
• Private sources

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What to Track First?

• Total inventory numbers
• USDA tracks cattle numbers all over the country
  and releases inventory
• Feedyard numbers
• Important to track because theyre the best
  indicators of future beef supply out there
• Meat production numbers
• Follow both numbers of cattle slaughtered and
  carcass weights

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Cattle Inventory Reports

• Issued in late January and mid July
• Longer-term barometer
• Cattle cycle where are we?
• Look deeper into the numbers to determine not
  only whether the cyclical phase is liquidation or
  expansion, but how quickly were likely to get
  there

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What Are the Indicators in the Inventory Report?

• Total numbers of cattle, beef cows, and calf crop
• Are we expanding or liquidating the herd?
• Beef replacement heifers
• Are we keeping more or fewer heifers back?
• Gauge of whether were gearing up to expand total
  herd size or not

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Cattle on Feed Reports

• Usually released the third Friday of the month
• State-by-state information on feedyard
  inventories and placements and marketings from
  the previous month
• Indicator of how many cattle are likely to come
  off feed in the next 5 or 6 months

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What Are the Indicators in the Cattle on Feed
Report?

• Shows where you are in relation to history in
  terms of total feedyard numbers
• Placement info yields insight into whether or not
  more beef or less beef will be produced in the
  coming months relative to the previous year
• Marketings indicate whether cattle are being
  moved from the yard to the packer in a timely
  fashion (currentness)

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Monthly Slaughter Reports

• Need to know the rate at which cattle get turned
  into beef
• When beef supplies go up, normally beef prices go
  down
• When beef prices go down, normally fed cattle
  prices get bid down, too
• Knowing cattle numbers is important knowing beef
  weight is vital

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What Are the Indicators in the Monthly Slaughter
Report?

• Total meat production (beef, veal, pork, and
  lamb) for the previous month
• Meat production relative to history
• Is there a glut or undersupply of beef?
• Whats going on with pork?

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Weekly Slaughter Reports

• Released each Friday, they show how many head of
  cattle, hogs, and lambs were processed the
  previous week
• Estimates of total weekly meat production
• Percent of females in the beef kill mix
• Carcass weights
• Very important report for projecting near term
  fed cattle prices

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What Are the Indicators in the Weekly Slaughter
Report?

• Percent of females in slaughter mix
• Important indicator of short-term expansion or
  liquidation
• Percent of heifers and beef cows greater than
  45, generally a good indicator of liquidation

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What Are the Indicators in the Weekly Slaughter
Report?

• Carcass weight
• Just as important than actual number slaughtered
• High carcass weights can be an indicator that
  feedlots are not staying current
• High carcass weights can mitigate the positive
  effects of a smaller herd size

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What to Track Next?

• Competing meats production
• Affects beef demand in the future
• Grain prices and grazing availability
• Fed cattle prices f (feeder price, corn price)
• Feeder stocker cattle prices f (calf prices,
  grain prices/grazing available)

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What Next?

• Youve spent a limited amount of time staying
  current on national market trends
• You have to stay abreast of market movements for
  the relevant commodity
• The previous work is no good if you cant time
  your marketing decisions

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Access to Local Market Information

• USDA reports weekly prices for 20 Texas livestock
  auctions and 3 electronic auctions
• USDA reports direct feeder cattle sales weekly
  and fed cattle sales daily
• Follow the futures markets, too

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Keeping Your Head in the Game

• You have to follow your local markets regularly
• Lets face it most all of us are price takers,
  but we have nearly complete control over when we
  market our cattle
• There is no excuse for not constantly monitoring
  local price trends
• Be careful which prices you watch

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Ok, One More Time

• Cattle Inventory Reports
• Give us a snapshot of where we are in the cycle
• Cattle on Feed Reports
• Give us an idea of how beef production is likely
  to look for several months
• Slaughter Reports
• Fine tuning our beef production forecast and
  seeing how female slaughter is going

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Ok, One More Time contd

• Grain prices and pasture quality
• Got to know how cost of production is likely to
  look for the next guy who owns our cattle
• Local market prices
• Have to constantly be checking for local
  marketing opportunities
• Income levels, changes in dietary tastes and
  preferences

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Do I Have the Time to Do This?

• Spend an hour twice a year interpreting the
  semi-annual Cattle Inventory report
• Invest a half-hour once a month digesting the
  Cattle on Feed and monthly Livestock Slaughter
  reports
• Spend 15-20 minutes a week taking in the local
  market and weekly slaughter reports
• Keep up with moves in the grain/grazing markets
• Can I really afford not to do this?

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Jim Sartwelle, III Extension Economist, Risk
Management Texas AM University