Factors Affecting Feeder Cattle Prices: Marketability & Traits

1. ECON 337: Agricultural Marketing Lee Schulz Assistant Professor lschulz@iastate.edu 515-294-3356 Chad Hart Associate Professor chart@iastate.edu 515-294-9911

2. Factors Affecting Feeder Cattle Prices

3. Marketability: Buy and sell them “right”… What exactly does “right” mean? • Buy low – sell high make lots of money! • As a seller, know what your buyers are looking for and strive to deliver it to them • As a buyer, recognize how the various traits and characteristics are valued and buy what best fits your program (i.e., your comparative advantage) (of course this doesn’t work for everybody as some are buying from those selling)

4. What drives/determines feeder cattle prices…

5. Feedlot Operators ― How important are the following traits for the feeder cattle that you buy? Schulz, L.L., P.J. Gunn, and D.L. Loy. 2015. A 2014 Survey of Iowa Feedlot Operators. ISUEO. IBC 101B.

6. Breed impacts price… Source: CAB “Where’s the Premium” study, 1999-2014 -- Consistent premium on Angus-influence calves and premium has generally been trending up over this time period

7. Color is a proxy for breed/genetics… Source: Schulz, L.L., K.C. Dhuyvetter, and B.E. Doran. 2015. “Factors Affecting Preconditioned Calf Price Premiums: Does Potential Buyer Competition and Seller Reputation Matter?” JARE 40(2): 220-241.

8. Weight impacts price… Prices decrease at a declining rate as weight increases (convex shape) -- Growth potential of cattle is most rapidly used up at lighter weights than heavier weights -$16.94/cwt -$4.13/cwt

9. Corn price impacts weight price relationship… “Low” CN: FC price ↓ more rapidly as weight ↑ Lightweight feeders worth more relative to heavy feeders because COG lower

10. Live cattle price impacts weight-price relationship… “Low” LC: FC price ↓ less rapidly as weight ↑ Lightweight feeders worth less relative to heavy feeders

11. Deferred fed cattle futures What feeders will be worth when finished Current slaughter cattle price may not matter much Affects derived demand for feeder cattle Higher slaughter cattle prices – feedlots can pay more for feeder cattle Lower slaughter cattle prices – feedlots must pay less for feeder cattle Recent work – close to 1:1 relationship Expected Slaughter Cattle Price

12. Weight (with season) impacts price… Source: Holton Livestock Exchange, Inc. (Northeast Kansas)

13. Weight (with season) impacts price… • Differences in feeder cattle prices across weights, attributed to: • 1. Feeding performance • 2. Profitability of feeding programs • Seasonal difference in weight discounts, accounted for by: • Larger weight discounts in the spring • Strong demand for lighter weight cattle for placement on spring pastures • During the fall, demand is stronger for feedlot cattle • Heavier animals are preferred • Seasonal variations in feeder cattle supply contributes to differing weight discounts

14. Weight (with gender, preconditioned) impacts price… -- Advantage of preconditioned calves declines at heavier weights -- For heifers the premium on preconditioned calves is higher Source: Schulz, L.L., K.C. Dhuyvetter, and B.E. Doran. 2015. “Factors Affecting Preconditioned Calf Price Premiums: Does Potential Buyer Competition and Seller Reputation Matter?” Journal of Agricultural and Resource Economics 40(2): 220-241.

15. Lotsize impacts price… Source: CAB “Where’s the Premium” study, 1999-2008

16. Several other factors impact price… Source: Schulz, L.L., K.C. Dhuyvetter, and B.E. Doran. 2015.

17. What about preconditioning calves… • Premiums consistent across location, exceptions (Regular Sale 4 & 5) • Premiums for PC heifers significantly higher than for steers • Preconditioned heifers purchased as herd replacements Source: Schulz, L.L., K.C. Dhuyvetter, and B.E. Doran. 2015. “Factors Affecting Preconditioned Calf Price Premiums: Does Potential Buyer Competition and Seller Reputation Matter?” JARE 40(2): 220-241.

18. What about preconditioning calves… • Average premiums for PC calves increasing over time (exception 2012–13) • Premium $1.71 to $7.44/cwt for steers and $6.03 to $11.76/cwt for heifers Source: Schulz, L.L., K.C. Dhuyvetter, and B.E. Doran. 2015. “Factors Affecting Preconditioned Calf Price Premiums: Does Potential Buyer Competition and Seller Reputation Matter?” JARE 40(2): 220-241.

19. What about preconditioning calves… • Premiums greater for lighter weight calves sold earlier in the market year • Prices for heavier calves sold in Feb equal (i.e., no premium for PC sale) • Somewhat “preconditioned” already • Past weaning stress period and bunk adjusted Source: Schulz, L.L., K.C. Dhuyvetter, and B.E. Doran. 2015. “Factors Affecting Preconditioned Calf Price Premiums: Does Potential Buyer Competition and Seller Reputation Matter?” JARE 40(2): 220-241.

20. What about seller (reputation) affect… • 21% of lots received statistically different prices • Range $20/cwt (+$9.70/cwt to -$9.93/cwt) • Implication: Some producers will incur more costs (PC) and may not receive any premiums. Some producers  may receive even higher premiums. Source: Schulz, L.L., K.C. Dhuyvetter, and B.E. Doran. 2015. “Factors Affecting Preconditioned Calf Price Premiums: Does Potential Buyer Competition and Seller Reputation Matter?” JARE 40(2): 220-241.

21. Class web site: http://www2.econ.iastate.edu/faculty/hart/Classes/econ337/Spring2016/index.htm