Cattle Marketing Game

Stacy HadrickMeade County Extension Educator

April 2006National WIA Conference

Stacy Hadrick, South Dakota Extension Educator

April 2006

National Extension Women In Agriculture Education Conference

The Cattle Marketing Game

The Game Guide• Follow the year of a cow/calf producer• Start in March-calving season through

October-weaning, may choose to background.

• Make Money, not TOP the Market Money• Determine Cost of Production• Develop a Marketing Plan• Gain knowledge about basis & seasonality• End of the game sell out & offset contracts

Ranch Information• Cow/Calf Operation• 400 head of mother cows-Calving now• Typically sell 550 lb calves when you

wean in October • Can decide to background in the

neighbors lot to 800 pounds and sell in January

• Can Forward Contract• Can utilize Hedges in your marketing plan

HedgingTaking a position in the futures market that is equal and opposite to the position one expects to take in the cash market, thus providing protection against adverse price movements

Long: Bought futures contract to protect against price increase. You plan to buy a commodity later

Short: Sell a futures contract to protect against price decrease. You plan to sell a commodity later

F – January

G – February

H – March

J – April

K – May

M – June

N – July

Q – August

U – September

V – October

X – November

Z - December

2 = ¼

4 = ½

6 = ¾

LCZ01 73.650

CK01 2606

CME-Chicago Mercantile Exchange

CBOT-Chicago Board of Trade

Contract Specs• Ticker Symbol FC• Trading Unit 50,000lbs. 650-799lb.• Price Quote $ per 100 pounds• Minimum Price .025=12.50/contract

Fluctuation (Tick)• Daily Price Limit 1.50=$750.00/contract• Contract Months Jan, Mar, Apr, May, Aug,

Sept, Oct, Nov.• Last Day of Trading Last Thursday of the

contract month, unless of holiday

• Cash Settlement

Cost of Production

Cow Cost $380

Land/Interest $48/head

Death Loss $45/head

Vet $12/head

Marketing $15/head

Do You Know Your COP?

MARCHCalf Weight 90 Expected Basis +$10.00

January Feeder Cattle Futures $86.80

Calf values are expected to follow the twenty-year average this spring, which is to say that prices are likely to see their spring high sometime in the next few weeks. 550 weights are expected to decline towards a summer low near $105/cwt. range during the balance of the summer. There is a possibility of higher corns prices.

Marketing Plan

 Enterprise Date

  

1. Production Level and Risk-

Write down what you reasonably expect to market. Be reasonable about death loss and pounds of animal marketed.

2. Financial Situation-

Note any major financial implications for the plan.

3. Price Targets-Translate financial goals into prices.

Use the breakeven price as a benchmark. Have targets of “needs” “wants” and “hopes”

4. Fundamental Outlook-

Identify some known's of the market. What are seasonal patterns and trends.

 5. Tools and Strategies-

State when you will sell, how much you will sell and by what method.

 

 6. Evaluation –Maintain a history of performance.

Marketing Plan

 Enterprise Calves Date March

 1. Production Level and Risk- *400 head of cows 90% calf crop=360 calves at 550lbs weaning weight*Consider Backgrounding

2. Financial Situation- *Reviewed financial statements-cash flow is good

3. Price Targets-Translate financial goals into prices. *Breakeven $91/cwt is a need; Want-$101; Hope-$135

4. Fundamental Outlook- *Volatility with BSE*Cattle Cycle-Supply & Demand

 5. Tools and Strategies-1. Track January Feeder Cattle Contracts2. April-Buy 2 feeder cattle contracts if January @ $933. June-consider forward pricing opportunities if market is above $1154. August-Forward contract 30% if cash is @ $1105. August-pencil out backgrounding option

 6. Evaluation –look how plan worked-what strategies do I need to change?

April

As grass season begins, the green grass fever and high calf prices associated with it are expected to subside. Current expectations are that 550 lb steer calves will see a floor near $105-$110/cwt. for a nationwide average during June, July and August.

Calf Weight 156 Expected Basis +$10.00

January Feeder Cattle Futures $89.50

Basis

Cash

-Futures

Basis

Made up of: weight, sex, type, location

Historical

South Dakota Cash Stocker Minus Nearby Feeder Cattle Futures

0

7

14

21

28

35

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Sources: AMS, CME, & SDSU

$/cw

t.

2005 Avg.'01-'05

South Dakota Cash Feeders Minus Nearby Feeder Cattle Futures

0

3

6

9

12

15

Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec

Sources: AMS, CME, SDSU

$/cw

t.

2005 Avg.'01-'05

May

USDA released data this week that supports the idea of limited supply of feeder cattle. The marketplace responded to tight supplies and strong demand by raising feeder cattle prices to record monthly levels. Sellers need to understand there are numerous issues which could provide price risk such as corn prices, another BSE case, closed export markets, etc. All could influence feeder cattle prices. Sellers are encouraged to consider forward contracts as a way to manage risk.

Calf Weight 222 Expected Basis +$10.00

January Feeder Cattle Futures $98.00

Forward Contract $124.50

June

Calf Weight 288 Expected Basis +$10.00

January Feeder Cattle Futures $100.85

Forward Contract $123.00

The market has had a very strong rally making some producers nervous about the sustainability of these price levels. From a historical perspective feeder cattle prices still have room to advance. Using this logic August feeder cattle could reach the $114 to $117 range fairly easily from now until early fall.

JulyCalf Weight 360 Expected Basis +$10.00

January Feeder Cattle Futures $103.40

Forward Contract $134.50

As more calves are offered and the extreme part of the summer weather passes, calves will become more attractive to cattle feeders and prices will rise slightly. From now through mid-September, prices could increase by as much as $5/cwt. before moving lower during the fall runs.

Backgrounding Indicators What is the market telling you?

What will it cost you to put pounds on calves?

What is the cash market doing in October vs futures market in January/March?

August

Time for fairs and motorcycles. Fall calf prices will be supported by historically tight supplies and the large degree of foreword contracting that will have already taken place.

Calf Weight 435 Expected Basis +$10.00

January Feeder Cattle Futures $105.00

Cash Market $139.00

Forward Contract $134.50

September

Feeder cattle have experienced considerable volatility over the last several weeks. Calf prices may largely trade within a range between now through mid to late October. Risk management plans should keep this in mind and account for the appreciation in the feeder cattle futures and cash markets.

Calf Weight 500 Expected Basis +$10.00

January Feeder Cattle Futures $106.00

Cash Market $134.00

October

Calf runs have started in the Central Plains and offerings will grow in size each week for a month. Calf values are a little more attractive, lower corn values and costs of gain have helped to offset part of the impact of both from a feeding standpoint.

Calf Weight 572 Expected Basis +$10.00

January Feeder Cattle Futures $108.00

Cash Market $132.00

Need To Decide-Sell Calves or Background!

Backgrounding Decision

October Cash Market $132.00

January Futures $108.00 + $2.00=$110.00

550lbs x 1.32=$726/hd

800lbs x 1.10=$880/hd$154 Difference

How much does it cost to add pounds to those calves?

November

Feeder Cattle outlook has become less clear as a result of the inconclusive BSE announcement last Thursday. Prior to this latest event the market was preparing to follow a largely seasonal price pattern with highs projected in last December or early January.

Calf Weight 661 Expected Basis +$2.00

January Feeder Cattle Futures $101.90

Cash Market $120.00

Forward Contract $102.50

December

Merry Christmas! Volatile markets make buying and selling decision very difficult. This volatility underscores the fact that producers should have a plan in place and profit objectives should be the headliner of the plan.

Calf Weight 730 Expected Basis +$2.00

January Feeder Cattle Futures $103.25

Cash Market $110.00

JanuarySell in Cash market

Offset any Hedges

Calf Weight 800

January Feeder Cattle Futures $103.50

Cash Market $107.00

Game Wrap up

• How Did You Do?

• Cost of Production-Do you know yours?

• Basis-What did you learn?

• Marketing plans-Did you use it?

• Marketing Options-Do you use those?