Ministry of Agriculture, Food and Rural Affairs

Understanding Cattle Prices

Farmers are faced with a wide range of market information and opinions on market prices. These sources of market information and opinion often offer conflicting views which can make marketing decisions for individual farmers quite difficult and stressful. It is useful for each farmer to have a general understanding of how prices are both determined and discovered. Price determination refers to the big picture or overall price levels for a commodity. Price discovery pertains to how an individual farm or business arrives at a transaction price for their commodities. These two concepts are fundamentally different things.

Every farmer should have some basic understanding of the factors that affect price determination for the commodities they produce. This will help you anticipate the direction of price movements over time. Understanding how prices can be discovered and anticipated gives you the best chance of maximizing sales price. This in turn, gives you the best chance of being as profitable as possible. None of these pieces of knowledge or understanding are a guarantee and sometimes the price discovery mechanisms farmers use, tell something quite different than the price determination factors. Being able to observe and understand why price discovery is telling you something different is key to being able to avoid such situations in the future. It will also improve your chance of maximizing sales price.

Price determination is the interaction of the broad forces of supply and demand that determine the overall market price level. Feeder cattle supply in Ontario is driven by several factors including: cow inventories, lagged feeder cattle prices, time of year, and availability of feed. Feeder cattle demand in Ontario is driven by several factors including: fed cattle prices, feed prices, time of year, retail beef prices and frozen stocks of beef.

For Canadian livestock producers, price determination is based on global, but mostly United States (US), meat supply and demand forces. These forces, such as livestock inventories, production, competing meat prices, consumption and trade, all come into play to determine a base price level. As long as trade in meat and livestock is free and open, Canadian pricing is going to be determined through US markets. If Canadian prices get too out of line with US markets, supplies will either move into or out of Canada, rapidly. This process is called arbitrage.

In the case of cattle, the overall price level is ultimately expressed as a representative, or widely quoted US cattle price. This might be futures contract price or a regional price such as Nebraska steers. The representative price chosen and used for price determination is really determined based on where your farm is located and the major US markets most influential to your local market.

Price discovery is a transaction that can take place at the market or individual farm level. In general however, price discovery in Canadian agriculture and in this case cattle, takes the form of this formula:

Canadian Price = US Price ÷ US/Canada Exchange Rate - Basis

Whether the observed market price is an auction transaction, a formula price for a contract, or a spot market negotiation, the final prices is going to follow this basic formula.

In the Ontario cattle sector context the US base or representative price is almost always the Chicago Mercantile Exchange (CME) futures market price for feeder or fed cattle. Note that market prices reported are in US dollars per hundredweight of live animal and further details on each futures contract are available at the links below:

Nearby Chicago Mercantile Exchange (CME) feeder cattle futures price www.cmegroup.com/trading/agricultural/livestock/feeder-cattle.html

Nearby CME live cattle futures price www.cmegroup.com/trading/agricultural/livestock/live-cattle.html

The basis is in many ways the most difficult part of the price discovery process. This is the local or regional component of the price. It's the difference in price between one region and a CME futures contract. Regions that have excess cattle will be on an export basis. This is often referred to as a negative basis where the local price is lower than the reference price (CME contract) adjusted for exchange rate. Normally, Ontario feeder cattle are on an export basis for most of the year. At times, local shortages for example can flip prices to an import basis and this has widely been the case for the last two years. The tricky part about the basis is that it is something that is only observed or understood after the cattle are sold. It is not known before you sell your cattle what the basis will be, rather all you know is what the basis has been lately, the factors that affect the basis and what the basis is normally for that time of year. Understanding these factors is key to helping you maximize the sales price you receive for your cattle.

OMAFRA does a weekly calculation of Ontario feeder and fed cattle basis and provides it on its statistics website: www.omafra.gov.on.ca/english/stats/livestock/weeklycattleprice.xlsx

The following is an example basis calculation for November 15, 2017:

• BFO average 500 to 599 pound steer price $225.5 per hundredweight
  
• CME Nov 2017 close $158 USD per hundredweight
  
• CDN dollar exchange rate 0.783

Nov 15, 2017 basis = $225.5 - $158 ÷ 0.783 = + $23.72

Note that the average feeder cattle basis for at or on Nov 15 for 2011 to 2015 was -$10.5, an export basis. And the basis on this day in 2017 was + $23.72, an import basis. This is a clear indication of the short supply of Ontario feeder cattle and the strong demand for what feeder cattle supply is available.

There are two very unique aspects about cattle that make using price discovery formulas and basis very challenging. First, feeder cattle, are one of the only agricultural commodities that are primarily sold by auction. The majority of other agricultural commodities, including fed cattle, tend to be sold on a spot cash market, a direct negotiated contract or a direct formula price. Second, cattle are not a homogeneous or standard product. Homogeneous products like a bushel of corn that are generally very similar can be easily standardized in terms of pricing and grades. Cattle have several attributes that greatly affect market price such as weight, sex, breed, frame, pre-condition (dehorned, castrated, vaccinated, age verified, etc.) and ability to be grouped and sold with one or more other cattle that have similar attributes.

Auction markets bring cattle buyers and sellers together and for feeder cattle provide the best method of price discovery. Market summaries are available online and for some of the auctions in farm newspapers such as the Ontario Farmer or BFO website on a daily and weekly basis. But as a potential seller, it is important to understand the characteristics each market has relative to the feeder cattle you are planning to sell. For example, some sales do not place requirements on the characteristics of the cattle being sold which can result in more variable numbers of buyers, sellers and available cattle from one week to the next. In many parts of Ontario there is a growing number of "special" sales that are designed to bring together a larger number of buyers and sellers and in turn provide buyers with a larger availability of feeder cattle that are very consistent in terms of a quality feedlot prep program [castrated, dehorned, bunk adjusted, vaccinated] and presentation. Previous virtual beef articles have shown these type of sales can be quite beneficial:

www.omafra.gov.on.ca/english/livestock/beef/news/vbn1015a3.htm

Regardless of where you sell your cattle or the characteristics of your cattle, the following are some key pieces of information that should be tracked every year to help you manage price expectations and hopefully give the greatest chance for success:

• Know your per sold animal cost of production and track over time
• Record your market prices received and the attributes your cattle had and if these attributes have changed over time
• If you sold at a specific auction, record the weight and frame category, low, high and average price and the volume sold and where your cattle fit into that range.
• If you didn't sell at a specific auction, pick one close to your area and record every year, using it as a reference, and relate the price you received to the average price.
• Record the CME feeder cattle futures and exchange rate for the day your cattle sold and calculate your own basis and compare to the weekly basis provided by OMAFRA www.omafra.gov.on.ca/english/stats/livestock/weeklycattleprice.xlsx

In summary, Canada's cattle sector is part of a highly integrated North American market. One benefit of being a small price taker in this North American market is that it enables quite clear linkages for price determination and discovery. The CME futures prices provides Ontario farmers with a solid tool to help plan and manage price expectations. Using CME futures prices, coupled with local market info from the BFO, OMAFRA or your own sales results, producers can help see for themselves where their cattle fit into this broader market picture over time. Doing so provides each producer with the best possible chance for pricing success in a cattle world with clearly no guarantees.