The majority of these calves are ”contracted” to a specific buyer early in the summer: the rancher agrees on a price, a delivery date, and a weighing facility. The price is per pound, and steers are worth about 6% higher than heifers, as they gain weight faster and yield more meat.
Arriving at an acceptable price is always a conundrum. The rancher, of course, wants the highest price possible. He knows what calves are selling for at the local auction yard in the weight range that he expects his calves to be in the fall; but will the price move up or down over the summer?
The buyer must purchase the calves cheap enough that he can buy all the necessary feed for them and still make a profit. But what will the feed cost, and what will the price be when those calves are ready for market?
Another option is to wait until fall and send the calves to the auction yard – taking the price of the day.
I have sold calves both ways. But since you never know what you would have gotten had you marketed them another way, you never really know which would have been the better option.
The major factor driving the price over the long run is the total number of calves being sold over the year. We are currently in a cycle of low cattle numbers – and the base price of calves is the highest it’s ever been.
Feed costs are what drive prices in the short term. Feeders have carefully calculated their expected cost of gain, and make their offer according to what they can pay for the calf and still make a profit when selling the fat cattle to the packer.
As the rancher doesn’t know what the calf market will be in the fall when he ships, neither does feeder know what the market will be when he sends the fat cattle to slaughter. He can of course look at what the Futures market is doing for the month that he expects to ship his fats, but that is subject to change according to weather, crop harvests, and the economy.
The ultimate factor in the price of cattle all the way up the line is the price of beef in the supermarket. If the price to the consumer is too high, he will buy less beef and more chicken, pork – and even tofu.
For the calf crop of 2012, beef demand remains strong and supply remains short. Some calves were contracted early in the summer for as high as $1.75 per pound – the highest price ranchers have ever seen.
But as areas of drought expand, crops shrivel and the price of feed climbs steadily. Hay that cost less than $100/ton last year will likely be over $150 this year; corn that cost $5.00/bushel last year may cost $8.50 this year. High costs for feed to grow those calves out will drive up the cost of gain, and feeders will need to buy those calves cheaper in order to compensate. And thus the price of calves has fallen quickly - to less than $1.50/pound now.
Will crop yields be better than currently projected – lowering the cost of gain and improving the feeders’ capacity to pay more for calves? Or will crop yields be worse – raising feed costs even more, and causing calf prices to continue their fall.
Will the feeders that bought calves early at higher prices be driven out of business by high-priced feed? Will ranchers that bought new equipment on the expectation of higher-priced calves be able to make their payments?
Should I contract the calves now before the price goes down further, or wait until fall in the hope that the price will rebound?
Stay tuned for the exciting conclusion!
It will be months before we know what the exciting conclusion will be.