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Introduction
Feeder cattle are usually bought and sold on the basis of weight and price per pound. When it is not feasible to weigh the cattle at the time that price is established, a “price slide” is often used. The sliding scale enables the final price to be adjusted for the difference in actual weight of the cattle from the base weight on which a base price is established.
Understanding Feeder Cattle Price Spreads
When feeder cattle prices are quoted, animals are typically made by gender and by weight, often in 100-pound increments. Usually, but not always, the lighter weight feeder cattle sell for a higher price per pound. The major factor affecting price spreads between weight-groups of feeder cattle are the answers to three questions. If the feeder cattle are placed on feed for slaughter at the current time and at their current weight, 1) when will they “finish”, 2) what is the expected price of fed cattle at that time, and 3) will feeding that animal make money?
For supply and demand reasons, fed cattle prices tend to peak in late winter or early spring before moving lower into summer. Figure 1, below show the seasonal price pattern for finished steers in Alberta. The chart shows seasonality with an index of 100 representing the annual average. The March bar, for example, show that during the years January 6, 1995 through September 15, 2006, A1 and A2 steer prices during that month averaged six per cent above the long-term, annual average. The September price averaged four per cent below the long-term annual average.
Figure 1
This seasonal price pattern of fed cattle results in a fairly predictable movement in the feeder cattle price spread as time passes. For example, in late summer, mid-weight feeders in the range of 600 to 700 pounds may have little price per pound discount to the 500 to 600 weight range feeder calves. If placed in a finishing feedlot at the beginning of September, a 650-weight steer would finish in about 210 days at around the end of March when slaughter cattle prices tend to be seasonally strong. Alternatively, the 550 weight feeder steer, if placed in a finishing feedlot at the beginning of September, would not finish until the end of April, probably after fed cattle prices have peaked.
As time passes through the fall, 600 to 700 pound feeders become less desirable to buyers for two reasons. 1) If placed in a feedlot in late November at 650 pounds, they will not finish until mid-June, when fed cattle prices tend to be seasonally weaker. 2) A 650-weight feeder, if “backgrounded” at a lower rate of gain, would become a 900- to 950-pound heavy feeder by spring. That 900- to 950-pound feeder at the end of April would not be desirable for the “grass” market, and if placed in a finishing feedlot, would be ready for slaughter about mid-August, when prices tend to be seasonally low. However, the 550-weight steer in late November would still be attractive as a backgrounder, and may still be feasible to send to grass in the spring. If that 550-weight steer was backgrounded to spring, the 800 to 850-weight spring feeder, if placed in a finishing feedlot, would be ready for slaughter in late-September, when prices are usually improving from summer lows.
Other factors affecting the price spreads between feeder cattle weight classes are demand-related to the backgrounding, “grasser”, or breeding stock market for heifers.
Rising feed grain prices tend to disfavor the value of lighter feeders compared to heavier weight feeders since it now costs more for the cattle to gain weight on a grain-based ration. Ample forage supplies tend to favor the value of lightweight feeders as forage owners bid up the feeder price in an effort to turn their low-value forage into beef.
Feeder heifer demand for the bred heifer market usually improves when bred cows become relatively high-priced. Conversely, when the beef industry is in contraction mode (reducing beef cow numbers), the demand and price for feeder heifers tends to drop relative to steers.
Figure 2, below, shows how relative prices change during the year for different weight ranges. The chart, below shows a 10-year seasonal price comparison between 550 (blue bars) and 850 (orange bars) weight feeder cattle for central Alberta. The grid has been adjusted to emphasize the comparative price. Much of this relative price difference can be explained by the combination of:
- when those feeders would finish if placed in a feedlot, and
- the seasonal supply and demand for the respective weights of feeders.
Moving from winter into spring, the supply of 550-weight calves is less, and demand for them improves for the grass market. Meanwhile, heavier weight feeders become more plentiful as cow-calf operators sell their backgrounders to concentrate on calving. Feedlots are not usually aggressively bidding for those heavy weights since they will finish at a time that fed cattle markets are seasonally weak. Into the fall, heavy weight feeders become more desirable since they will finish when fed cattle prices are seasonally stronger, while lighter weight feeders are in plentiful supply as the bulk of calves are weaned and sold in the fall.
Figure 2
How the Sliding Scale Works
The numbers used in a sliding scale should be derived from the market. Here is an example. Suppose that the current average price for 650-weight steer calves is $1.27/pound, the average price for 550-weight steer calves is $1.33/pound, and the average price for 450-weight steer calves is $1.41/pound. A group of average quality steer calves is bid at the farm. The buyer estimates their average weight at 550 pounds. Based on the current market, that group of 550-weight calves should be worth about $1.33/pound. However, since the weight of those calves is just an estimate at this point, the buyer and seller may wish to build adjustment factors into the offer to account for the difference between the estimated weight of 550 pounds and the actual weight of the calves to be determined later upon weighing.
Since the current market price for 450-weight steer calves is $1.41/pound, or eight cents a pound more than 550-weight steers, it would be appropriate to positively adjust the price of the farm calves by eight cents a pound for every hundred pounds that the actual weight is less than the 550-pound base weight.
On the other hand, the current price of 650-weight steer calves is $1.27/pound, or six cents a pound less than 550-weight steers, so it would be appropriate to negatively adjust the price of the farm calves by six cents a pound for every hundred pounds that the actual weight is greater than the 550 pound base weight. If these adjustments became part of this bid, the bid would be $1.33/pound for a base weight of 550 pounds, with a 06 slide up and a 08 slide down.
Using this sliding scale, often called “zero-six up” and “zero-eight down”, and a base price of $1.33/pound for 550-weight steers, here is how the price would be adjusted after the cattle are actually weighed. If the actual average weight of the cattle is 575 pounds, or 25 pounds greater than the base weight, the final price would be $1.33 - (25/100 X .06) or $1.3150. If the actual average weight of the cattle is 530 pounds, or 20 pounds less than the base weight, the final price would be $1.33 + (20/100 X .08) or $1.3460.
Summary
The sliding scale enables bids for cattle to be presented by the buyer to the seller prior to actual weighing of the animals. Sliding scales are used as part of the sale process for internet or satellite auctions and on on-farm sales where the animals haven’t been weighed before the seller places a bid or where there is no scale at the seller’s facility.
The cattle owner must be aware of current market prices for similar cattle to determine the fairness of a bid and the slide being offered. This means the producer must visit auction markets to observe cattle sales, watch Internet or satellite sales, consider the seasonal price trend of various feeder cattle weight groups and seek market opinion from others in the industry. |
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