Brian Roe's June 2007 Livestock Outlook

US - Eastern Cattle Price Trends
calendar icon 7 June 2007
clock icon 4 minute read

This month I am releasing an updated set of basis figures for Eastern Corn Belt cattle producers. Basis is the difference between the price that is meaningful to the producer, such as a local cash price, and the price that is used to determine the payout of a risk management tool, such as the futures price. Because risk management tools have expanded to include things such as USDA’s Livestock Revenue Protection insurance policies, I include the difference between local cash prices and those prices used by USDA to determine if the payout for these revenue insurance policies.

For fed cattle the relevant price used by USDA is the 5-area cash price, which is a price for a typical load of 65% choice and 35% select cattle sold in 5 key western markets. I compare this price to eastern Pennsylvania fed cattle auction results for both Choice 2-3 steers and Select and Low Choice steers. For feeder cattle the relative price is the Chicago Mercantile Exchange’s feeder cattle index price, which is a composite of prices for feeder steers weighing 700 to 850 pounds sold at sales and auctions throughout the country, though the majority of these are also from Missouri and further west. The local price I use is the Kentucky weekly auction and sales averages for 700 to 800 pound feeder steers.

By calculating these basis figures, which are available for half-month periods averaged over the 20002 – 2006 time period at, one can also look for trends in basis over time. Given the basis figures for USDA index numbers are against western-leaning prices, this analysis provides a view of regional price trends over time.

For example, in 2002 and 2003, a load of 65% Choice and 35% Select steers sold for $0.40 more, on average, in eastern Pennsylvania than it did out west. By 2005 and 2006, the average price out west was now about $1.50/cwt. more than that reported in eastern Pennsylvania. In other words, a 1200-pound steer sold in eastern Pennsylvania went from nearly a $5/head advantage to an $18/head disadvantage – more than a $20 swing in revenue per head. Note that these prices reflect auction prices in eastern Pennsylvania, which are not necessarily identical to the prices paid by key Pennsylvania packers, though these packers will sometimes bid at these auctions to fill needs.

While this seems like bad news to Eastern Corn Belt finishers who ship cattle east for sales and slaughter, one must look at the whole picture, which includes an analysis of price trends for feeder cattle. In 2002 and 2003, 700 to 800-pound feeder steers sourced from Kentucky auctions average about $4.50/cwt. less than the western-heavy CME feeder cattle index price. In 2005 and 2006 the average discount for feeders steers from Kentucky swelled to about $8.00/cwt. So, for a feedlot purchasing 750-pound feeder steers, this results in about a $3.50/cwt. relative improvement in the cost of sourcing feeder steers compared to the western average, which equals about $26/head. If the relative quality of reported Kentucky feeder steers has not changed over this time period, it suggests that Eastern Corn Belt feeders have been able to procure feeders relatively cheaper than their western counterparts over the past 6 years. In fact, the $18/head relative loss to the West lost on finished cattle may be more than offset by the $26/head relative reduction in costs of procuring feeder cattle.

This fact that there is a difference in relative prices between Kentucky feeder steer auction prices and western average prices is not too surprising given that the 5-state region (Indiana, Michigan, Ohio, Pennsylvania, and Kentucky) holds more than 5% of the country’s beef cows but only 4% of the cattle on feed – higher prices will be paid for feeder cattle nearer to the main feedlot action out west. The increase in this eastern discount over the past 6 year can partially be explained by the fact that these 5 states have added more beef cows (about 70,000) while the cattle on feed numbers in these states have remain static, though I’m not convinced this modest increase in beef cow numbers justifies the full decline in the eastern discount observed.

The other possible explanation for this larger eastern discount over the past 6 years is that the reported Kentucky prices may reflect a greater segmentation of the feeder cattle markets. In other words, higher quality feeder cattle may be not be sold through the marketing channels that show up in the typical Kentucky auction reports. Indeed, if the prices for local sales of feeder cattle are sliding compared to western markets, it means that cow calf producers must continue to document feeder cattle quality and delivery pens of cattle with desirable traits to the market place to offset the regional price decline. Iowa State researchers have documented that large premiums can be obtained through management steps such as pooling cattle into larger lot sizes and shipping cattle to sales with larger sales volumes

( For example, delivering a pen of 75 cattle rather than 20 resulted in an average price increase of about $7/cwt at Iowa sales during the winter of 2005-06, while selling as sales with total sales of 3,000 head rather than 1,000 head would result in an average price increase of $5/cwt.

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