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Feuz explains methods of predicting feeder cattle prices

by Wyoming Livestock Roundup

Torrington – “Using monthly seasonal index values is one way to see annual patterns for most years. You want to ask yourself how reliable and how typical the seasonal price patterns are, but this method can give you an estimate based on the historical seasonal price pattern,” explains Dillon Feuz of Utah State University.
“Using monthly seasonal index values is one way to see annual patterns for most years. You want to ask yourself how reliable and how typical the seasonal price patterns are, but this method can give you an estimate based on the historical seasonal price pattern,” says Feuz.
“We can convert those different prices from year to year to an index and look at them as a percentage. You usually only need three to five years of data to come up with a pretty good indicator of market trends and patterns,” he adds. “Converting prices to a percentage gives you an idea of how much higher or lower prices should be at different times of the year.”
To calculate this prediction, Feuz recommends gathering data from where you plan to market cattle.     
“I took five years of price data from Torrington, and calculated indexes. I took their actual prices and divided them by the annual average price, then multiplied by 100 to get the seasonal index,” explains Feuz of how to figure a seasonal index.
Feuz notes that predictions based on indexes are most effective when predicting prices no more than six months out. “This is used to predict the near future, and not to predict prices far into the future,” he says.
“If it were August and I wanted to predict the November price for a 550-pound steer, then I would take the current August price and divide by the August index, then multiply by the November index,” explains Feuz.
“If the August price is $130/cwt, the August index is $101.01, and the November index is $93.55, then the November prediction would be $130/101.01 x 93.55 = $120.40/cwt.,” he demonstrates.
Another method Feuz recommends for predicting prices is adjusting the futures market price by the historical basis.
“Whether you like it or not, the futures market is the consensus of the traders of the market. Some of those traders are cowboys like yourselves, and some are doctors and lawyers and people who have no idea about the market. The fact is no one is trying to lose money in that market, so it’s gathering all this information, and in today’s electronic age it’s pretty tough to keep information a secret. Sometimes that’s good, and sometimes it’s bad.
“If China decides to do something with their currency, just that rumor can drop commodities, so you never know what will drive the market. It’s constantly changing, but at least it gives us a forecast for the future.
“The futures market is more of a national level, and with cattle it’s a cash settled price that basically represents a 13-state average price for average quality cattle. You need to adjust that to your local price, and we do that with what we call basis – which is defined as your local cash price, minus the futures price for the same commodity,” explains Feuz.
He adds that if the June price was $105 for 750-pound steers, and if the August Feeder Cattle Contract averaged $103.50 in June, the basis would be $105 – $103.50 = $1.50.
“How you use the basis to predict prices is you take whatever the futures market is today and look at the historical basis. Then you either add or subtract depending on whether basis is positive or negative,” explains Feuz.
“Over time we find that basis is much more stable, and therefore predictable, than either the underlying cash or futures price,” explains Feuz. “It can vary, and if predicting I would probably allow for five to six dollars either way.”
“In mid-November, the CME March 2011 Feeder Cattle Contract was trading around $117. If I wanted to predict the price of a 750-pound steer in March 2011, I would subtract the historical basis, which is -$0.94, from the $117 futures price, and expect to receive around $116.06 if I were to market that calf in March. I can then adjust that depending on where I think the market will be.
He adds that another important aspect of price prediction is to remember that feeder cattle prices, fed cattle prices and corn prices are all related.
“A general rule of thumb is that a 10-cent-per-bushel increase in corn prices will result in feeder cattle prices declining one dollar per hundred weight. This is particularly true for cattle weighing between 600 and 800 pounds.
“Feeder cattle prices may increase $1.50 to two dollars per hundred weight in response to fed cattle prices increasing by one dollar per hundred weight.
“These rules of thumb are fairly reliable when prices are adjusting to underlying supply and demand conditions in the these markets. However, if commodity prices are responding to changes in the value of the dollar relative to other currencies, or to strength or weakness in the economy, you may find that feeder cattle, fed cattle, and corn prices are all moving higher or lower over the same time period,” explains Feuz.
Feuz spoke on tools used for predicting feeder cattle prices during the Beef Production Convention in Torrington on Nov. 23.
Heather Hamilton is editor of the Wyoming Livestock Roundup and can be reached at   

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