Marketing Calves and the Price Slide
I always enjoy driving around Wyoming this time of year, seeing all of the new calves on the ground. For ranchers, it is a time of long days and nights but also a time of renewed optimism, as new life brings new opportunities. Now that there are calves on the ground and a few more to come, it is not too early to think about marketing.
Okay, so I admit marketing is always on the top of my list, but now really is a good time to give it some thought.
One of the common methods of marketing is forward contracting, with ranchers utilizing both video sales and order buyers to secure sales early in the summer. One question or concern that I hear quite often is, what is the price slide? This question is usually followed by the question, is the price slide fair?
What is the price slide?
When a buyer and seller enter into a forward contract on calves, there is an agreed-upon price per hundredweight and an agreed-upon shipping weight. As we all know, price per hundredweight fluctuates with weight. Lighter calves bring a higher price, and as weight increases, bid prices decline. It is not always easy to make sure the average calf weight comes out to the exact agreed upon figure. We can have good years and bad years in Wyoming, and both affect calf weights.
Generally, when a seller enters a forward contract, they are conservative on the estimated weight of their calves. If they contracted 500-pound calves at $135 per hundredweight, they would not want to end up selling 450-pound calves at the same price.
While being conservative on the weight estimate usually works to protect the seller’s interest, it is not very helpful for the buyer. The buyer wants to be protected against overweight calves.
In the previous example, if the contract was for 500-pound calves at $135 per hundredweight, the buyer would not want to pay that same agreed upon price for 550-pound calves.
Hence, we get the price slide.
The price slide is an agreed-upon discount to protect against overweight calves. The price slide can vary from contract to contract, but generally ranges from five dollars to $10 per hundredweight. If the agreed-upon slide is five dollars, that means for every 100 pounds above the agreed-upon weight, the agreed upon price will be five dollars per hundredweight less.
Does that mean that the price slide only works in 100-pound increments? No. The price slide adjusts to the exact weight of the calves.
Let’s look at an example to clarify.
If calves are contracted at 500 pounds at $135 with an overweight price slide of $5, and the actual shipping weight of the calves ends up at 515 pounds, the new market price would be $134.25, figured by dividing 15 pounds by 100, then multiplying it by five dollars and subtracting that value from $135.
Is the price slide fair?
As sellers, ranchers generally don’t like getting less per pound for their calves. However, oftentimes the per-pound discount is still in the seller’s favor.
The answer to the question of is the price slide fair depends on the cost of gain. If the difference in value due to the added weight is equal to or less than the cost of gain, then the seller should be comfortable with the slide.
Consider the following example. If the projected value of our 500-pound calves selling at $135 per hundredweight is $675, and they come in at 515 pounds, with a five dollar slide, for a total of $691.39, the difference in value is $16.39. When we divide that by 15 pounds, the breakeven cost of gain is $1.09 per pound.
According to this example, if the seller can add 15 pounds of weight on their calves for less than $1.09 per pound, then the negotiated price slide is a benefit to the seller.
Wyoming Ranch Tools
Hudson Hill and I developed a calculator on the Wyoming Ranch Tools website, found at uwyoextension.org/ranchtools, to help ranchers analyze the price slide. The calculator works through the same math in the example to provide a break-even cost of gain.
Users can enter their own contracted price and weight, as well as the agreed upon price slide. The user then enters the actual shipping weight to complete the calculation. This is a great way to analyze a forward contracting opportunity on calves.
In summary, the answer to the question, “Is the price slide fair?,” is it depends. My recommendation is to use the calculator to find out the break-even cost of gain and make your decision from there.