Determining Cattle Prices
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Why are cattle prices down? When will prices go up?
What are the important price benchmarks for livestock?
What are management request made by buyers at the Stockyards?
How can producers increase the prices of their livestock above the average?
Comments from Professor Kim Anderson, OSU Market Extension Specialist
Edited by Glenn Detweiler, NCSU County Livestock Agent
What determines price? Is it supply and demand? That is what is taught in economic classes and is expounded by economists. Dr. Kim Anderson claims that price is determined by expectations. No one knows what the supply is or what supply will be in the future. No one knows how much cattle is in demand and what the demand will be in the future. However, to determine what price will be paid for cattle, supply and demand is estimated, based on available information. Information is used to develop expectations. Companies spend millions of dollars to obtain information to estimate current supply and demand and future supply and demand. Anderson believes price is determined by expected supply and expected demand. Merchandisers use information to determine supply and demand expectations. Then supply and demand expectations are used to determine price offers and bids. Anderson states, “An efficient market is a market that incorporates all available information when determining price.”
Everyone knows that prices change. Reviewing a few benchmarks will assist in understanding price changes. First, Anderson says, “The direction of change must be known.” For example, if available information indicates that prices will increase, merchandisers/traders will buy the cash commodity or use futures markets to sell when the price does increase. Second, he states, “Profit is earned by people or companies that acquire information before anyone else in the market.” For example, if a buyer learns before anyone else that Japan is going to buy 200,000 metric tons of U.S. beef, futures contracts may be bought before Japan’s purchase and then sold during the purchase at a profit. This is why companies pay large amounts of money to people who talk to others worldwide about supply and demand conditions. They want to be the first to anticipate changes in supply and demand conditions. Third, past and current market expectations must be included in the information gathering. For example, information shows that placements of cattle on feed are 5 percent higher than last month.
If the market were expecting cattle on feed placements to be 8 percent higher than last month, cattle prices would be expected to increase. However, if the market were expecting cattle on feed to be less than last month, prices would be expected to decline. Whether this information will cause prices to go up or down depends on the change in expectations. What makes the price different? New information compared to past information changes expectations that result in bid and offer adjustments and different prices. Anderson concludes that prices cannot be predicted because no one knows what the new information will be for each day.
Where do most cattle producers fit into the market situation? To make a profit based on price in the market, producers must do three things.
1. They must have benchmarks to determine the direction of future prices.
2. They must be the first to obtain relevant information.
3. They must analyze the information better than the collective market.
All this is nearly impossible for producers to do. Prices are nearly impossible to predict. Therefore the producer’s marketing decisions should not be based solely on price but on probabilities and on what is “normally” right and not based on what is “normally” wrong. Anderson concludes that the producers should take “a general course of action that is normally right and avoid acts and policies that are normally wrong.”
Joining us at the CVCA meeting will be the owner and operator of three livestock yards. Mr. Marcus Harward and daughter, Miss Brooke Harward, will discuss cattle price changes and management tools to increase your livestock prices . CVCA will have this meeting on November 8th in the evening at 7 p.m. at the Catawba County Extension office. Phone GPS: 1175 South Brady Ave. Newton. Agenda: 6:00 p.m. Meal; 6:45 Business meeting; 7:00 Program: “Determining Cattle Prices” All are welcome.