By Matthew Diersen
During December of 2020 the price for 500-600 pound steers in South Dakota briefly averaged above $190 per cwt for a couple of weeks, a level last observed in early 2016. The value of calves depends on the expectations for their ultimate value as finished animals. Thus, the price of calves expected in 2022 depends on where the trade thinks the price of fed cattle will be in mid-2023. The LMIC projections have the price of fed cattle higher in 2022 than in 2021 with a further increase expected in 2023. That bodes well for calf price expectations and the LMIC projections are for higher calf prices in 2022, but prices can still fluctuate.
There are several ways to transfer the risk of changing prices partially or fully to other market participants prior to the typical time of year when calves are sold (often November in the northern plains). A common way to transfer some risk is to use forward contracts – selling calves for delivery at a later time. Those are uncommon until late spring and early summer. Until then, the futures and options markets are more likely choices. Livestock Risk Protection (LRP), price insurance, is another choice.
There is no futures contract on calves, so the feeder cattle contracts are used with adjustments for basis or the price differential expected on calves versus heavier feeder cattle. The basis on calves followed a seasonal pattern in 2021, with the cash price for calves in South Dakota trading at a premium to the nearby feeder cattle futures price. The basis was at its widest level of $36.83 per cwt in March and at its narrowest level of $18.04 per cwt in November. Basis tends to be strong in South Dakota, reflecting its strategic location between cow-calf production and corn production regions. Basis is also tricky – it can follow averages like those for fed and feeder cattle. However, basis for calves also reflects the values of feedstuff like corn and hay that are needed to grow the calves to feeder weights. The current LMIC price projections for corn and hay are lower in 2022/23 than in 2021/22. That would imply a wider basis could be expected in November of 2022 on calves than was observed in November of 2021.