About the Price Forecasting Tool

This page contains the following helpful information for users of the BeefBasis Price Forecasting tool.

  • A brief description of key features,
  • Information about inputs and examples for choosing and entering values,
  • An explanation of outputs

Purpose of the Price Forecasting Tool

This tool generates a customized estimate of feeder cattle basis and cash selling price at an expected future sale date. Forecasts are based on:

  1. user-provided information about intended sale lot characteristics (such as sex, weight, frame, class, etc.), and
  2. current prices for deferred futures contracts.

This tool is designed to provide relevant market price information, forecasts, and analysis that will be useful to cattle producers when considering alternative marketing or price risk management strategies. For example, these may include estimating expected sale or purchase prices at the conclusion of a futures or options hedge, evaluating a current cash market quote, or evaluating forecasted cash prices.

Input Descriptions

The BeefBasis Price Forecasting tool uses information supplied by the user to generate result output that is customized to a specific location, marketing date, and type of cattle. Please read the following input descriptions to better understand how to use the tool to produce results that are most relevant to your situation.

Sale Lot Characteristics

The forecasting tool incorporates information about several characteristics of the cattle to be sold as explained below.

Weight

Enter the expected average weight per head of the cattle in this sale lot at the time they are expected to be sold. For example, if you expect your calves to weigh 600 pounds at the expected sale date, enter 600 in this field.

Head

Enter the size of the sale lot, meaning the number of head of cattle that you intend to market as one group. Research has confirmed that sale lot size will tend to influence selling price per pound.

Location

Select an AMS reporting location that best represents your local market. For example, you may select the local auction where you plan to sell your cattle if it is included in the tool. If you are not planning to market your cattle through one of these locations, pick the location with which you are most familiar or that best represents your market outlet based on location or type of cattle sold.

Expected Sale Date

Enter the date when you expect to sell the cattle. This will be the date for which the basis and selling price estimates are made. Select the date by scrolling through months using the arrow buttons on the calendar tool. Then click the desired day on the calendar month.

Frame

Enter the expected USDA frame category that is most appropriate for the cattle you intend to market. Most producers, and especially those who don't know the frame type of cattle they expect to market, should use the most commonly marketed frame of cattle sold for their weight range at their selected location. In many cases this will be the combined "Medium Large" frame type. For more information on grading, please refer to Feeder Cattle Grades and Standards documentation on the USDA-AMS website.

Class

Enter the expected USDA class designation that is appropriate for the cattle you intend to market. Most producers, and especially those who don't know the class of cattle they expect to market, should use the most commonly marketed class of cattle sold for their weight range at their selected location. In many cases this will be "Class 1." For more information on grading, please refer to Feeder Cattle Grades and Standards documentation on the USDA-AMS website.

Sex

Enter the sex of the cattle that you are expecting to sell. Depending on the state, you must select either "Steers" or "Heifers." "Bulls" may be selected in some states where this marketing practice is more common.

Price Inputs

The forecasting tools use current prices for selected futures contracts as explained below.

Feeder Cattle Futures Price

Enter the current futures price ($/cwt) for the Feeder Cattle contract that will be nearby at the expected sale date. For example, if you intend to market 800 lb. steer calves on December 5, you would input the current price for the January feeder cattle contract at the time you are making the forecast. By default, the Price Forecasting tool determines the Feeder Cattle contract that will be nearby on the date entered in "Sell Date" and preloads the current price of that contract into the Feeder Cattle Futures Price field. However, you may override this default price and enter a different expected price if you choose.

Corn Futures Price

Enter the current futures price ($/bu) for the Corn Futures contract that will be nearby at the expected sale date. For example, if you intend to market 800 lb. steer calves on December 5, you would want to use the current price for the December corn contract at the time you are making the forecast (e.g., $4.00). By default, the Price Forecasting tool determines the Corn Futures contract that will be nearby on the date entered in "Sell Date" and preloads the current price for that contract into the Corn Futures Price field. However, you may override this default price and enter a different expected price if you choose.

Note: "Nearby contract" refers to the futures contract that will be next to expire on a particular date. For example, if the sell date is in June, the August feeder cattle contract will be the next to expire. Therefore, the August feeder cattle contract would be considered the "nearby contract."

Model Outputs: Forecasts

The BeefBasis Price Forecasting tool uses the feeder cattle futures price and other inputs to predict expected selling price and basis to the feeder cattle contract.

  • Expected cash price ($/cwt) is the model forecast for feeder cattle having the selected sale lot characteristics (sex, frame, muscling, weight, and number of head in the sale lot), marketing location, and sell date given current futures price expectations. This price forecast is customized to the user inputs provided and is designed to help cattle producers relate market information to their individual circumstances.
  • Model-estimated feeder cattle basis ($/cwt) is the expected difference between the local cash price for this customized sale lot (group) of cattle and the price of the feeder cattle futures contract that is nearby at the expected sale date. Specifically, basis is defined as cash price minus futures price.
  • Confidence interval for expected cash price and basis is a statistical estimate of predictive accuracy for the forecasts. Based on historical data sampling, the actual price or basis is expected to fall within the confidence interval 68% of the time.

Model Outputs: Hedging Tools

One method of offsetting the price risk associated with having a long position in the cash market (which is to say, owning cattle that will be sold in the future) is to take an offsetting short position in a futures market (for example, short selling a feeder cattle futures contract). This practice is referred to as hedging. A hedge ratio is the proportion of the position taken in futures to the size of the exposure in a cash market in order to minimize price risk. The BeefBasis Price Forecasting tool produces the following outputs that can be useful when determining your hedging strategy.

  • Optimal hedge ratio is the proportion of the size of the position taken in feeder cattle futures to the size of the exposure in a cash market in order to minimize price risk. For example, a hedge ratio of 1.25 for 600 pound steers would imply that, for each 100 lbs of cash feeder cattle, one would need to take a short position in the feeder cattle futures market of 125 pounds in order to minimize realized price risk across many such transactions (realized price means cash price plus trading gains in the associated futures market).
  • Number of calves hedged per contract represents the number of calves of the weight specified that will be "optimally" hedged by short selling one 50,000 pound feeder cattle contract. The following example calculation is based on the above example of 600 pound steers and an optimal hedge ratio of 1.25. This ratio suggests that taking a short position with one feeder cattle futures contract will "optimally hedge" 40,000 pounds (50,000 / 1.25) of steers that weigh 600 pounds. That is equal to approximately 67 steers (40,000 / 600). In other words, a short position of one feeder cattle contract would be expected to act as an effective hedge to minimize the realized price risk for about 67 steers weighing 600 pounds in that market.

Calculating the Hedge Ratio

The hedge ratio calculated on the BeefBasis price forecasting page is estimated using a method similar to the one described in the following K-State extension publication on cross hedging: Cross Hedging Agricultural Commodities. Our BeefBasis models incorporate additional factors affecting cattle price differentials, the most important of which is the weight of the animal sold in the cash market. However, the general idea behind the hedge ratio is the same. A particularly relevant excerpt from that document (p.2) is included below:

Determining the Hedge Ratio

Determining the size of the futures position to take requires calculating a hedge ratio. The hedge ratio is found by estimating the relationship between the futures price and the cash price of the commodity being hedged according to the following equation:

Expected Cash Price = β0 + β1 (Futures Price)

where β0 is the intercept or expected basis and β1 is the hedge ratio. This equation identifies the historical relationship between the futures price and cash price and allows the hedger to determine the cash price that could be expected by cross hedging.

The hedge ratio (β1) is the futures contract quantity position divided by the cash market quantity being hedged. It is an estimate of the relative price change between the futures market and the cash market. A hedge ratio of 1.0 implies a one-for-one hedge where for every $1 per unit change in the futures price, the cash price of the commodity being hedged also changes by $1 per unit in the same direction. A hedge ratio of 1.5 implies that for each $1 per unit change in the futures price, the cash price of the commodity being hedged changes by $1.50 per unit. A hedge ratio of 0.8 implies that for each $1 per unit change in the futures price, the cash price changes by 80 cents per unit.

Source: Graff, J., Ted Schroeder, Rodney Jones, and Kevin Dhuyvetter. "Cross Hedging Agricultural Commodities," Kansas State University Agricultural Experiment Station and Cooperative Extension Service. September 1997. Available at https://www.coffey.k-state.edu/farm-management/Cross%20Hedging%20Agricultural%20Commoditie.pdf