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Use Price Slides to Develop a Competitive Market Price

Posted Mar. 11, 2007

A "price slide" is a tool used by cattle industry buyers and sellers to establish a fair market price before actual sale weights are known. The use of a price slide reduces risk in forward contracting and creates the framework for a competitive market price. There are several ways to establish a working price slide, but the idea is relatively simple to understand. In almost all cases, heavier calves bring less per pound than lighter calves. It is in this situation that the price slide becomes necessary. When weights of cattle are estimated in a contract between a buyer and a seller prior to delivery, a price slide can work to the advantage of both parties. The slide adjusts the prices according to the difference between actual weights and estimated weights, providing an accurate market price at the time the final weight is known.

Price slides can be set up in many different ways, and it is up to the buyer and seller to determine how the contract is written. One method is to write the contract with an acceptable weight range before the slide takes effect. Another way is to specify that the price slide takes effect when the final weight is off by some specific weight (e.g., one pound) from the estimated weight. Alternatively, a contract could be written to trigger the price slide only on the upside or downside, where the slide price could be set differently for the up and the down. However, most contracts are written where the price slide only takes effect when the cattle's weights are heavier than estimated. My recommendation is to make a substantial effort to estimate the cattle's future weights as closely as possible and adopt a contract that always allows the price slide to take effect.

Information in Figure 1 is useful in determining the dollar amounts to use in the price slide. One study recently reported that a $6 per hundredweight slide for cattle around the 400- to 500-pound weight range, and a $4 per cwt slide around the 700- to 800-pound weight range was most appropriate. Those figures were based on sales at feeder cattle auction barns in Iowa.

Over the past several months, we have seen the price differential paid per pound for different weight classes narrow. Higher corn prices are believed to be responsible for the narrowing of the price differentials, especially considering corn's important role in feed rations. When the price per pound between weight classes narrows (widens), a smaller (larger) price slide is recommended. This implies that a price slide used in a previous year will likely need adjusting before it is used in the following year to reflect the ever -changing market conditions.

Here's the easy part. To set up a price slide, the following six pieces of information are required:

  1. Initial Contract Price (IP)
  2. Slide Price (SP)
  3. Estimated Future Weight (EFW)
  4. Final Weight (FW)
  5. Final Price (FP)
  6. Date of Transaction

The equation used to determine the final price for a contract is: FP = EFW - FW * SP + IP

The following example illustrates the simplicity of the calculation. Joe is a rancher and has 100 steers he wants to sell in one month. He believes the average weight of the steers will be 700 pounds at that time. Jack heard about Joe's steers and would like to purchase them. The two have decided the transaction should take place on March 7. The negotiated initial price was $94/cwt. They decided on a $4/cwt price slide to take effect on either the up or downside. The average final weight for the steers on March 7 was 675 pounds, so the final price (FP) is equal to [(7.00 - 6.75) * $4] + $94 = $95 per cwt. The example reconfirms that the use of a price slide accounts for the cattle weights being less than predicted and provides a higher price per cwt for the lighter-than-expected cattle, and, therefore, creates the opportunity for the desired competitive market price.

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