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The Johnny Cueto Contract

The Reds reportedly have agreed to a four year, $27 million contract with 24-year old RHP Johnny Cueto. This would be the third major extension the club has offered a young player, and the fourth multi-year extension of the offseason.

Cueto was signed as an international free agent in 2004, and progressed quickly for his age, appearing in his first big league season at age 22. He throws four-seam and two-seam fastballs, as well as the occasional cutter, a slider, and a change-up. He'll use the change a lot on one-strike counts, and will try to finish off hitters with his slider or fastball. Here is how he's done:

Year Age Team IP ERA* FIP* xFIP BABIP K/9 BB/9 HR/9 GB% WAR-R/9* WAR-FIP*
2008 22 CIN 174.0 4.64 4.72 4.37 0.309 8.2 3.5 1.5 39% 1.2 1.1
2009 23 CIN 171.3 4.48 4.51 4.57 0.296 6.9 3.2 1.3 42% 1.4 1.3
2010 24 CIN 185.7 3.77 3.85 4.26 0.296 6.7 2.7 0.9 42% 3.1 2.6
ZiPS 25 CIN 190.7 4.13 3.96 --- --- 7.4 2.9 1.1 --- 2.4 2.7
Oliver 25 CIN 178.0 4.34 3.92 --- --- 7.1 2.9 1.0 --- 1.7 2.7

While initially, Cueto looked to be a fly ball/strikeout pitcher, he has seen his strikeout rate drop dramatically after his first season. At the same time, however, his walk rates and home run allowed rates have fallen, while his ground ball rates have increased slightly. He certainly seems to have the kind of stuff needed to have better strikeout numbers than he had last year, and the two projection systems I'm using both see him getting over the 7 k/9 mark this season. If he can do that, and continue to keep his walks and home runs down, he should continue to be a fine pitcher for the Reds moving forward.

I report two WAR stats here. The first is based on park- and fielding-adjusted runs allowed per nine innings. The second is built on estimated runs allowed using a park-adjusted FIP. They are generally in pretty good agreement throughout Cueto's career, and rate his 2010 performance as being worth somewhere in the 2.5 to 3 wins above replacement range.

The two projections vary a fair bit in terms of what they see in Cueto's future. But Oliver's R/9-based WAR, as I calculate it, seems unusually low...and I wonder if they are projecting that the Reds' fielding in 2011 will be quite a bit lower than I think it will be. If we just average across both systems, and both WAR calculations, Cueto projects as a 2.4 WAR player next season.

The Reds are paying $27M/4 yrs, including a buy-out of all of his arbitration years and his first year of free agency. Here's a schedule that fits that contract:

Year Age $/WAR ArbDiscount WAR Payout
2011 25 $5.00 40% 2.3 $4.6
2012 26 $5.40 60% 2 $6.5
2013 27 $5.83 80% 1.7 $7.9
2014 28 $6.30 100% 1.4 $8.8

Total: $28 M

So that's pretty much right dead on, and would make this a market-fair contract for the Reds. They don't gain a lot of value under that scenario, but at least they have cost control--they won't have to pay more for Cueto if he continues to improve and outperforms this projection.

Cueto is only 25 years old, however. 25-year old pitchers will typically get hurt and spend time on the disabled list 29% of the time (avg of 68 days), so that has to pull down his projection. But there's also still a decent chance (say 30%?) that Cueto will improve over his past performance. And there's a good chance (say 40%?) that he stays healthy. Based on those probabilities, we could just assume a flat aging curve--equal chances of getting better or getting much worse (hurt). So if that's the case, then Cueto's future value might look like this:

Year Age $/WAR ArbDiscount WAR Payout
2011 25 $5.00 40% 2.4 $4.8
2012 26 $5.40 60% 2.4 $7.8
2013 27 $5.83 80% 2.4 $11.2
2014 28 $6.30 100% 2.4 $15.1

Total: $39 M

If you think that's a fair assessment of Cueto--and you'd have an argument--then this deal goes from fair market value to a pretty significant cost savings for the Reds. The Reds would be essentially paying an non-aging player like Cueto to be a 1.7 WAR pitcher every year, when he's roughly a half-win better than that.

My guess is that the truth lies somewhere in between. At worst, I think this is probably a market-even deal for the Reds, and you can make a reasonable projection that shows the Reds making out very well on the deal.

The cool part in all of this is that we now have four multi-year extensions on the books this offseason. With the exception of the Arroyo deal, all of them project to be better than market value, even if Votto's is a marginal benefit. This means is that, on average, the Reds should be able to save several million per season because of these deals. And, because they are all operating at the same time, there's a good chance that if one player underperforms his contract, another will likely overperform it--they are essentially insured against each other. While they still have to deal to Volquez's contract, this caps what has been a pretty productive offeseason for the Reds. They might not have brought in any big names, but they've done a lot to put the Reds in the best shape to win year after year in the NL Central.

Update: When it was made official, it was also announced that there is a one year option for a fifth year at $10M. While with expected aging moving into his year-29 season Cueto might not project to be worth that amount (though he might--depends on your aging curve), his projection would certainly change if he performs even a bit above projection over the coming couple of years. The small buyout ($880k) makes this a terrific addition to the deal, and gives the Reds a chance at another year of Cueto at well below what it might cost to replace him on the open market. Kudos to the Reds for making it happen!