“It’s difficult to quantify the absolute inventory of stocker cattle, but it’s been estimated to vary seasonally from 8% to 20% of total U.S. cattle inventories,” says Jason Sawyer, a Texas A&M University stocker specialist. “Based on 2009 inventory levels this would represent 3.3-8.2 million animals in stocker systems depending upon season. Because these numbers represent seasonal counts, such that new cattle enter the segment per season, a reasonable estimate is that 11.5 million head of cattle flow through these systems per year. Each animal typically gains 300 lbs. of bodyweight in a stocker program and this gain is valued at 75¢/lb. (last year). Based on these estimates, stocker cattle production adds $2.6 billion of direct value to beef cattle per year.”
That’s a heap of risk to manage. On the price side alone, as cattle and feed prices increase, both required equity and risk escalate. Yet, stocker operators continue to shun some of the most common and effective price risk-management tools available to them.
At least that’s true according to a couple of stocker surveys.
When researchers at Oklahoma State University (OSU) polled stocker producers in 2008, they found only 34% utilized futures contracts, 29% used options, and 26% utilized cash/forward contracts.
In the landmark National Beef Stocker Survey conducted by BEEF Magazine and 11 land-grant universities in 2007, and sponsored by Elanco Animal Health, 25.8% said they used futures, 18.4% options, and 16.1% forward contracts. These were the stocker operators whose exclusive involvement in the cattle business is through the stocker segment.
None of that is saying stocker producers should be utilizing any of these tools. But it does suggest there’s plenty of opportunity for producers to manage more of the price risk they face.
At January’s annual Cattlemen’s College, held in conjunction with the winter meeting of the National Cattlemen’s Beef Association in San Antonio, CattleFax analysts presented a session geared toward establishing an effective risk-management strategy. You can find it at www.beefusa.org/.
Also, keep in mind that in April, the CME Group is launching a futures contract for distillers dried grains. Liquidity will be the first barometer of whether it can be a useful tool for stockers. At least you’d think it should track feed value more fundamentally than corn, which continues to follow the energy market as much as anything.