Decisiveness has always been an asset in a business defined by risk. But it's gaining importance as calf prices continually eclipse old highs, perhaps finally reaching their cyclical top the last 60 days.
High calf prices, along with escalating costs for other stocker staples like fuel and fertilizer, continue to narrow margins significantly. For example, according to Cattle-Fax, the average return to summer stocker programs was better than $100/head the past two years, the highest in history.
This year, those margins are expected to dwindle to $20/head or so. That means making the same gross returns across a stocker operation boils down to running more cattle.
“I think we'll see some of these guys running smaller numbers fade away,” says Jim Link, a long-time Texas stocker operator. He's also director of the Texas Christian University Ranch Management Program.
Link is referring to the fulltime stocker operator, not cow-calf producers who retain ownership through a backgrounding and grazing phase, or the growing number of feedlots expanding their participation in stockering themselves or via gain contracts. Whereas narrow stocker margins represent added opportunity for these groups — and a stable inventory for feeders — at $15-$20, Link estimates it would take at least 1,500 head or so to make a living, and a Spartan one at that.
If land and higher equity requirements allow, some operators may expand. Start pushing the envelope of 2,000 head, and it may mean hiring more help, Link says. That, in turn, means you may have to double numbers to cover overhead.
Stocker role growing
However it plays out for individuals, there's no reason to believe the scope or need for the stocker industry will diminish. In fact, folks like Jason Sawyer, a Texas A&M University stocker specialist, believe the stocker's industry role is expanding. That's a mouthful when you consider Sawyer estimates 80% of all fed cattle already undergo some sort of growing program between the calving pasture and feedlot.
“I see more types of opportunities for stockers today than ever due to structural changes in the total industry and what the stocker can provide both suppliers and customers,” Sawyer says.
As for customers and suppliers, Sawyer points out the need still exists for stockers to smooth out the annual supply of feeder cattle, given that approximately 70% of the cows in the nation calve in the spring. But where stockers traditionally smoothed out the supply curve by collecting, commingling and sorting cattle, tacking on pounds as they warehoused them ahead of feeding, Sawyer says stocker are increasingly helping cattle feeding customers mitigate production risk.
“Price margins in the cattle feeding business may have narrowed because the industry has become more efficient, but I think the average profit margin remains about the same as it has been year-in and year-out, which is about zero on a cash-to-cash basis,” Sawyer says. “For these businesses to manage profitability, they need to feed heavy cattle. Warehousing cattle through the stocker phase is about the most efficient way for them to manage fixed cost.”
Arguably, that's why feedyard participation in the stocker business, directly or via gain contracting, has increased as cattle supplies dwindled. Whether cattle feeders will be as eager to be part of the stocker business when supplies loosen up again remains to be seen.
Either way, Sawyer says the industry is driven harder by the need for consistency today than ever before. And, that's more than just consistency on average. The trend toward providing retailers with brandable products means stocker operators can play a larger role in sorting and managing cattle that fit specific brand requirements.
“If you look back 25 years, the main way stockers smoothed the supply was by adding weight,” Sawyer says. “Today, it's not just weight. Stockers are helping customers mitigate production risk with things like health management.”
He adds technology and the capacity to collect and analyze information is enabling stockers to reduce group variability and smooth out the supply curve with growing precision.
“For maybe the first time in history, we're not just talking gross production. As we learn more about how growing programs impact production attributes, I think we'll see more prescriptive stocker programs, prescriptive production programs based on optimum targeted end points,” Sawyer says. “It's becoming more a matter of information management — how can I change the margin without changing the productivity?”
To illustrate, Sawyer uses two four-weight steers — one a high-percentage Continental, the other a black baldie. They have different growth curves and different compositional endpoints, but do they represent different values?
“If I recognize the difference up front and place them in programs that recognize the difference, maybe they have the same value. I think that kind of mindset is the future of profitable stocker operations,” Sawyer says.
Such opportunities may be limited today and the necessary data and experience still on the ground floor, but that's the possibility he sees.
“Stocker operators have tremendous potential to add value to calves and a variety of ways to do it,” Sawyer says.
Even with demand strong for the services and products stockers provide, Link emphasizes the current and future value of being flexible in both attitude and action.
“When you see a window of opportunity, you have to dive on it,” he says.
For instance, in his own operation, Link usually starts buying calves in September for wheat pasture, then summer grass. By the first of this year, though, a feeder offered him enough that he broke with his plan.
“It left a hole in my summer grazing program, but when you can make as much today as you hope to six months from now, you have to take advantage of it. The nice thing about being in the stocker business is they keep making more cattle,” Link says.
Industry trends also have Link playing a different hand at the cycle top of calf prices this time around.
“Used to be, in times like these, I went to running plainer cattle, looking at purchase price,” Link says.
The notion is dog-eared among veteran stockers — buy the cheaper cattle, straighten them out, and they'll wind up selling close to the pricier top-enders. But Link believes that's changing as more fed cattle sell away from the live cash market, spreading the price gap across all classes of cattle. This time around, Link is still buying the upper end from suppliers with whom he has a history.
“I'll accept less margin with them in the stocker phase, but I'm looking at feeding them out, so I'll have another enterprise to spread the cost over,” Link explains.
Of course, using the same input across more enterprises, which adds value through more stages of production, is another way to manage risk. And, that's becoming tougher for stockers even as the need for it becomes more essential.
“In times of tight supply, it's pretty rare you can hedge something acceptable,” Link says. “It's been hard to hedge an acceptable profit six months out. And, when you have hedged, the market wound up beating it. I'd rather use the futures today to leverage the price on a forward contract, rather than actually hedge them because I can get the price and not pay the margin money.”
This kind of creative risk sharing may be the shape of the future.
“Talking supply management from a feedyard perspective, I think we're moving toward more custom grazing,” Sawyer says. That statement might have been considered heresy a few years ago, but the notion is making more sense to more producers.
“We're seeing some equity sharing that facilitates retained-ownership and feedyard supply management,” Sawyer says. “We see continual development of contractual arrangements. It's not just the buy-sell margin anymore. I think we see a wider variety of programs and an increase in programs where stocker cattle aren't just owned by the stocker operator.”
Some of those programs can include the stocker supplier, too. Whether it's packaging a retained ownership triumvirate — cow-calf producer, stocker and feedlot — or helping suppliers comply with increasing market requirements, such as national animal ID or age verification, Sawyer believes stockers are uniquely positioned to build a more expansive bridge between producers and the feedlot.
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