When was the last time stocker production was harder than marketing?

Derrell Peel, Oklahoma State University Extension livestock marketing specialist, asks that question in light of little, if any, wheat pasture available for grazing on the dry High Plains and the disastrous drought in the Southeast.

At the same time, feeder cattle futures prices remain high, generating a “value of gain” and profit probably as close to automatic as ever.

But this is, after all, the cattle market. And anything can happen around the corner or around the world to negatively impact prices just when you're ready to make the sale.

However, Peel sees opportunities for stocker operators to secure the good markets on the table - strategies that can protect against a wreck and even lock in a $30+/head profit.

“We often say production is easy and marketing is hard,” Peel says. “It's almost the opposite now. There are a lot of factors that project good feeder-cattle prices well into 2008.”

Those factors include a flat line in cattle numbers caused by the reverse in herd buildup. “In early 2006, we had a large pool of replacement heifers,” Peel notes. “But a lot of those were slaughtered (because of the drought). We've had to start all over again.”

That's keeping prices up there, in the $111-$112/cwt. range on the feeder-futures market.

On-feed figures tell the story

Cattle-on-feed and placement numbers show why feeder-cattle shortages will likely continue to see pressure. Nationally, there were 2.716 million head placed on feed in October, up 12% from the previous year. Every state but California and Idaho had higher placements in feedyards.

That's keeping prices in the $108-$112/cwt. range on the feeder futures market.

January's USDA Cattle On Feed Report indicated that feeder cattle shortages will continue to see pressure. Placements in feedlots during December totaled 1.70 milion, 1% below 2007 and 10% below 2006. Net placements were 1.64 million head.

Placements of cattle and calves weighing less than 600 lbs. were 480,000, compared to 470,000 a year earlier. Placements at 600-699 lbs. were 505,000, compared to 504,000 in 2006. Seven-weight placements totaled 420,000, equal to 2006. And 800-lb. placements were at 296,000, up from 320,000 in 2006.

It's likely that many of those cattle were sent to the feedyard before their owners wanted because of the lack of grazing, Peel says, adding that if dry conditions continue, even more pressure will be placed on replacement heifer buildup.

Since there's been little grazing in key stocker areas, calf prices are closer to feeder prices as far as overall value is concerned. So buying calves and grazing with supplements up to 800-850 lbs. should more than pencil out.

“Overall, you can easily see a 77-78¢ value of gain,” Peel says, “which is nearly the same as the cost of gain feedyards are seeing for finished cattle.”

For example, using Oklahoma City average prices, a 450-lb. steer would cost about $1.33/lb., for a total cost of about $600. If that animal is over-wintered to 850 lbs., it would be worth about $1.07/lb., based on Oklahoma City numbers.

Worth the risk?

A risk-management strategy could be used to protect that price. And spring and summer feeder-cattle futures have been offering such protection and even a profit.

Referring to futures prices in early December, Peel says stocker operators had the opportunity to lock in a profit using the March, April, May, August and even September feeder cattle futures contracts. “I can see these good prices for the foreseeable future,” he says.

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For example, April '08 feeder-cattle futures were trading near $111-$112/cwt. last fall. A producer could sell futures at that level and lock in a $4/cwt. profit, or more than a $30/head profit for an 850-lb. animal, based on its $107/cwt. value.

The same goes for cattle ready for the feedyard in May or into the summer and even fall. In fact, all '08 feeder cattle contracts were trading in the $111-$112 range last fall.

Options a possibility

Options could also work into the strategy, but be prepared to pay high options premiums, particularly for at-the-money puts. “The out-of-the-money puts can be a cheaper way to at least protect against a disaster,” Peel says.

Lenders could appreciate the options protection to cover a loan against a wreck. “Since there's virtually an even basis due to the shortage of cattle, the futures price can be a sound gauge for a cash price,” Peel says. “And a bank's loan portion of a cattle transaction could easily be covered.”

He suggests limiting options trades to more nearby months. “Options are sometimes thinly traded in the more distant months,” he says. “They may be too expensive. I wouldn't go out more than 3-4 months.”

If a stocker operator locks in a futures hedge, then sees a potential rally in the market, the “synthetic put” might be in order.

“With this strategy, you put in the floor price with the hedge, then buy a call option to obtain upside protection,” Peel says. “You can delay this strategy and not buy the call until later to reduce the premium cost.”

Winter of opportunity

With the tighter margins between lighter and heavier calves, producers can buy calves at heavier weights and still expect to see good results, he adds.

“Before, there was little interest in keeping stockers after 650 lbs.,” he says. “Now, feedyards are buying cattle as big as they can get. They don't want to pay the cost of feeding them high-priced corn.”

That's making the stocker business easier. “You can just about own them as long as you want and they will work.

“We're almost in a situation that an old-fashioned program will work,” Peel says. “You can dry-winter calves on a little pasture and supplement, then graze them in the summer.”

That may mean feeding lower quality hay until there's pasture, getting out of your comfort zone and looking beyond the ordinary for the forage-based gains that should be profitable.

He points out hay supplies are generally tight on a regional basis. “Hay quality is marginal in many situations, even when supplies are adequate,” Peel says. This fact and the lack of wheat pasture means that most producers are managing feed supplies pretty conservatively.

“In the face of high supplemental feed costs, it's essential for cattlemen to carefully manage costs and utilize forage resources wisely.”

Of course, cost of putting on the pounds will likely vary from ranch to ranch. Peel suggests stocker operators figure all their costs of production and run a spreadsheet to determine a total cost of production.

“That can help determine how much risk, if any, you want to cover with hedges or even options.”

Peel says there's no indication cow-calf or stocker producers are interested in being very aggressive with production plans until they see how spring and summer forage conditions develop. Until then, keeping an eye on marketing potential may be your best bet.

Larry Stalcup is a freelance writer based in Amarillo, TX.