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.