A changing profit picture in the cow-calf sector means that perhaps it's time to consider retained ownership.
Is it time you finally fed out your calves? Though there's no sure thing, the numbers point to a better profit potential in retaining ownership of your calves through the feeder cattle stage or even the feeding cycle. And if your genetics are good, high-quality carcasses may give you an even better profit.
Talk of more retained ownership grew louder last fall, spurred by dropping calf prices. In Oklahoma City, the average price for a 500-lb. steer was $110/cwt.; heifers were $95 in early November.
In Mississippi, 5- to 6-weight steers were $90-$96, with heifers at $78-$85. Prices averaged about $133 for 5-weights in Norfolk, NE, with heifers at about $120. A major video auction had 525-lb. steers at $98-$115 in late October.
That wasn't, and still isn't, enough for many. And with calf sales at barely breakeven, taking them to the next stage or two may be the road to take.
Eyes wide open
“It's a reasonable strategy,” says Jim Mintert, Kansas State University agricultural economist, of retained ownership. “But people need to walk into it with their eyes open. Even though we've seen prices come down already, you still need to have a risk-management program in place.”
Derrell Peel, Oklahoma State University agricultural economist, says producers should evaluate and recognize the potential benefits of retained ownership. “The recent decrease in feed-grain prices has resulted in lower stocker value of gain and simultaneously provided some opportunity for positive feedlot margins,” Peel says.
“All this has occurred in markets with tremendous volatility, which makes both buying and selling trickier. Bottom line is that retained ownership (both forage-based stockers and feedlot) are alternatives that should be evaluated.”
He suggests getting the most out of your grass and/or wheat or other small-grain pasture before sending calves to the feedyard. “I'm not sure it makes much sense to think about putting a 500-lb. calf in the feedlot, even with the recent decrease in grain prices,” he says.
“Depending on when the corn is priced, the feedlot cost of gain is going to be 75¢-85¢/lb. and the calf will need 210 days or more to finish. The breakeven for June would be $100/cwt. at least, and is way above what can be locked in now (when live-cattle futures prices were just over $90).
“It makes more sense to consider a stocker or backgrounding program to get the calf to 700 lbs. by March and evaluate the sell or retain decision at that time. It might even be possible at that time to take the calf to 900 lbs. into May and once again evaluate whether to sell or retain into the feedlot.”
Don Close, Texas Cattle Feeders Association market director, agrees putting calves on wheat pasture or other grass through March should benefit cow-calf producers.
“When calf prices broke in late October, I looked at the potential return for putting calves on wheat,” he says. “There was a $3/cwt. advantage for the wheat calf over a true yearling for March or April on the March feeder board (futures price).
“I also looked at buying yearlings and sending them to the feedyard, or putting calves on wheat pasture and then feeding them out. There was an advantage for the calves all the way through.”
Richard Chumley, a stocker and feeder cattle order buyer in Stratford, TX, says “a lot more producers don't want to take the feeder price and are going ahead and putting them on wheat pasture or feed.”
Chumley isn't getting as many calls for cattle from feedyards. “They're a lot more conservative,” he says. “Even with shorter numbers, they're not as eager to step out and give the phenomenal prices we saw in the spring.”
He notes fed cattle made a little profit last spring, in the $50-$100/head range, prompting higher bids for feeders. “But all of a sudden they're paying $1.15 for feeder cattle and losing money again,” he says.
Chumley says 550-lb. heifers may be more attractive to feed than the same-weight steers. “A 550-lb. steer brought about $105/cwt. (in mid-November). But you could buy the heifer in the mid-$80s. With the board (live-cattle futures) in the mid-$90s, if you could get $90 for her, you could likely make some money,” he says.
Peel says breakevens on wheat-pasture cattle will be all over the board, depending on purchase date. “Early-fall purchases were higher priced, but there was also a better futures market to hedge against at that time,” he says.
Lock in your margins
“Cattle feeding may have some opportunity that we haven't seen for many months,” Peel says, “but that may not last.” He says that with the volatility of input and output markets, “it makes it even more important to evaluate margins” and lock in both inputs and outputs if possible.
“We have producers who have created just as many problems locking in high inputs as those who haven't priced outputs or priced outputs too low,” he says. “It's essential to evaluate the margin and manage the risk on both ends of the deal.”
Mintert says the risk-management program should begin with knowing your own breakeven, not just the average breakeven, then locking a put option to set a floor price.
“After you work through a budget and determine your personal breakeven, you can start thinking about how many dollars you are willing to risk on that set of cattle,” he says.
“You need to determine a put option strike price for feeder cattle if you plan to sell them after they come off wheat, or a live-cattle put strike price if you'll carry them through slaughter.”
The puts protect against a major loss and leave the upside open if prices increase. However, a call options strategy should be considered for locking in feed cost.
“We saw a crash in corn prices (to below $4/bu. futures price),” Mintert says. “But you have to recognize there's upside potential on feed prices if you put cattle in the feedyard.”
He adds that pre-buying corn on the cash market could be a good strategy if there's a good grain storage situation.
Preconditioning is a must
Jay Gray, general manager of Graham Land & Cattle Co., Gonzales, TX, is among those getting more calls from ranchers wanting to put calves on feed. His first question is, “have they been preconditioned?”
If the answer is “no,” he warns them against expecting good performance from calves commingled with others.
Calves undergoing a solid preconditioning, VAC 45-type vaccination and weaning program regularly perform better at the feed bunk and face far fewer health problems in the feedyard.
Also, producers with good genetics and proven performance of cattle in the yard and on the rail should consider marketing cattle based on their carcass data. In addition, calves that can be age and source verified can garner a $35 premium at participating feedyards.
Larry Stalcup is a freelance writer based in Amarillo, TX.