After running a South Texas ranch for 40 years, Bill Crain might know a thing or two about producing quality calves and marketing them at the right time. A $3-$10/cwt. premium over the average market is prime proof.
Crain is foreman of the Rutherford Ranch, Pearsall, TX, a Braford and Brahman-cross family operation that includes an Angus seedstock component in Buda. Along with the Braford and Brangus-cross program, Crain oversees a herd of F1 Tiger Stripe cows bred to Charolais and Angus bulls. And the calf crop from all segments usually stands tall at the Superior Livestock Auction video sale when they're marketed at 650-700 lbs.
“Marketing calves can be tough in today's environment,” Crain says. “So you have to make sure you have a quality animal to sell.”
At Superior's mid-November sale last year, an individual lot of 70 heifers weighing 680 lbs. brought $115/cwt. At its late November sale, a mixed lot of 42 steers weighing 660 lbs. and 32 heifers weighing 640 lbs. averaged $116.
“I don't hedge cattle,” Crain says. “When the calves are about ready, I contact my video-auction rep and he helps me decide which sale to move them in. That's been a good strategy.”
Dan Kinsel, Cotulla, TX, who's been with Superior since satellite cattle sales' infancy, says Crain's Rutherford cattle will typically be shining stars.
“The cowherd is the key down here in South Texas, where it's hot and dry,” Kinsel says. “They use good bulls and the calves are uniform. They have a certain amount of recognition. They have many return buyers bidding for them.”
The $115-$116 prices compared very favorably to late-November Texas markets in the $102-$108 average for 600- to 650-lb. steers, based on the USDA National Feeder and Stocker Cattle Survey, and $99-$102 for 700-750 lb. steers. Regionally, Oklahoma markets averaged $111-$115 for the 600- to 650-lb. steers and about $111 for 700- to 750-lb. steers. Rutherford Ranch heifer sale prices were even stronger against national markets.
Don't be greedy
Those strong price performances are among the reasons why Crain doesn't hedge or use futures options. “We've always been able to receive a pretty good price,” he says.
But Shane Ellis, Iowa State University livestock marketing specialist, says that with the volatility seen in the corn market, cow-calf producers should think hard about locking in any profit that's available.
“If your breakeven price for calves is $105/cwt., and you see a price where you can make a little profit, you should take a strong look at it,” Ellis says. “Even if you're making just a little money, you'll stay in business. This isn't a time to be greedy.”
He suggests producers set some benchmarks — price levels that will cover feed, all variable costs and then total costs. “If the whole objective is to maximize profitability, then minimize costs and look for a way to protect at least a sale price you can live with,” he says. “It may not be what you want, but it's what you may have to settle for early on.”
Feeder cattle futures, options or forward contracting with stocker or feedyard operations could provide the tools needed to secure that price cushion, Ellis says.
Projections by Cattle-Fax and others forecast a strengthening of fed-cattle markets the latter part of the year. In early spring, live-cattle futures were in the $94 range for the August contract, $5 higher for October, $8 higher for December and $10 higher for February 2009. Feeder-cattle futures were all in the $108 range for 2008 contracts and $106 for January 2009.
The feeder-cattle contracts are for 650-849-weight cattle. They don't track ideally with the 500-lb. calf, but can still be a marketing tool, given that feedyards are looking for heavier cattle.
A hedging strategy for calves ready for marketing this fall could involve selling October feeder cattle futures for $106-$108, or higher if the market is rallying this summer. That could be a pretty solid floor price, again, with pressure from corn prices.
One options strategy could involve buying out-of-the money October puts at a $102 level to protect against a wreck. The cost would be $2-$3/cwt., providing a floor of $99-$100, including the cost of price protection. An at-the-money put would likely cost $4-$6/cwt.
Corn prices will remain the key factor. Continued prices in the $5-$5.25/bu. range means feedyards will continue to seek heavier feeder cattle.
“With fed-cattle prices over $100 for late in the year, someone buying calves will be able to lock in a pretty good price,” Ellis says. “But feeders still won't be able to pay as much for calves as in the past several years.”
Ellis likes the opportunities that satellite video sales or other electronic sales offer. “Buyers get the cattle they're looking for,” he says. “Although buyers only see the cattle on video, they get additional information on the cattle being offered. Cattle don't have to be handled at any midpoints and can be forward priced. That's a major advantage for both buyers and sellers.”
Crain still sells some calves through local sale barns. “We sometimes have 60-70 calves that don't quite work,” he says. “We pull them out, run them to about 800 lbs. and sell them as yearlings at the Pleasanton (TX) sale.”
Protein blocks provide a supplement for cows and bulls. The calving rate is 90-95% on about 1,400 mother cows. Buyers of Rutherford Ranch calves know they have been part of an extensive preconditioning program, Kinsel says. Most of the year, the cattle graze Klein grass originally sown by Crain in the 1970s. “I get a finish on calves I can't get with anything else,” he says, adding that the winter-grazing program includes oat grass.
“We also have a preconditioning program that involves a seven-way blackleg vaccination treatment to prevent BVD,” he says. When calves are castrated or dehorned, the vaccine includes a treatment for tetanus. Calves are also dewormed and all animals have ear tags for fly and tick control.
The result is a quality calf that's much less prone to getting sick at the stocker operation or feedyard, and one that typically performs well. And Crain gets paid for it.
A solid preconditioning program can add more than $6/cwt. to the price of calves, says Harun Bulut, an Iowa State agricultural economist who was part of 2005-2006 preconditioning-value research involving more than 19,000 cattle sold in Iowa sale barns.
“The purpose of preconditioning is to boost the immune system of cattle in feedlots,” Bulut says. “This makes the cattle less susceptible to disease, which decreases treatment costs and mortality rates and increases feedlot efficiency and prospects for achieving a higher-quality grade. Therefore, the preconditioning investment of producers is valued by buyers, including feedlots and stocker operators.”
After controlling a variety of feeder-cattle traits, and market and sale conditions, the price premiums for preconditioning claims (vaccinations and minimum 30 days weaning) with and without third-party certification are estimated as $6.12/cwt. and $3.35/cwt., respectively, Bulut says. (For more on the value of third-party certification, see “Proving It” in the August 2007 issue: http://beefmagazine.com/beef-quality/beef_proving/).
As ranch foreman, Crain says he's “everything from a ditch digger on up.” Results of the calving and marketing program indicate that he's a pretty good hand at digging up quality and profits, too.
Larry Stalcup is an Amarillo, TX-based freelancer.