“It scares me anytime I put together a stocker budget and see much of a profit. Because if I account for all the opportunity costs, there usually isn’t much profit,” says Derrell Peel, Oklahoma State University Extension livestock marketing specialist.
But when Peel works through a winter stocker budget, that’s exactly what he sees – a potential for significant profit.
Consider stocker value of gain, defined as the gross sale price of a head of cattle minus the gross purchase price, divided by the pounds of gain. By that measure, and because of the current and atypically narrow price rollback between weight classes, stocker value of gain in September was running $80-$90/cwt. for cattle weighing from about 400 lbs. to 900 lbs. (basis Large and Medium #1 steers, Oklahoma City).
Peel explains part of the lofty level has to do with generally high cattle prices across the board, buoyed by tight supplies. It also has to do with what he terms permanently higher corn prices.
“Stocker value of gain is the mirror image of feedlot cost of gain,” Peel explains.
For the three decades before the commodity bubble two years ago, corn prices hovered tightly in the range of $2-$2.50/bu. Subsequent cost of gain at the feedlot of roughly $30-$50/cwt. meant stocker value of gain was capped at the same level.
Now and into the future, because of global shift to higher grain prices, forage-based gains have relatively more value. In fact, the stocker sector – already an essential cog in the industry wheel – becomes relatively more important.
Incidentally, winter stocker programs this year appear to have extra potential, according to Peel. In September, he was estimating the marginal cost of wheat pasture production at 30-40¢/lb. of gain, depending on stocking rate and rate of gain. Logic suggests renting wheat pasture in the High Plains this fall might run 40-50¢.
Really, for the first time, cattle producers in general, and stocker producers specifically, have the opportunity to exploit the ability of cattle to transform forage into edible, high-quality protein. Higher corn prices will negatively impact the pork and poultry industries more than beef over the long haul. At the same time, Peel points out that the increasing value of forage-based gains adds to beef’s cost competitiveness with those competing proteins.
There are no slam-dunks, but along with the current profit potential, higher value of stocker gain offers two key risk management tools.
First, Peel explains the high value of stocker gain across such a wide range of weights allows production flexibility, which can mitigate short-term price volatility. In other words, profit potential exists about equally for stockering lighter calves or heavier ones, for turning sets of calves quicker or holding them longer.
Second, time is on the stocker operator’s side. By and large, dwindling cattle supplies relative to at least constant consumer beef demand suggest that cattle purchased today will sell into a higher market tomorrow.
Peel cautions producers to work through budgets carefully, and to plan ahead.
“There are two ways to mess up a positive margin,” he says. “Buying calves without locking up the sales price and locking in the sales price before buying cattle in the spot market or through a forward contract.”
By the same token, a psychological risk in the current market environment, with prices and equity requirements so high, is hesitating too long.
Peel relates the conversation a stocker pal of his had with the banker, who wanted to know what the plan was if it didn’t rain.
“I may go broke because it doesn’t rain,” said Peel’s friend. “But I’ll never go broke because I was scared to buy calves.”
In other words, Peel says, “You can’t be afraid to play the game and expect to win.”