In sizing up calf marketing this fall, Dillon Feuz, Utah State University livestock marketing specialist, says there will be some profit opportunities, but they may not come from doing the same things you've always done.
“The past two years, anyone forward contracting or selling on video sales for fall delivery early received a better price than waiting for fall sales,” Feuz says. That's because corn prices rallied the past two falls, depressing calf prices.
Considering weather-induced, later-than-normal corn planting and emergence, projected trend-line yields were already in jeopardy by the first week of June 2008.
“I suspect corn prices will continue to be very volatile. I think we'll see fall calf prices lower than last year,” says Tim Petry, North Dakota State University livestock economist and marketing specialist. That was before Midwest flooding blasted corn futures past $7 for all traded months through September 2009.
On the other hand, bullishness in the futures market has been downright awe-inspiring. The first week of June, April 2009 live-cattle contracts were trading for $110 and June at $106.
“If those contracts drop even $5, that will push calf prices down at least $7-$10,” Feuz says. “I have a hard time believing the market will get a lot better between now and fall.”
Consequently, Nevil Speer, Western Kentucky University beef industry analyst, says, “There's so much uncertainty out there about what might or could influence the market that I believe forward contracting should be investigated closely this year.”
In North Dakota, the current epicenter of extreme drought where cow-calf pairs were already moving to auction in May, Petry explains, “No one here wants to be locked into a November delivery date when the drought means they may have to move them before then.”
For producers who can consider forward contracting, Feuz points out, “The few reports I've seen indicate there's not the over-exuberance on price there has been the past two years. Prices for fall delivery are more in line with the futures when adjusted for basis.”
Pounds vs. cost
Even with high corn prices and more moderate early-season, forward-contract offers, it's not like cattle feeders have pulled in their buying horns as much as many expected; over-capacity in that sector continues to buoy calf and feeder prices.
There has been added demand for heavier weight cattle entering the feedlot, though. As such, adding more pounds to calves than typical could pay some producers this year.
“The main thing is determining at what price you can add pounds,” Feuz emphasizes. “Figure a 550-lb. calf, onto which you add 200 lbs. in order to make a feeder for the end of January or first of February. Assuming a cost of gain (COG) of $92/cwt. (first part of June), there's about a $35/head profit. If you can achieve a COG significantly less than $90/cwt., using things like corn stalks and wheat pasture, there's money to be made.”
Likewise, Darrell Mark, University of Nebraska-Lincoln livestock marketing specialist, says, “By cowboy arithmetic (using fall futures prices adjusted to average Nebraska basis and price spreads), you could be looking at $131/cwt. for a five-weight steer this fall, or $723/head. Background him for 120 days at an average daily gain (ADG) of 1.67 lbs. (200 lbs.), and you'd have a 750-lb. steer in mid-February. With average Nebraska basis early next year, you'd expect $1.18/cwt., or $900/head. That leaves $167 to add the weight, about $83/cwt. for 200 lbs. If you can do it for less cost than that, it could make some sense.”
Feuz says another factor that might help in this scenario, at least regionally, is the Conservation Reserve Program ground made available by USDA recently for grazing and hay.
In general terms, though, Speer says, “Despite a narrowing price differential between calves and yearlings due to higher corn prices, the market is still providing a fairly substantial ‘feed truck’ premium. Feedyards need cattle and continue to bid them at or above breakevens. As long as that occurs, it's difficult in most instances for retained-ownership to make sense given the assumed risk associated with extended ownership.”
Keep in mind these comments are pointed at adding significant weight and substantially delaying the marketing of weaned calves vs. weaning, preconditioning and then marketing the calves about 45 days later.
Ironically, though high input costs make preconditioned calves more valuable than previous years when premiums for them have generally averaged $4-$8/cwt., those same costs may make it difficult for premiums to increase enough for producers to take the preconditioning risk.
“Part of it depends on the calf weight coming into fall,” Feuz says. “Last year you couldn't give away a five-weight calf in the fall; seven-weights were bringing the same price. If the same scenario holds this fall, it would probably be advantageous to precondition a calf weighing 500-550 lbs. and start earlier to put more weight on him.
“If it's a four-weight calf or one just barely 500 lbs., there might be more interest in a market looking for lighter-weight calves for wheat pasture or backgrounding programs, so there probably wouldn't be any incentive to precondition them,” Feuz adds.
Either way, Speer stresses, “The decision to precondition calves depends on a number of factors, including a realistic assessment of willingness and ability to manage freshly weaned calves, coupled with availability of facilities, time and labor. Next, preconditioning must enhance profitability and provide a positive return on investment.
“That's going to be especially difficult for producers to accomplish given the run-up in feed prices, unless they're managing a large number of cattle,” he adds. “Sick cattle cost a lot more than they used to, and I'm not sure the market's premiums have or will keep up with that reality in 2008.”
What about retained ownership?
Given the bullishness of the futures market, there's apparently some opportunity to retain ownership through the feedlot this year, but tread carefully.
“Unless the calf market falls considerably, the market has them priced at a level where there isn't a big incentive to retain ownership through the feedlot, although there is more incentive than in the past two years,” Feuz says.
Carry Mark's earlier math one step further: Put 700 lbs. on that same 550-lb. steer that you could sell at weaning, and make him weigh 1,250 lbs. for the mid-May to June 2009 market (3.3 lbs. ADG for 210 days). “With June 2009 futures approaching $1.10, and expected May fed cattle prices of $1.09 (adjusted for basis), that gets a lot of people excited about retained ownership,” Mark says. “That would give you $1,367 for the fed steer compared to $723 this fall, which leaves you $644 to put on that 700 lbs., or about $91-$92/cwt. The difficult thing is to achieve that COG.”
At $5.80 corn, he figures feeding cost in Nebraska at $1.07 (using a conventional corn only diet), which is higher than breakeven. So, he says you'd have to find ways to cheapen up COG, like adding some of the weight with forage and contracting distillers grains (DGs) this summer, or buying DGs this summer and storing them.
But, Mark cautions, “It's harder for smaller operations to originate DGs and achieve the feed conversions and COG of larger operations. So, those larger operations have more incentive to bid cattle up to breakeven levels or even beyond, betting on the come.”
Plus, he says, size, efficiency and availability of ration ingredients are spreading variation in cost of gain. “I know some cattle feeders making money with $6 corn and others losing a lot of money,” he says.
“Even if I could get COG down to $70-$75 in planning, prices can change significantly between now and then. So, it isn't something I'd recommend unless you protect the prices,” Mark says. He'd use forward contracting, Livestock Risk Protection (LRP) or puts and options to mitigate the downside risk.
“That's what I like about LRP - it gives you a floor,” Petry says. “I'd encourage producers to look at it; at least you've got a floor price and don't have to worry about it. You can still sell them into any market, and you aren't locked in to where or when you market them.”
The first week of June you could find LRP contracts for October delivery at $125/cwt. ($4/cwt. premium) and at $118.75 ($2.25 premium).
“By late July and early August, we'll have a better idea of what the market is heading into fall. We'll start to see the trends and have a better feel for the value of a four-weight calf the end of September vs. holding them to market as a five-weight the end of October, then we can make some decisions,” Feuz says. “But just waiting until Nov. 1 like normal and marketing them may not be the best strategy.”
Or it may be. The point is, increased price volatility and value relationships, confounded by runaway input costs, demand more market planning (see “Market, don't sell,” page 7).
“All those small decisions that could add $1/cwt. here and there could be the difference in making a profit or a loss this year,” Feuz says.