Recognizing the increased value of forage and production, and the marketing latitude that comes with it, is the primary profit driver in the stocker business today, says Derrell Peel, Oklahoma State University Extension livestock marketing specialist.
“For 30 years, cattle feeders could put pounds on calves cheaper themselves than they could buy them because of the cost of gain (COG). For stocker operators, I think that’s what has really changed,” Peel says.
Consider that feedlot COG based on closeouts for Kansas feedlot from 1992 to 2006 averaged about $56/cwt. During that same period, Peel explains the value of gain (VOG) averaged $56-$58/cwt. It was consistent no matter the particular kind of stocker program or season.
In other words, Peel explains VOG reflects COG and should.
“The market encourages the industry to be as efficient as possible. It comes down to who can do something the cheapest,” Peel says. “Feedlot COG really set the bar on how high stocker VOG could be. From a feedlot perspective, it’s a question of whether you want to put more pounds on the cattle yourself or buy them.”
Around 2006, skyrocketing corn prices pushed feedlot COG beyond $1/lb., pulling VOG along.
“VOG has jumped sharply because it’s driven by feedlot COG, which is the alternative for adding weight to cattle,” Peel emphasizes.
When cattle feeders could no longer add pounds cheaper than they could buy them, Peel explains stockers carved out more opportunity to buy calves at heavier weights, to own the cattle longer and to market feeder cattle across a broader range of weights.
“Now that feedlot COG is not the cheapest way to add pounds, stockers have another 200 lbs. of weight gain to work with and a broader range of placement weights. We have more opportunity to hold cattle longer and to put more weight on them,” Peel says. “Where you could work before was economically narrow. You’d buy the lightest calf you could and then sell them at around 650 lbs. In general, there is a lot more opportunity now, and in a lot of ways it’s easier. The market gives you more room to work than it ever did.”
Peel believes the primary challenge for stocker producers these days is evaluating how they might do things differently in order to exploit the added flexibility provided by increased forage value.
“The secret to the stocker business has always been to have a robust playbook and then look to the market to determine which play to call,” Peel says. “It used to be only one play would work in a given year or season but now a handful can.”
Spun differently, a stand-by program of buying cattle at a certain weight for a rigidly specific program likely will work less frequently today.
Changing Value Drivers
As forage value and VOG increase, the relative value components of stocker production change.
Generally speaking, Peel says stocker operations have made money three primary ways: upgrading mismanaged cattle and assembling and sorting cattle into uniform groups; adding pounds (VOG); and exploiting seasonal price trends.
“Higher VOG puts more relative emphasis on the ability of cattle to gain weight,” Peel says. “For some, there could be a proportional shift in their motivation toward cattle with more ability to gain, making more of their money from the VOG (vs. making it from upgrading).”
That means while the buy price remains crucial to the stocker profit equation, producers have more incentive to buy cattle with more ability to gain pounds.
“By and large, the market hasn’t rewarded good cattle as much as it has paid to upgrade poor-quality cattle,” Peel says. “Historically, a lot of value came from upgrading cattle. There is still a place for that, and there is still value in assembling uniform groups of cattle, but all else being equal, high VOG puts more premium on higher-quality cattle. Cattle that gain better have more value.”
“Stocker operators who can identify those cattle in sale barn or out in the country are the ones who have an advantage,” says Stan Bevers, Texas AgriLife Extension agricultural economist.
Doing More With The Basics
Of course, it’s still hard to underestimate the value of such stocker basics as getting cattle bought right.
“My first profit is in the buy,” Bevers says. “If I get them bought right, the rest starts to fall into place.” If not, climbing from the economic hole toward breakeven seems, and often is, insurmountable.
Obviously, there’s usually only so much wiggle room on buying opportunities relative to when calves are needed.
“Is there value in one set of calves vs. another? Can I buy calves a little cheaper or of a little lesser quality and make them work in my operation compared to someone else?” Bevers asks. “Recognize there are people out there who buy cattle for a living and can help you identify those differences.”
Still, Bevers says, “Things have grown so dynamic, it almost comes down to whether or not there is moisture, whether you have somewhere to go with the calves, and whether or not calves are available for a decent price.”
Though more can be done to alter the sell price – the other bookend of gross margin – opportunities for control are also limited.
“Do I want to take a position? Does my banker tell me I need to? Do I short the board, buy puts or Livestock Risk Protection Insurance?” Bevers asks. “If you don’t do anything, you’re saying you expect the price (indicated by futures) will stay the same or go higher.”
That leaves the gross margin.
Here in the Rolling Plains surrounding Vernon, TX, the sprawling wheat pasture country where Bevers is headquartered, he says gross margins remain remarkably static at around $250-$300/head. That was true when calves were worth $500/head coming in, and is still true now that they’re worth $800 and more.
There’s not much that can be done about the sunk costs in the margin – things like cattle cost and interest. Likewise, around here, Bevers says you can count on pasture cost eating up about half of the margin. But he reckons that leaves 10-25% of the margin that producers can control.
“Once you get past the buy and sell, everything else is about gain, the things that comprise average daily gain and everything you do to promote that; adequate forage, implants and ionophores,” Bevers says. “What’s my gain and what can I do to enhance it? If cost enhances gain, that’s probably a dollar well spent.”
The same goes for time and resources spent to straighten out calves and keep them healthy.
“The stocker producer is selling pounds. The more pounds he can generate from his forage base, the more he increases profitability,” says Doug Hufstedler, Elanco Animal Health beef technical consultant. “We know healthy animals gain more. So, what proven technologies can I utilize to optimize gain, be it an implant, Rumensin®, or a well-designed and executed animal health program?”
“Death loss costs more than it did before. There’s just a higher level of risk in general,” Peel says. “Management is clearly worth more. VOG puts more emphasis on the productivity of animals. Because animals are more valuable, there are more dollars at risk. So there is a lot of value in minimizing death loss and anything that reduces productivity.”
Hufstedler believes tracking the performance of individual cattle is an underutilized opportunity that can help producers measure the relative worth of various management practices and technologies.
With that in mind, Hufstedler is an advocate of collecting and utilizing, at a minimum, group, and ideally, individual animal data rather than guessing. He explains the latter often leads to uninformed, profit-killing, kneejerk reactions. He emphasizes descriptive information and performance data can be a powerful decision-making tool.
Hufstedler adds that tracking individual cattle relative to such variables as order buyer, origin, sale barn, trucking company, transit time, etc., helps gauge potential risk level, which ensures proper health protocols are in place upon arrival. Subsequently, he explains performance pros and cons can be evaluated and leveraged using the same information.
“With the right information, you can identify warning signs in front of a wreck that help you stay ahead of the cattle rather than behind them,” Hufstedler says. “I think that’s something we’ve been missing out on and to me, that’s one of the biggest opportunities stocker producers can capitalize on.”
“The stocker business has always been defined by higher risk and higher return. Every dollar you spend is up for grabs. Add that to the dollars on the table and there is more emphasis on risk management,” Peel says.
Incidentally, Hufstedler also sees growing opportunity for some stocker producers to spread capital risk by growing calves in partnership with or for larger stocker and cattle feeding entities.
“Generally, they find you because you have developed a reputation for delivering well straightened out calves,” Hufstedler says.
High VOG Should Continue
“Fewer calves and high-priced corn says anything you can do to add weight with forage is a good thing. I don’t see that changing back fundamentally. The beef industry came from a forage basis and I think the market is telling us we need to return to more of it,” Peel says. “The only way we can change the amount of grain we use as an industry is by what we do to the cattle before they get to the feedlot. That’s why I think the stocker industry has to grow. That’s why I’m optimistic about the stocker business and the forage business.”
As always, though, Bevers explains, “It isn’t doing one big thing better that makes one stocker producer more profitable than another; it’s the accumulation of doing lots of little things better.”