With fed-cattle prices hovering around the century mark, is it worth the risk to retain ownership of your calves and seek better profit opportunities? Probably not, if you take them through the feedyard. But probably so, if you background them and put on 250-300 lbs.
That’s the feeling of livestock marketing specialists amazed at the high prices seen for bigger cattle in the wake of colossal corn prices that threaten to slice margins even thinner in 2011.
“Even with the high prices, the feedlot situation is pretty dicey,” says Derrell Peel, Oklahoma State University Extension livestock marketing specialist. “However, retaining ownership (RO) beyond 500-600 lbs. to the stocker stage could generate solid profits.
“Due to high corn prices, feedlots are looking for the heavier animal. The market is offering a good value of gain for heavier cattle. For a 500-lb. calf, there’s not much incentive to put on just a little extra weight. But if a cow-calf operator can take the 500-lb. steer to 750-900 lbs., those last pounds have a lot of value,” Peel says.
Steve Swigert, Samuel Roberts Noble Foundation agricultural economic consultant, Ardmore, OK, agrees that from the cow-calf to the stocker level “there are some attractive margins with values of gain in the 90¢ to $1/lb. range, especially if you have the forage component.”
Feedyards are definitely paying more for heavier calves. For example, in examining Oklahoma City auction sales in mid-November, a 600-lb. steer brought less per cwt. than a 900-lb. steer ($107 compared with $110). Selling a 600-lb. steer at $107 grossed $607. But by carrying the animal to 750 lbs., he would have brought $112/cwt., generating an $840 gross. Taking him to 900 and selling at $110 would gross $990.
“The beauty of feeder price relations is, even with a short grazing period in winter, cattle can come off wheat the first of March and only have 80-85 days to graze,” Peel says. “If you’re the cow-calf guy, you can put 150 lbs. or more on him and get paid for all the pounds. If you buy a 600- to 625-lb. steer, you can turn him out for 80 days, he makes money from day one.”
Swigert says the availability of wheat pasture or grass, as well as the charge for gain for renting pasture, plays a big part in whether ranchers carry calves beyond a recommended weaning program. “We’re seeing a 50¢ charge (lb./gain),” he says. “Some deals are being made at 48¢. They’re strong because wheat pasture guys know the cost of gain is in the $90s at the feedyard.”
Good rains and early snow on parts of the Southern Plains helped bump up wheat pasture prospects after some farmers had planted wheat in soil short in moisture. Wheat fields that had few or no cattle in much of October were seeing stockers right and left before Thanksgiving.
What’s the cutoff economically for retained ownership through feeding? Like many production and marketing decisions, it varies by operation. Calf quality matters as much as the price. If there’s an alliance involved, that can also sway a producer one way or another.
“It’s hard to put a general rule on the cutoff point,” Peel says. “But if there’s an alliance relationship involved in an overall value-added program, then you’re probably trying to minimize the fact that the feedlot phase isn’t returning much.”
Feeding breakeven numbers change daily, or even hourly, in the volatile markets seen for cattle and corn. Cattle placed on feed in mid-November, for example, were projected at a net loss of about $3/cwt. and $37/head.
In breaking down those numbers, provided by http://agcenter.com in Amarillo, TX, cost of an average 750-lb. steer was used. Cost was about $112/cwt. Cost of gain was projected at 92¢/lb., based primarily on May 2011 corn futures at about $5.40/bu. That equaled about $460 for putting on 500 lbs. Estimated interest at 1% over prime was $22/head.
Those numbers provided a breakeven of $105/cwt. or $1,320/head, which exceeded April live-cattle futures prices of about $102, equal to $1,282/head for the 1,250-lb. live slaughter weight. With those figures, the cattle would lose money.
For the cow-calf or stocker operator, the decision would be whether he or she could sell calves at levels that would provide more price potential than the $112/cwt. they’d receive for the 750-lb. animal. That decision certainly depends on the quality of cattle, Swigert says. A complete RO can yield more than potential short-term profit.
Long-term impacts may be the goal. Seedstock operators normally provide good data when bulls or replacement heifers are purchased, providing an idea of how calves wean and how they’ll perform at the feedyard and packer. To take the information-gathering process a step further, some producers retained ownership of some or all of a calf crop through the feeding stage.
They can obtain data on each animal for performance at the bunk and at the packer. This added information can help them market future calf crops at a higher premium because their customers know the calves will perform.
The Texas Cattle Feeders Association also points out that retained ownership offers producers flexibility in managing annual tax liabilities by being able to transfer taxable income from one year to the next.
No matter what the reason for RO, quality cattle are essential to make it work. Research for Certified Angus Beef LLC (CAB) by Professional Cattle Consultants showed that in measuring feeding profit and loss for low-, middle- and high-performing cattle, there was a $140/head higher profit for the high-performing group over the low performers.
Quality was the difference. The high performers graded 56.2% Choice, compared with 49.8% for the low, and 51.6% for the middle. CAB, or the upper two-thirds Choice, was 12.3% for the highs, compared with 9.6% for the lows and 10.8% for the middles. Average daily gain was 3.31 lbs. for the highs, compared to 2.8 for the lows and 3.13 for the middles.
The high performers went on feed at 719 lbs. and finished at 1,311. The lows went in at 736 lbs. and finished at 1,270. The middles were placed at 729 lbs. and finished at 1,290. Overall, the high performers had a $90+ profit, compared with a $39 loss for the lows and a $27.90 profit for the middles.
Swigert says that in programs the Noble Foundation recommends for RO, bulls should be in the top 20% weaning and yearling growth. Coupled with a good preconditioning program (a must), cow-calf producers can at least yield calves they know will likely perform well on feed and yield a premium at the packer.
Whether you feed out your calves for profit potential or as an experiment to see firsthand how your genetics perform at the feedyard, there are mistakes that must be avoided.
Swigert says the biggest is not incorporating solid preconditioning. Another is not using a proven nutritional program and balancing forage needs with supplements provided to calves.
“Not taking hay samples is a common mistake,” Swigert says. “Another is not managing shrink. Shrinkage above 6% can be very costly. Factors affecting shrink include age, weight, feed, water, weather, facilities, personnel, loading and unloading, transportation, grouping and even paperwork.”
Larry Stalcup is an Amarillo, TX-based freelance writer.
Manage Your Risk
If you retain ownership to the stocker or feedyard stage, protect the price of your cattle as well as the corn they’ll consume. There’s too much volatility in grain prices to risk not having that input covered, says Dan Basse, president of AgResource Co. in Chicago.
If December 2011 corn futures hit $5/bu. or even $5.25, producers and others feeding cattle should look at buying corn that far out. With growing economies in China, India and other countries, the drought in Russia and questions about South American production, corn could easily spike toward $8 or higher, Basse says.
“It’s hard to be in the livestock industry and not be buying feed at the start of the next season (2011),” he says.
The Noble Foundation’s Steve Swigert says many successful producers who retain ownership use forward contracting for feeders or fed cattle to ease volatility problems. They’re also contracting for corn to lock in those inputs. “Options are a possibility to help prevent wrecks or take advantage of price rallies when forward contracts are in place,” he says.
“Make sure you cover your feed,” adds Oklahoma State University’s Derrell Peel. “If you can lock in a good margin, then concentrate on managing the cattle. If they go all the way to the feedlot, you need to manage the feed cost and lock in a margin.”