In late January, 7- and 8-weight steers were in the $1-plus range. Paul Heath is determined to keep those prices intact for a long time.
The northwest Oklahoma stocker operator and cow-calf man uses marketing strategies that include a molding of various futures and options tools to form price protection on the up and down side. And he depends on his herd genetics to produce a hefty premium either for calves or fed cattle.
“Marketing is really tough,” Heath says. “It's turned into a world situation, not just a regional or national market. We try to take positions that prevent major shifts in the market from hurting us one way or another.”
Walt Prevatt, Auburn University professor and livestock marketing economist, says that's good advice for stocker operators.
“In contrast to the cow-calf producer, stocker operators are margin operators who have defined goals of making a given level of profit,” he says. “They need to be paid for the their labor, management, land and owned assets.”
Heath takes marketing as seriously as he does gain. He operates out of Canton, OK, on a fourth-generation farm and ranch. He runs 2,000 stockers a year, mostly bought from northern states, which graze mainly wheat pasture.
He also has a small grower yard he'll use to straighten out or precondition calves at times. His 320-cow herd features Angus and Red Angus females bred back to Angus bulls. Calves are marketed through the U.S. Premium Beef (USPB) cooperative.
He often carries a portion of his stockers to Kansas feedyards.
“But feeder prices got so high in 2004 we sold 90% of our stockers as feeder cattle,” he says. “This year is off to a similar start with good prices. So we're using the board (Chicago Mercantile Exchange futures) to protect the cattle.”
Exactly when he markets stockers depends on the quality of available wheat pasture and March feeder prices. The 2005 winter wheat was blessed with lots of fall rain and some early-year snow and ice pack. He expects to sell some 7-weight cattle off wheat, graze some out or send some to the feedyard later in the spring. The percentage of each will depend on conditions as of mid-March.
Whichever move he makes, most of the cattle will be price protected. For graze-out cattle to be marketed in the summer, he's using a combination of futures and options.
“Our breakeven is in the high-90¢ range on these cattle, so we'll be protected against a drop in the market with the futures positions,” Heath says. “If the market moves up, we can take advantage of the higher prices with the call options. Otherwise, we could lose $4 to $5/cwt. on the futures alone if the call option weren't in place.”
In his marketing program, he sold May feeder cattle futures in the $1/cwt. range. Those positions may be rolled into August futures if the market remains steady. To compensate for potential high volatility in the market, he was considering buying out of the money August call options in the $1.08 to $1.10 range.
He had a similar strategy in place for cattle ready for sale in January with a $1 breakeven. He sold March futures at $1.05 on about 75% of the cattle; then bought $1.02 and $1.10 January calls. The positions were placed in September and October.
“I don't like to get too far out on futures and options positions due to the market's uncertainty,” he says. “Also, with March cattle, there's too much pressure on the market with cattle coming off wheat. Mid-March is when most people are running to sell. You need to be able to ‘walk’ during that time.”
Auburn's Prevatt advises stocker operators to use the marketing tools available to them.
“I prefer using at least some level of price protection,” he says. “In my opinion, the potential for downward price movement is currently much higher than for an upward price movement.”
Price protection is important because borrowed money is likely at risk in most stocker enterprises.
“Recent market-altering events, such as questions about food safety, the potential for terrorist attacks, trade policy of closing and opening borders or trade limitations, and changes in consumer demand, strongly suggest stocker operators seek some form of price protection,” he says.
That's particularly true when operators market cattle one or a few times per year, Prevatt notes. He suggests any price protection strategy that allows a profit to be made or provides enough price protection to allow you to continue in the business should the market move against you.
“The losses in a stocker operation can be huge if the cattle market moves against you,” he says. “There are too many factors that can impact a stocker operation.”
Heath goes by the rule that “if you can get cattle bought right, on price and genetics, you've made 90% of your profit potential.” He counts on good genetics in his Angus cow-calf program to boost his profit potential.
“I use the USPB program,” he says. “I can get paid for the quality of cattle I produce. My average price is a minimum price advantage of $15/head above the live basis. Some could even bring a $40 to $60 premium. That's a pretty good return.”
Heath took part in the now-defunct Future Beef Operations venture to learn how well his herd's calves would perform.
“I feel I have good genetics that let me earn more from the premiums they bring,” he says.
Larry Stalcup is a freelance writer on risk management strategies and is based in Amarillo, TX.
For more stocker production information visit beef stocker USA www.beefstockerusa.org