“We were rewarded for a whole lot of bad behavior.”
Buffalo, Okla. rancher R.A. Bentley doesn’t mind saying what a lot of cow-calf and stocker operators know: When the market virtually guaranteed a $350 to $500 profit for about any calf that was breathing, many producers didn’t invest in good preconditioning or even basic vaccinations.
With the drought-caused shortage of calves, just about every backgrounder, stocker operator and feedyard was ready to pay $2.50 to $3.00 per pound for 5-weights as they struggled to keep pastures and pens occupied. Lack of cattle forced packers to cut slaughter capacity.
“But then the drought subsided, replacement heifers and cows were bought, and more of their heifer calves were retained,” says Tom Fanning, manager of Buffalo Feeders, a custom feedyard with 30,000-head feeding capacity at Buffalo, Okla.
With more cattle now available, some premiums for calves and yearlings have narrowed, Fanning says, and packers are more selective. All those things have affected the market to where the 550-pound calf that sold for $3 per pound two to three years ago now brings less than half that.
So what are your options? “Retained ownership of calves and placing them on feed provides an opportunity to expand a producer’s risk management and possibly take advantage of bounces in the market,” says Derrell Peel, Okla-homa State University Extension livestock economist.
Fanning stresses that in order to make retained ownership pay, calves need to be preconditioned and have been on an animal health program that includes vaccinations and boosters to prevent bovine viral diarrhea, bovine respiratory disease and other diseases.
Bentley is an Angus and Red Angus seedstock producer and runs a commercial cow herd. He also runs stockers made up mostly by calves bought from his bull and replacement heifer customers.
He has used retained ownership since 2004. “I’ve done it mostly to obtain data from my genetics,” Bentley says. “I was a little apprehensive early on — then Tom said the feedyard would buy half the cattle. So we partnered with them, which removed some of the burden.
“After that first feeding session, information I received caused me to get rid of some bulls and cows I thought were pretty good. With all the effort put into AI and good genetic influence, we need to feed them to prove what we have to our customers.”
A set of his steers that went on feed in January 2016 did just that. They were weaned in a value-added calf (VAC) program, which included a preconditioning and vaccination program recommended by Bentley’s veterinarian. They went on wheat pasture last fall and entered the feedyard at about 775 pounds.
With the solid preconditioning and VAC program, their cost of gain was about 10 cents per pound below the feedyard’s average cost of gain of about 75 cents. “That was a $55-per-head advantage on their feeding cost,” Fanning says, noting that the cattle finished in midsummer and slaughtered at about 1,350 pounds.
“They graded 100% Choice,” Fanning boasts. “When they were marketed, the Choice-Select spread was $20 per cwt.”
That increased their closeout to $250 to $270 per head or more when marketed through U.S. Premium Beef. “The overall premium over the average price was about $110 per head,” Fanning says. “The reduced feeding cost boosted the profit even more.”
Of course, 100% Choice is extremely rare. However, Bentley says cattle he runs through retained ownership average 85% to 90% Choice. He had a second set of cattle on feed in late summer that were just below the 100% Choice cattle in quality. “We’ll know about those cattle once they finish later in the fall,” he says.
Depend on data
Fanning says data received from the packer on quality grade and yield grade help ranchers better understand their herd performance. “They can know whether to cull a cow or bull simply by looking at data on carcass quality,” Fanning says. “That data can also be used by a feedyard when a second or third round of calves from a particular ranch are placed on feed.”
At Buffalo Feeders, each animal is weighed individually and ear-tagged to aid in monitoring performance. “We sort them as much as possible to make sure they can perform at their best,” Fanning says. “We place the 6-weights with 6-weights, 9-weights with 9-weights and so on.
“In some circumstances, like when cattle arrive from a sale barn with an average weight of 700 pounds, we may sort them seven ways if there are enough cattle to fit the pens. Even the best cattle from proven genetics can be sorted so they can be marketed through the best grid or other marketing program to get the most out of them.”
Retained ownership as stockers
Peel says producers may be better off holding calves a few months longer to increase profit potential. “Despite today’s lower grain prices that normally prompt feedlots to buy lighter-weight cattle, they’ve been trying to buy them as big as they can,” Peel says. “The result is little difference between markets for 550-pound steers and 750-pound steers.”
He says prices were within about $10 per cwt for 5-weights and 7-weights sold through Oklahoma City markets in mid-August. “However, there was about a $20 per cwt drop in prices for 550-pound steers compared to 450-pound steers,” Peel says.
“So if the price relationships between the 4- and 5-weights and 5- and 7-weights continues into the fall, it may pay to wean and sell calves lighter, or put them on wheat pasture or grass to put on an extra 200 pounds. With the well-established breeding and weaning programs many producers use, taking calves to the heavier weight is likely more attractive.”
Peel says risk management is important in a retained ownership program. “Live cattle futures prices have remained discounted to cash longer than I would have expected,” he says. “That makes it more difficult to lock in a profit through straight hedges. So it may be better to look for a strong cash contract or a basis contract that provides some profit potential.”
To protect against a market wreck, buying out-of-the-money put options may be the answer. “This is a disaster insurance policy to cover market shock as a result of disease, global uncertainty or other issues,” Peel says.
For example, calves placed on feed in late summer would finish at 1,300 to 1,400 pounds early next year. They could be price-protected using the CME February 2017 live cattle contract.
February futures were trading at about $115 in mid-August. But ranchers could buy a $106 out-of-the-money put option for just over $2 per cwt. If the market wrecked and prices plunged toward $100 or even lower, they would be protected at $106. At the same time, if the market increased and closed higher, they could take advantage of the upside increase in prices.
“Higher-quality cattle should provide higher profit potential,” Peel adds. “If cattle are known by the feedlot or a particular packer, they may be more willing to step out and price those cattle at a premium. Producers may also be able to tie into a value-added program.”
But in order to determine if those cattle will generate excitement on the buying end, Bentley’s argument that you need to feed them to know them is certainly valid.
Thus, “bad behavior” probably won’t be rewarded any longer.
Larry Stalcup is a freelance writer based in Amarillo, Texas.
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