If you apply lessons from the Good Book to current stocker opportunities, declining value of gain and increasing costs mean that now is a time to sow rather than reap.
“We need to focus on equity preservation, hitting singles and doubles rather than trying for the homeruns we've had,” says Mike Murphy, CattleFax market analyst.
Speaking to stocker operators at the recent Pfizer Cattlemen's College, Murphy pointed out the average futures premium to the cash market last year meant cattle feeders could pay more. They were eager buyers, too, chasing fewer cattle for too much pen space, posting the most economically devastating year in cattle-feeding history.
Now there's lots less cattle feeding equity left to risk prices beyond breakeven.
Doing some simple cowboy math on a cash-to-cash basis, which doesn't account for risk management, Tom Brink at JBS Five Rivers Cattle Feeding LLC noted at the same Cattlemen's College that as much as two-thirds of the equity in the cattle-feeding business evaporated last year.
That means cattle-feeding pens and entire feedlots will likely begin exiting the business this year, just as packers began culling overbuilt capacity in 2008.
Even without such attrition, Murphy notes, “When cattle feeders lose equity, they buy feeder cattle that can be hedged on the day they're purchased. At least that's been true historically.”
That's one reason value of gain will fall short of the last two years' historical highs when it was often equivalent to the sale price.
CattleFax expects value of gain to average in the $50s/cwt. for 2009, says Troy Applehans, CattleFax analyst. For comparison, he explains that since 1990 value of gain has ranged from a low of 47¢ (1990-2002) to a high of 68¢ in 2007; it was 67¢ last year. Those averages are based on adding 250 lbs. to a five-weight steer.
At the same time, feed prices will remain high. Between high-priced fertilizer demanded by tame and cereal-grain pastures, the opportunity cost associated with double-cropping wheat, as well as more cultivation of grain crops where possible, forage is also getting scarcer and more expensive.
Though the margin between value and cost of gain is narrowing, there's still opportunity. Average stocker profit for CattleFax members was $29/head from 1980 through 2007.
Besides, the same forces weighing on value of gain underscore the crucial need and reliability of the stocker segment to decrease overall industry breakevens.
Perhaps ironically, the surest way for stocker operators to accomplish that consistently revolves around the dog-eared notion that “bought right” is at least half sold.
Applehans shares the example of buying a 500-lb. steer for $1.24, then marketing it at 750 lbs. for $1.03, with a $54.33/cwt. cost of gain. Reduce the purchase price 10% and the breakeven drops by $8.07/cwt., worth about $64.56/head. Increase the sale price by 10%, and the return increases $77.40/head.
Though significant, increasing average daily gain 10% decreases breakeven only $3.21/cwt., adding $26.61/head. Decrease pasture cost, interest cost and death loss by 10% each and their combined benefit is less than half that (+ $11.69/head).
Speaking at the annual CattleFax Outlook, CEO Randy Blach explained, “In my opinion, one of the biggest challenges we have in this industry (overall) is that we have too many folks trying to pick the highs and lows in the market, rather than focusing on the margin.”
So, there's at least as much need to manage margin risk as price risk.
Though he was speaking to cattle feeders about managing high and volatile corn prices, specifically, Brink's advice is germane to all segments: “We're going to have to focus on covering at least part of our needs at placement. I don't think hand-to-mouth is any longer a viable management strategy.”