If you have a 600-lb. steer, hold off on selling him. He'll likely pencil out a lot better as an eight-weight.
That's the strategy of Eddie Womack and his father Tommy in Tulia, TX. “We rarely market stocker cattle below 750 lbs.,” Womack says. His attitude is shared by Derrell Peel, Oklahoma State University livestock marketing specialist, who helps guide stocker operators puzzled over whether to sell cattle as calves or yearlings.
Darrell Mark, University of Nebraska livestock marketing economist, also indicates that heavier cattle should garner more on the bottom line, saying “there's an incentive to grow calves to heavier weights.”
Peel is always inundated with questions about whether to pull cattle off wheat pasture or graze-out past the typical March 15 period. The magic number for 2010 is probably in the 95¢ to $1/lb. range, Peel says.
“We're shooting for $1,” Womack says. “That's when we'll start getting most of our cattle sold.”
The Womacks run a fourth-generation wheat and cattle operation, with a little cotton production thrown in. They run about 1,500 stockers/year, which includes much of the calf crop from their 375-cow, Angus-cross herd.
“We make a living off wheat, wheat pasture and stockers,” Womack says. “When we sell stockers usually depends on the price of wheat and feeder cattle. If we see cattle at about $1 in mid-March, we'll probably graze them out. If cattle prices are lower and wheat is higher (than $4.75-$5/bu.), we'll go ahead and sell them.”
Much of the marketing is performed long before half the cattle are sold. Womack says at least 20% were locked in at a $1/lb. sale price through feeder-cattle futures last fall for cattle coming off wheat pasture this spring.
“We sold May futures at $100/cwt.,” Womack says. “We hedged those cattle in early fall when they went on wheat pasture and the market was attractive. We also bought a few March feeder-cattle put options. They were in the $96-$98 range. It's likely that at least half the cattle will be marketed (through futures, options or forward contracts) before all are sold in May.”
Fortunately, the Womacks are located near two large commercial feedyards. Cattle are sometimes contracted with the yards and covered with futures or options. “We keep a grower yard that enables us to hold cattle longer if the forage is weak or the market is low,” Womack says. “We have our own sorghum silage source and also feed hay and cotton seed.”
Cattle are moved at between 750-850 lbs. “About 775 is probably our average weight,” Womack says. “This is the type of cattle feedyards want.”
He says they ultimately market cattle based on a general rule — “what price can we make money on — and stay in business for.
“Of course we'd like to see $1.20 this year, but we know that's probably not going to happen.”
Size matters this year
Peel and Mark say larger feeder animals are likely worth more this year.
“There's a hole in the middle of the feeder price at the middle weight,” Peel says. “No one wants to own a 650-lb. steer. For a lighter animal moving up to that weight, the price rolls back pretty fast. But if you take the animal from 600 to 750, that is the most valuable gain in the feeder cattle complex. It drops a little, but stays pretty high all the way up to 900 lbs.
“Feedyards are still so poor and face enough risk for high feed costs that they really don't want to own those lighter weight feeder cattle. They're looking at 750 lbs. and up. If they're at 600-650, another 100 lbs. on top of that is some of the most valuable gain you can put on. So you may want to own the cattle a little longer.”
Peel points to an example of lighter calves bringing less. “In mid-December, there was about a $9/cwt. rollback for 480-lb. calves when compared to 420-lb. calves,” he says.
Futures prices offered some good price protection in late 2009 for calves bought as stockers. “You could buy a 600-lb. animal for $95 and lock it in at $93 or higher (for sale at 750),” Peel says.
“If the same price relationship persists into March and beyond, producers should look at the same strategy. The only stocker producers who made money in 2009 were those who had cattle into the summer. If feeder prices stay like they are ($95-$100/cwt.), we'll probably see a similar situation this year.”
Mark says feedyards want heavier cattle due to risks of higher corn prices and should be willing to pay for added pounds. “For example, in Nebraska, a 525-lb. steer brought about $108/cwt., or $570/head in late December,” he says. “At the same time, a 575-lb. steer brought about $104, or $598/head.
“So, for the extra 50 lbs., a rancher or stocker operator is getting paid $31, or 62¢/lb. Going from a 675-lb. steer at $96.75/cwt. up to a 775-lb. steer at $95.55/cwt. adds $87 to the value of the steer, or 87¢/lb. In both cases, it appears that the market will pay more for the extra weight than the cost of putting it on,” Mark says.
“Most backgrounders' costs of gain are likely less than the 62¢/lb., and certainly most are below the 87¢/lb. So, I would look at trying to add this weight to the stockers before selling them. However, if that means substantially delaying when you would be selling them, you have to be aware of seasonal price changes and the added risks you're taking. But, some of these can be protected or hedged.”
Options? Many complain that options are too expensive. For example, a $96 May feeder-cattle put costs about $3-$3.50/cwt. That's $24-$28 for an 800-lb. animal. An out-of-the-money $92 put option costs about $1.50-$2, lowering the cost of price protection considerably.
In both cases, markets are open to the upside. If prices plunge, the producer is covered, less the cost of price insurance based on price risk. In some cases, call options can be sold to lower the price of the puts.
“Producers need to first determine, ‘what should be my strike price so that no matter what happens, this won't be my last year in the cattle business?’” Peel says. “That can be different for everyone. There are a lot of factors — your lender, your landlord on rented land and how much equity you're willing to gamble; and if you're on wheat, whether it will make a grain crop and how much wheat is selling for.”
Manage downside risk
Mark says it will be prudent to manage the downside price risk on feeder-cattle marketing this spring. “Much of the feeder-cattle price reaction this spring will likely result from corn market changes, because the fed-cattle market will likely be relatively static in 2010 and struggling to gain momentum with the economy challenging beef demand.
“Without a strongly bullish fed-cattle market outlook to support feeder-cattle prices, I think we have to watch the corn market. While the types of corn price rallies observed in 2008 and 2009 might not occur, we certainly don't know that yet, but we do expect corn prices to remain relatively strong.”
Mark adds that retained ownership is another avenue for producers and stocker operators. “There is enough margin in feeding calf-feds out right now,” he says. “You could make an extra $70/head. Granted, there are always performance and price risks inherent in doing so, but I think there is enough of a margin there right now to think about it.”
Age and source verification can mean an extra $35/head for calves. “Our fed-cattle market is going to be increasingly reliant on the export market, because domestic per-capita consumption is declining modestly and will for the next few years,” projects Mark. “Those international customers will increasingly expect age and source verification. I think it's important for cattle producers to be prepared for this.”
The Womacks use the age- and source-verification marketing tool when they can through marketing calves from their own herd. “It costs about $350/calf to wean it off our cows,” Eddie notes. “That's pretty cheap when you have to pay $550 for stockers to go on wheat pasture. And maintaining all information about our calves and many we buy adds to our profit potential.”
Larry Stalcup is an Amarillo, TX-based freelance writer.